^J^ liBUkHES -A- Digitized by the Internet Archive in 2011 with funding from Boston Library Consortium IVIember Libraries http://www.archive.org/details/efficiencyofgrouOOgrub 531 1415 (1 working paper department of economics THE EFFICIENCY OF A GROUP-SPECIFIC MANDATED BENEFIT: EVIDENCE FROM HEALTH INSURANCE BENEFITS FOR MATERNITY Jonathan Gruber No. 92-19 Nov. 1992 massachusetts institute of technology 50 memorial drive Cambridge, mass. 02139 THE EFFICIENCY OF A GROUP-SPECIFIC MANDATED BENEFIT: EVIDENCE FROM HEALTH INSURANCE BENEFITS FOR MATERNITY Jonathan Gruber No. 92-19 Nov. 1992 m^' THE EFTICIENCY OF A GROUP-SPECIFIC MANDATED BENEFIT: EVIDENCE FROM HEALTH INSURANCE BENEFITS FOR MATERNITY' Jonathan Gruber Harvard University June, 1992 I consider the effects of "group-specific mandated benefits", such as mandated maternity leave, which raise the costs ofemploying a demographically identifiablegroup. The efficiency ofthese policies, relative to more broad-based financing ofbenefits expansions, will largely be a function of the valuation of the mandated benefit by the targeted group. Such valuation should be reflected in substantial shifting of the cost of the mandate to group-specific wages; however, there may be barriers to the adjustment of relative wages which impede such shifting. I study several 1976 state mandates which stipulated that childbirth be covered comprehensively in health insurance plans, increasing the cost of insuring women of child-bearing age by as much as 5% of their wages. I find substantial shifting of the costs of these mandates to the wages of the targeted group. Correspondingly, I find little effect on total labor input for the group which benefitted from these mandates; hours rise and employment falls, as may be expected from an increase in the fixed costs ofemployment. These results are confirmed by using a 1978 Federal mandate as a "reverse experiment". * I am grateful to Gary Chamberlain, David Cutler, Dan Feenberg, Richard Freeman, Rachel Friedberg, Roger Gordon, Olivia Mitchell, Jonathan Morduch, Rodrigo Vergara, Oved Yosha, and members of the Harvard Labor group and the Harvard/MIT Public Finance Seminar for helpful discussions; to Josh Angrist, Larry Katz, Jim Poterba, and Larry Summers for both valuable suggestions and guidance; and to the Sloan Foundation and the Harvard Chiles Fellowship for financial support. In an era of tight fiscal budget constraints, mandating employer provision of workplace benefits to their employees is an attractive means for a government to finance its policy agenda. Consequently, in recent years there has been a growth of interest in mandated benefits as a tool of social policy. For example, the centerpiece ofa recent Democratic health care proposal was mandated employer provision of health insurance (New York Times, June 6, 1991, p. A22). Furthermore, 20 states have mandated some form of maternity leave since 1987, and a federal policy has been under consideration for a number of years. Aside from their political attraction, there may be an efficiency argument for mandates, relative to public expenditure, as a means of financing benefit expansions. As highlighted by Summers (1989), publicly financed benefits require an increase in government revenue raising, with the resulting deadweight loss from taxation. Mandates, however, are financed by a benefits tax; if employees value the benefit which they are receiving, then the deadweight loss from financing that benefit will be lower than from tax financing. In the limit, with full valuation of the benefit by employees, wages will fall to offset the cost of the benefit to the employer, and there will be no efficiency cost. In fact, recent research has suggested that the increased costs ofone workplace mandate, workers compensation, were largely shifted to wages with littleeffect on employment (Gruber and Krueger, 1991). This efficiency argument, however, may not apply to a certain type of policy which is particularly popular, the "group-specific mandate", which mandates the expansion of benefits for a demographically identifiable group within the workplace. One example is mandated maternity leave; another is the recent recommendation of a Federal advisory panel that there be mandated employer-provided health insurance coverage of all pregnant women and children (NYT, June 4, 1991, p. A18).' In these cases, there is likely to be less scope for the free adjustment of wages to reflect the valuation of the benefit by the targeted group, since there are barriers to relative wage adjustment within the workplace (such as anti-discrimination rules or 'Given the prevalence of experience rating in insurance markets, any social insurance mandate may be group-specific, since different indiyiduals may cost the employer different amounts. In this paper, I define group-specific mandates as those which affect a demographically identifiable group only. It is unclear whether the results can be extended to cases where workers are distinguished along more subtle dimensions.