Statins, seat belts and unemployment benefits reduce some of life’s risks. Yes?
Told that statin medication would diminish high cholesterol, some people eat more cheese, more ice cream, more steak. The result? Less healthy diets.
Knowing that seat belts increase auto safety, certain drivers become more reckless because there is less of a chance of dying in an accident. The result? An increase in pedestrian fatalities.
Designed as a cushion for those without jobs, unemployment insurance makes joblessness less risky. Economists have observed though, that when employers know workers have an alternative, they are not as concerned about firing them. The result? More unemployment.
A University of Chicago economist, Sam Peltzman has hypothesized that risk diminishing regulation has unintended consequences. Called the Peltzman Effect, sometimes the new incentives created by a risk reducing rule offset its benefit. The reason is the law of demand. When the cost of risk becomes cheaper, we might be willing to accept more of it.
Sources and resources: Below is a video of Sam Peltzman at Hebrew University explaining how the Peltzman Effect relates to financial regulation. As for my three examples, the first was anecdotal, the second from Dr. Peltzman’s research and the third from an Econtalk podcast interview of economist Casey Mulligan.
The Affordable Care Act is doing what France has done for years. It has a 50 employee tipping point.
The Affordable Care Act says that businesses with 49 employees will not have a health insurance mandate. However, for those with 50 or more, no coverage could mean a $2,000 fine per full time worker (minus the first 30 workers). So the fine will be 20 workers x $2,000 = $40,000. There is more detail in the Kaiser Foundation infographic, below.
In France, worker #50 means that a firm needs to create worker councils, establish profit sharing, and report to employee representatives when firing people for economic reasons.
As a result, there are 2.4 times as many businesses in France with 49 employees as with 50. When a growing enterprise hits 49 workers, a typical entrepreneur starts a second company rather than expand beyond 50. Or, that person avoids hiring #50.
The Affordable Care Act’s Employer Mandate:
To start on January 1, 2014. From Kaiser Family Foundation.
Are we creating the same incentives as France?
Sources and Resources: For an Affordable Care Act implementation timeline, 2010-2018, a brief and clear summary of the act’s provisions, and a more extensive infographic, do go here to the Kaiser Family Foundation website. It is excellent. To read further about France’s labor market rigidities, this Bloombergarticle and this econlife post (which has been partially quoted above) have more details. Finally, complementing our facts, this economix blog from economist Casey Mulligan provides considerable insight.
University of Chicago economist Casey Mulligan believes that the US unemployment rate has remained high because of many separate public policy changes. Big and small, each one influenced workers, businesses and consumers by creating new incentives.
For workers, Dr, Mulligan described a bigger safety net:
People could collect unemployment insurance (UI) for 99 weeks instead of 26.
Food stamp programs became more inclusive with less stringent qualifications.
The food stamp benefit grew by 40% in 2 separate stages.
A $25 “bonus” was added to the usual unemployment benefit.
The duration of work history was decreased as a qualification for UI.
Mortgage help increased for longer unemployment.
The unemployed could receive 65% of their health insurance expense.
He also explained why, for businesses, the incentive to fire workers increased:
Concerned employers knew that fired workers would get relatively high benefits.
Obamacare taxes and tax hikes are making employees more expensive.
It became increasingly attractive to replace workers with less expensive capital.
Employees had to be fired (rather than quitting) to qualify for unemployment benefits.
In addition, certain consumers had less to spend.
Increased taxation involves taking more money from one group than it gives to the other group.
As a result, several million lower income workers had more when unemployed than with a job while the majority had the equivalent of 85% to 90% of their previous income. Yes, of course, depending on the individual, the new incentives have a varied impact. Still though, Dr. Mulligan asks all of us first to recognize that our lawmakers have implemented changes that he believes have increased the unemployment rate substantially.
Then we have to decide whether we support the tradeoff: More support for the unemployed or more efficiencies that lead to fewer unemployed?
7.9% during January, the civilian unemployment rate touched 10% during October, 2009.
Sources and Resources: An hour long, every minute of the econtalk podcast in which Casey Mulligan described his research and new book to Russ Roberts was captivating. It perfectly conveyed the tradeoff that we all need to know, whatever our preferences. Then, for recession data, here is the BLS website.
I suspect that the incentives in New York’s doctor quality plan will have unexpected consequences.
An incentive for results, bonuses will be given to NY hospitals that they share with their doctors. Described as a reward system and P4P, Pay for Performance, for quality care, really it’s a quota system. A hospital will get higher reimbursements if goals like patient satisfaction, moving quickly through the system and using certain medical protocols are met. The NY Times says there are 13 criteria ranging from doctor communication to speedy discharges.
Sadly, the plan reminded me of the former Soviet Union, when the economy was run by government committees. With output predetermined, quotas were the rule. If you had 1,000 apartments then maybe 4000 light bulbs were the manufacturer’s lighting quota. Pajamas? Size and quantity could be the quota.
The good news is that the quotas were met. The bad news is the unrewarded details.
If only the number of light bulbs mattered then then many did not work. As for the pajamas, the sizes might have been fine but they had neither buttons nor buttonholes. I actually had a friend who stayed in a college dormitory room where the lamps were so heavy that she could not lift one. The reason? The lamp manufacturer’s quota was expressed in weight.
You see. When people have to meet quotas to get pay or bonuses, other non-rewarded details get ignored. The result is unintended consequences.
Problems with quotas returns me to the market system. Not ideal, still profits seem create the most effective incentives. As Adam Smith explained, “It is not from the benevolence of the butcher, the brewer or the baker that we expect our dinner but from their regard to their self-interest.”
Sources and Resources: Bill Keller’s insightful NY TimesOp-Ed and this NY Timesarticle were the sources for my NY hospital incentive plan.