The Happy Meal Fallacy

by on July 20, 2015 at 7:25 am in Economics, Food and Drink, Law | Permalink

Some restaurants offer burgers without fries and a drink. These restaurants cater to low-income people who enjoy fries and drinks but can’t always afford them. To rectify this sad situation a presidential candidate proposes The Happy Meal Act. Under the Act, burgers must be sold with fries and a drink. “Burgers by themselves are not a complete, nutritious meal,” the politician argues, concluding with the uplifting campaign slogan, “Everyone deserves a Happy Meal!”

happy-mealBut will the Happy Meal Act make people happy? If burgers must come with fries and a drink, restaurants will increase the price of a “burger.” Even though everyone likes fries and a drink they may not like the added benefits by as much as the increase in the price of the meal. Indeed, this must the case since consumers could have bought the meal before the Act but chose not to. Requiring firms to sell benefits that customers value less than their cost makes both firms and customers worse off.

The Happy Meal Fallacy is fairly obvious when it comes to happy meals but now let’s consider the debate over the gig economy and the hiring of employees versus contractors. Employees are entitled to benefits that contractors are not. Thus the standard conclusion is that classifying workers as contractors “is great for employers but potentially terrible for workers.” Wrong. Employees get their wages with fries and a drink while contractors get wages only. Would a law requiring firms to provide all workers with fries and a drink help workers?

If firms are required to provide benefits to contractors they will lower the contractor wage. But how do we know the extra benefits aren’t worth the reduction in wages? If the extra benefits were worth more to workers than they cost firms, firms would have eagerly provided these benefits as a way of increasing profits. Firms can profit whenever buyers are willing to pay more for a product than its cost. Benefits are a product that workers buy from firms.

Workers buy benefits from firms by offering to work at a lower wage. Firms are happy to sell benefits when workers will accept a wage reduction that covers the cost of the benefit. Thus, if workers value a benefit by more than its cost, there is a mutually profitable deal to be made. The firm will provide the benefit and wages will fall by more than the cost but by less than the value of the benefit. Both firms and workers will be better off. It’s implausible that firms and workers will overlook mutually profitable exchanges. Thus requiring firms to provide benefits with every job means requiring firms to sell benefits that workers value less than their cost and that makes both firms and workers worse off–just like requiring restaurants to sell burgers with fries and a drink makes firms and customers worse off.

If the cost of the benefits far exceed their value to workers, the firm will close. But even if the firm doesn’t close, firms and workers will both be worse off. The exact division of the burden will vary depending on particulars but the workers who value wages the highest and benefits the least will be the most burdened. Often these will be the lowest income workers.

The Happy Meal Fallacy can lead to very unhappy firms and workers.

Addendum: The theory of compensating differences in wages with benefits was pioneered by Adam Smith. See Matt Kahn for a short overview and Sherwin Rosen for a full treatment of the theory. Jonathan Gruber and Craig Olson offer empirical evidence. The MRU video, The Tradeoff Between Fun and Wages presents another application.

1 Anon July 20, 2015 at 7:36 am

Some restaurants offer burgers without fries and a drink. These restaurants cater to low-income people who enjoy fries and drinks but can’t always afford them.

Or people who low-carb.

2 Agra Brum July 20, 2015 at 12:23 pm

And interesting that people who cannot afford fries or a soda suddenly have a strong – nay, equal, bargaining power with employees that give them the leverage to negotiate a fair pay deal…

3 Rick Russell July 20, 2015 at 1:16 pm

Well, the negotiation is with their feet. If many employers are offering contract jobs, then contractors will go where they think they’re getting properly remunerated and skip the jobs that don’t pay.

4 Ken August 4, 2015 at 1:58 pm

Obviously Agra has never hired anyone, thus it would know how much bargaining power potential employees and current employees have. In fact, it all ready knows, also, as it routinely hires phone companies, electric companies, gas companies, etc. yet I’m certain that despite it being the employer, Agra will now complain about the negotiating power of its employees: the phone companies, electric companies, gas companies, etc.

5 richard rose July 20, 2015 at 7:41 am

fries and drinks are ‘wants.’ one does not need them to survive. healthcare is a ‘need.’ if one does not have it, the burden is shifted elsewhere (emergency rooms, bankruptcy, death from treatable ailments). i seem to recall a post about opinion pieces making elementary mistakes?

6 TMC July 20, 2015 at 7:50 am

The Nuns that got ruled against last week ‘need’ birth control added to their health plan?
Maybe you should read up on elementary mistakes.

7 richard rose July 20, 2015 at 8:13 am

presumably, the nuns insurance rates are calculated with reference to the likelihood of them availing themselves of such benefits. back to elementary mistakes?

8 Jonathan July 20, 2015 at 10:33 am

You presume incorrectly. Have you not heard of community rating?

9 Boonton July 20, 2015 at 8:47 am

Do the nuns have jobs? Why are they trying to avoid healh plans that cover birth control? The mandate tax doesn’t really apply if you don’t have taxable income to begin with. If they work for a non-profit entity it isn’t clear to me that the deduction for providing health insurance to workers is all that valuable either.

10 Ryan Miller July 20, 2015 at 9:46 am

The case is about the employees of the nuns, who run a chain of non-profit nursing homes, which are staffed partly by themselves and partly by lay employees. Basic facts, people.

11 Rich Berger July 20, 2015 at 10:05 am

I like that response. It’s almost like you are talking slowly so that it will easier for them to follow.

12 Shaky bogey July 20, 2015 at 10:20 am

Birth control is not healthcare and, in any event, mandated for male employees, too. Also, alternative medicines, chiropractic care, pre-natal and other overpriced sodas and fries.

These are stupid add-ons to mandated coverage, no getting round that.

13 Boonton July 20, 2015 at 12:09 pm

If you are going to define a tax benefit for providing coverage to workers (or buying coverage for yourself) then you have to define what coverage actually means. The same thing happens with auto insurance. In theory I could buy a very cheap policy that will cover any damage I do to other people in excess of $1M. While such a policy isn’t illegal, no state in the US would consider that acceptable to drive my car on their streets.

Also if you are doing an exchange based system that lets people compare different plans side by side, it makes sense to compare like to like which means plans that cover a basket of health services roughly the same but with different premiums, deductibles, co-pays and networks (which makes it more than enough of a challenge to shop intelligently).

Finally, the idea that we should use insurance as a type of moral endorsement for everyone else who is also buying insurance is strange and probably something most people do not want in the long run. For example, I have homeowners insurnace. If I throw a sex party and it gets out of hand and damages my house I can submit a claim. I don’t throw sex parties, though, so should I demand the company not cover such things based on the convoluted logic that if they do then my premiums are subsidizing those who throw home damaging sex parties? I have no problem if we say it is ok if the insurance company gives me a special rider saying they won’t cover damages from sex parties, but I don’t think I should get a lower premium for that nor do I think just because I pay my insurance premium I have any moral responsibility or claim on other people who happen to be buying the same policy.

14 Boonton July 20, 2015 at 1:58 pm

Basic facts, people

The addition of birth control to health insurance appears to actually reduce costs.

When this fact is pointed out, people immediately declare that is impossible. But in reality it makes all the sense in the world.

Birth control pills are cheap. Giving birth is expensive. Cover pills and you get fewer births. The people who are ‘paying for’ the pills are not the nuns, but in fact the women who would have otherwise given birth. So in reality if you did not want to be a part of insurance that covers birth control then the solution would be for you to pay extra on your premiums. The reality is you are probably enjoying an implicit subsidy from your insurance company because it covers birth control. If you feel that is tainted money then you should pay a higher premium for your coverage.

15 E. Harding July 20, 2015 at 6:46 pm

That is impossible.

16 Volume July 20, 2015 at 8:41 am

Contrary to your assertion, people do indeed need food to survive. They just like the freedom to decide which food and in what quantities.

Back to health insurance. My wife and I would prefer to purchase our health insurance directly from an insurance company and have her work as a contractor for her company (I am self employed). When my wife was a contractor at a local hospital she received greater pay and had great flexibility in setting her schedule. These were both great benefits for our household.

But along comes Obamacare and two things happened. One, our insurance premiums went up while coverage went down and the hospital where she was a contractor began forcing contractors into fulltime positions or cutting their hours. No my wife has to work as a benefited employee at the hospital, even though that’s not what we would prefer and it has reduced our quality of life.

17 richard rose July 20, 2015 at 9:08 am

presumably, there are food products other than burgers, fries, and drinks available on the food market, unlike healthcare which is provided by the market in a very limited manner. with regard to your health care scenario, it sounds awful. there’s nothing i can say about that except that hopefully while you two certainly did not benefit, it would appear that by many metrics there has been a benefit to society. (http://www.nytimes.com/2015/06/26/opinion/paul-krugman-hooray-for-the-aca.html)

18 Shaky bogey July 20, 2015 at 10:23 am

Insurance, not healthcare.

19 spencer July 20, 2015 at 11:38 am

Could you tell us exactly why you prefer to buy your insurance with after-tax dollars rather than before tax dollars. You do realize this raises the price of your insurance by whatever your tax rate is. I bet the firm can also negotiate lower rates from the insurance company than you can.

20 Rick Hull July 20, 2015 at 1:13 pm

He already explained the preference for contracting:

> When my wife was a contractor at a local hospital she received greater pay and had great flexibility in setting her schedule. These were both great benefits for our household.

21 Ross Levatter July 20, 2015 at 10:03 am

Wow! I had no idea that basic principles of economics, such as scarcity and costs, could be successfully ignored just by calling the use of scarce resources “needs” instead of “wants.” The power of the strategic use of mere words never ceases to amaze.

22 blades July 20, 2015 at 12:35 pm

Hah, reminds me of dealing with my child, who was then a toddler. I was trying to get something away from him. His first determined response, was “I want it”. When I insisted, “No, David. I need that,” he hesitated for a second and said, “I need it.”

23 MC July 20, 2015 at 1:25 pm

+1

24 James July 20, 2015 at 10:30 am

Doing it at the employer level won’t work though, for the reasons outlined in the article. In the case of Uber, they’ll just reduce driver pay to cover the benefits, and/or limit UberX drivers to 29 hours a week so they aren’t classified as full time employees. And that will basically ruin what they have going for them now, which is that you can make more money driving for Uber than a cab or delivering food, and it’s more convenient to schedule around other commitments.

If the government is going to mandate that people have health care, it ought to be the one providing it, otherwise there’s going to be too many side effects.

25 JWatts July 20, 2015 at 11:26 am

“If the government is going to mandate that people have health care, it ought to be the one providing it, otherwise there’s going to be too many side effects. ”

Which is most probably the intended goal of those who wrote the ACA. They wanted to make the design bad enough to cause a market failure and usher in nationalized health care.

26 Roger July 20, 2015 at 7:14 pm

“Which is most probably the intended goal of those who wrote the ACA.”

The ACA was drafted by a former Wellpoint VP and lobbyist , so I doubt it had any such hidden purpose. If anything, with the Medicaid expansion it continues the trend of having the state cover poor and high-cost (elderly) individuals at taxpayer expense while allowing insurance companies to reap profits covering healthy young and middle-aged people. Privatize the profits, socialize the losses. The big change with the ACA of course is using the state in a new, compulsory role via the individual mandate to force young and healthy people to participate in this system and hand over their wages to the private insurance companies.

27 triclops41 July 20, 2015 at 10:55 am

The cost shift to emergency rooms is barely a blip in costs, the bankruptcy shift is vastly overstated (read: lied about) by your progressive thought leaders.
2 of your 3 points are fallacious.
Also, you conflate health care and health insurance.

Nice arrogance though.

28 JWatts July 20, 2015 at 11:22 am

“fries and drinks are ‘wants.’ one does not need them to survive. healthcare is a ‘need.’”

That’s laughably wrong. You mean in your opinion you’d like to classify “fries and drinks” as wants and you’d like to classify ” healthcare is a ‘need.’”. That’s hardly a universal opinion and it’s certainly not a fact.

29 Julius July 20, 2015 at 11:46 am

Ha ha ha. “Give me a Happy Meal and a Dr. Pepper or I will die”. The parody commenters are the best thing here!

30 adam July 20, 2015 at 12:21 pm

Give me that birth control pill or I’ll die. Give me that Viagra or I’ll die. Give me that cataract surgery or I’ll die. Give that psychiatric counseling or I’ll die. It’s almost like a lot of healthcare isn’t life or death and instead a matter or comfort/improved lifestyle….

31 Julius July 20, 2015 at 6:08 pm

Birth control, I knew it was the thing making surgery and prescription drugs so expensive.

32 A Definite Beta Guy July 20, 2015 at 1:04 pm

Hmmmmmmm. That’s not how healthcare works, ya know?

33 Alan July 20, 2015 at 1:04 pm

But if I satisfy my health insurance “need” elsewhere, it is no longer unsatisfied.

34 Ken August 4, 2015 at 1:59 pm

“healthcare is a ‘need.’”

Modern health care is such a “need” that it has only existed for 0.0002% of human existence (50 out of 250,000 years of human existence). Food is a far greater need that what now constitutes health care. I suggest you pull your head out.

35 Bill July 20, 2015 at 7:41 am

What if there is an externality.

Employer and employee agree on a minimal health benefit–one which results in uncompensated care to the local hospital, which then shifts the cost to me when I buy insurance or go to the hospital or shifts the costs to taxpayers.

Is the meal so happy when someone else, rather than the two parties to the transaction, pays.

36 Another Alex Post July 20, 2015 at 10:22 am

Another post where I think to myself, what was Tyler thinking? And then I realize, he wasn’t. He let Alex post again.

37 Shaky bogey July 20, 2015 at 10:25 am

The “emergency room” cost was not a material problem, the more knowledgable of your ilk stopped using it years ago once they got their bill.

38 triclops41 July 20, 2015 at 10:57 am

Plenty of the dishonest ones still use it.

39 Anon July 20, 2015 at 10:34 am

The proper solution to this problem is to mandate that one of the two buy basic insurance that covers emergency rooms. If only that is already law….

40 Dan Lavatan July 20, 2015 at 12:15 pm

Uncompensated care is less than 2% of costs in a hospital system that is 80% inefficient compared to other countries. Most of the difference between what hospitals get and what they want is underpayment by Medicare. Much of the uncompensated care is by people who have insurance but can’t meet their copayment requirements or be people who would need their insurance to be 100% subsidized anyway.

Lots of regulated professions include some notion of charity – lawyers for instance do pro bono work as a condition of being a member of the bar. If you must have a theoretical solution, we should end all government payments to medical providers (thus restoring their ability to require cash up front) and end all medical licensing (so the cost of care drops 80% overnight for similar results).

Advocating for anything less than the end of all insurance requirements is financial suicide.

41 John Stanley July 20, 2015 at 12:45 pm

“end all medical licensing”

This sounds like a disaster waiting to happen.

42 Vlad July 20, 2015 at 4:22 pm

> and end all medical licensing (so the cost of care drops 80% overnight for similar results

Moderate less “scary” solution: establish a visa program where anyone with a medical license anywhere else in the world can come over and be a doctor. This may even be superior from a humanitarian perspective to simple deregulation because it implicitly establishes a kind of industry-specific version of open borders as a rider.

43 Bill July 20, 2015 at 5:50 pm

Dan,

You are making up numbers.

According to Kaiser, the cost of uncompensated care was $89.4 BILLION dollars. Here is the link:
http://kff.org/uninsured/report/uncompensated-care-for-the-uninsured-in-2013-a-detailed-examination/

I challenge you to support your claim that uncompensated care is less than 2%.

Challenge on.

44 Careless July 21, 2015 at 12:05 pm

90 billion times 50 is $4.5 trillion. US healthcare spending is 3.2 trillion. So he was wrong, 3%.

45 Just Saying July 20, 2015 at 7:46 am

You are self-contradicting here – first you say: “These restaurants cater to low-income people who enjoy fries and drinks ***but can’t always afford them.***”

Then later you say: “Indeed, this must the case since consumers could have bought the meal before the Act but chose not to.”

It’s not that consumers chose not to, it’s that consumers couldn’t afford them, as you mentioned in the beginning of your treatise.

Supply-side economics is riddled with this flawed thinking – presenting Faustian choices as indicative of a true consumer model, and equating it as a form of Liberty itself.

46 TMC July 20, 2015 at 7:55 am

‘can’t afford’ does not necessarily mean ‘does not have money to’.
It may also mean that the extra money is allocated to something with a higher priority.
Now the higher priority good will have to be downgraded to accommodate the new rules.

Net loss for the consumer.

47 MOFO. July 20, 2015 at 8:46 am

Also, if they truly cant afford fries and a drink then mandating fries and a drink will simply make it impossible for them to consume what they really want, a burger.

48 Careless July 21, 2015 at 12:07 pm

Sorry, you’re the one contradicting yourself. Either they could afford it but didn’t want to, or they couldn’t afford it, and mandating that they buy it won’t help

49 Brad July 20, 2015 at 7:52 am

But what if the government subsidizes fries and drinks when bought by corporations but not when bought by individuals?

50 TMC July 20, 2015 at 7:57 am

Doesn’t sound like the government should be involved with fries and drinks at all. What fool could support this?

51 Rich Berger July 20, 2015 at 9:27 am

You must not have read the comments that carefully. Try it, and you’ll have your answer.

52 Engineer July 20, 2015 at 7:53 am

After my last employer shut down a year ago I began to do a kind of “gig work” tangentially relating to my engineering expertise.

The positive thing about it is that I would not have been hired as an employee to do this kind of work due to lack of experience. Thus gig work can be viewed as a kind of apprenticeship.

The most salient negative aspect is that at least in my case it includes the negative aspects of freelance work (ie. dealing with demanding and problematic customers). Working for a company is supposed to create efficiency because it assigns engineers, sales people, marketing people etc. to utilize their strengths. But on a gig I have to waste my time and make less money because I am sometimes dealing with clueless customers who don’t know what they want.

53 TMC July 20, 2015 at 8:00 am

So if the positives outweigh the negatives, then do it. Otherwise don’t. It’s nice to have that choice.

54 Moreno Klaus July 20, 2015 at 8:22 am

Is it really a choice? probably not….

55 Alain July 20, 2015 at 11:40 am

Lolz!

Who, exactly, is forcing him?

56 Arjun July 20, 2015 at 11:04 am

How do you know somebody is an engineer? Don’t worry, he’ll tell you

(Source: Am an engineer)

57 JWatts July 20, 2015 at 11:47 am

“But on a gig I have to waste my time and make less money because I am sometimes dealing with clueless customers who don’t know what they want.”

I’m confused as to how that’s an issue that the company could reasonably fix. That sounds like an issue that all engineers deal with. At least, it’s something I’ve dealt with for my entire career. The Marketing and Sales people get you a toehold in front of the customer. It’s up to you to make the relationship work out in the long run. Yet another example indicating that “Life is not Perfect”.

58 Engineer July 20, 2015 at 1:32 pm

I’m confused as to how that’s an issue that the company could reasonably fix. That sounds like an issue that all engineers deal with. At least, it’s something I’ve dealt with for my entire career

As an employee, you get your monthly salary no matter what. As a “gig”-based contractor paid by the job, clients who hem and haw cost me money.

If it were up to me I would decline to work with some of these customers.

59 Shaky Baky July 20, 2015 at 2:38 pm

In America you can be fired for sucking at customer interactions, so no you do not get lifetime employment from “company”.

60 Engineer July 20, 2015 at 3:01 pm

Maybe the point isn’t clear. A customer needs a job done, and I tell the firm I work for that it will cost X. The firm then argues me down to 80% of X (and of course the firm will be getting their cut of my fee). I do the work and give it to the customer. The customer says “Great. Except now we realize we need blahblah to be a bit different”. I would like to say: “fine then pay for it” but the firm only permits that in extreme circumstances. So essentially I spend days at a time for “unpaid” work.

Now you might say that the fee that I quote should include the expectation that the customer will be problematic. Or that I should learn how to manage clients so that they don’t waste my time. My point is that these are not currently part of my skillset as an engineer, and that a project manager or account manager type of personality would handle these things better.

61 William Woody July 20, 2015 at 8:05 am

As someone who has been a freelance software developer on and off over the years, I wonder how the mechanics of providing me “benefits” would work when many of the customers I engage with are for fixed-priced app development which takes between 4 and 6 weeks to complete. Given that it takes 45 days for a health care plan to engage, would each person who engages me (including small startups who are too small to have a group health care plan) be required to put me on and off their group health care plans as I start and complete projects?

Or wouldn’t it be easier for them to just pay me a little bit more and I can buy my own health care plan–so as to reduce the logistics of me being popped on and off of various health care plans as I move between companies building their iPhone apps?

And if the latter–isn’t that sort of the situation now?

I can understand the problem people have with Uber: you’re really not working for multiple companies but are doing work for Uber. And given that Uber defines how much you will get paid and you are at the whim of your riders as to where you go–I can understand the idea that somehow you’re not really a 1099 contractor but a W-2 employee who has the perk of being able to set your own hours.

But bad situations create bad law–and just because Uber seems to some to be testing the fringe case doesn’t mean we need a law which also applies to folks like me.

62 Ryan Miller July 20, 2015 at 9:50 am

Considering that whether one has multiple clients is *already* part of the legal test for contractor status, I don’t really understand the legislative problem. Is the complaint that this feature should be a more absolute factor in the test than it is now? I haven’t really seen any arguments for that claim.

63 Harun July 20, 2015 at 12:54 pm

For some jobs its impossible to have more than one client at the same time.

I can’t drive you to the airport and john to the store at the same time.

Uber can just become a marketplace and resolve these issues.

Of course, this makes one wonder if maybe all this paternalism is really worth it, especially when “your boss” is an app. Its hard for an app you can turn off at any time to exploit you.

64 Harun July 20, 2015 at 12:52 pm

Uber drivers can work for Lyft at the exact same time.

Uber could easily make a few cosmetic changes and become a marketplace, by charging Uber drivers a monthly subscription fee. Amazon does this for its sellers…we are not employees of Amazon.

But indeed, if you wish to force Uber to treat its drivers as “employees” then why not have the same laws force your employers and yourself to be inconvenienced as well? In fact, working on an app for one customer seems analogous to driving one customer to a location, IMHO.

65 adam July 20, 2015 at 12:55 pm

Lots of uber drivers have more than one client too. Plenty of them drive for a more traditional chaffeur type company, or for a hotel, and pick up uber riders in between. There are also people who work regular non-driver jobs during normal work hours and drive uber at night and on weekends.

66 Nickik July 20, 2015 at 8:06 am

Only in the US is a burger with fries, some water and lots of suger considered a “nutritious meal”. You want to get healthy and buy only a burger and some salat? Not anymore, now you get a burger with fries and tons of sugar. Keep healphy!

This is probebly gone be won of those cases were the rest of the world facepalms.

67 Hamish Atkinson July 20, 2015 at 9:16 am

^where the rest of the world facepalms.

Agreed, though. I often buy only the burger because I don’t like fries, or sugary-tasting drinks, and neither do my arteries.

68 Bob from Ohio July 20, 2015 at 9:53 am

Some restaurants serve only kale but government should mandate yoghurt and water. Better?

You realize he was just using his example so it would be like a Happy Meal which is a McDonald’s kid’s meal.

69 Yancey Ward July 20, 2015 at 11:33 am

I am face-palming right now.

70 Alain July 20, 2015 at 11:42 am

+1

71 Harun July 20, 2015 at 12:56 pm

Europeans eating fried fish and fries at Nordsee or Kebab with fries all feeling smug because they have some salat next to the fries.

72 Dave Backus @ NYU July 20, 2015 at 8:13 am

Another reference for your collection: Amanda Kowalski and Jonathan Kolstad’s study of the Mass healthcare law. Link: http://www.econ.yale.edu/~ak669/malabor.latest.draft.pdf

73 MD2 July 20, 2015 at 8:19 am

“Benefits are a product that workers buy from firms.”

Yes, and tenure is a product the taxpayers buy for people who understand the world as clearly as Dr. Tabarrok and are willing to explain it to us as if my employer benefits were a happy meal.

74 JWatts July 20, 2015 at 11:58 am

The University tenure system is a part of the Professor pseudo guild system and, as such, isn’t subject to market forces. So, I’m uncertain what your point is?

75 Anthony July 20, 2015 at 3:05 pm

Not entirely true, because for at least some fields, people qualified to be professors have similarly-lucrative opportunities outside academia. Tenure (job security) is something which costs the university less to offer than it is worth to some number of candidates, helping the university compete against non-academic employers.

76 Sam July 20, 2015 at 8:34 am

“Even though everyone likes fries and a drink they may not like the added benefits by as much as the increase in the price of the meal. Indeed, this must the case since consumers could have bought the meal before the Act but chose not to.”
This assumes the price would be the same under a different bundling scheme, which it generally wouldn’t. Preventing a firm from offering certain bundles–or forcing them to offer bundles they’d prefer not to–can dramatically change the prices goods are offered at and the efficiency of the market, depending on the degree of market power and the particulars of how consumers value the various components. There’s a big literature on this question and it’s not nearly as simple as Tabarrok presents it.

77 rayward July 20, 2015 at 8:37 am

Tabarrok doesn’t mention withholding and employment taxes: employers withhold neither from the compensation of independent contractors, leaving compliance (including the cost of compliance) and the obligation for remittance of taxes solely with the contractor. Collecting at the employer level is both convenient for the employee (and avoids compliance costs) and increases compliance. If everyone is a contractor and nobody is an employee, funding government would become far more difficult because compliance would be reduced, which is likely Tabarrok’s point/objective. That’s a different matter than the goal of reducing the cost of employment in order to encourage more of it, as the benefits Tabarrok mentions, such as health insurance, are an historical anomaly that are best ended. But creating a fiction out of thin air (that an employee is an independent contractor when she isn’t) is not the way to do it, as it increases disrespect for all laws and reduces compliance with all laws. We allow Apple and other multi-national companies to avoid U.S. taxation by apportioning much of their income to file drawers in tax havens. Do we allow companies to avoid employment taxes and the obligation to withhold taxes with a fiction that their employees aren’t really employees? Tabarrok may believe that’s a great idea because it likely will reduce tax compliance, but it’s dishonest: if the size off government needs to be reduced, do it the old-fashioned way – through democracy.

78 MOFO. July 20, 2015 at 8:51 am

“leaving compliance (including the cost of compliance) and the obligation for remittance of taxes solely with the contractor. Collecting at the employer level is both convenient for the employee (and avoids compliance costs) and increases compliance.”

Then why not make compliance cheaper and easier?

79 Engineer July 20, 2015 at 9:21 am

if the size off government needs to be reduced, do it the old-fashioned way – through democracy.

Extremely old-fashioned. Today the way to do things is get them approved at the UN security council before even making them public, and then calling Congress names for not immediately agreeing to rubber-stamp.

80 JWatts July 20, 2015 at 12:00 pm

LOL, an uncharitable soul might say those particular Executive actions are not democratic at all.

81 adam July 20, 2015 at 1:00 pm

“Collecting at the employer level is both convenient for the employee (and avoids compliance costs) and increases compliance.”

What’s your evidence that this increases compliance? Uber is surely issuing 1099s to all of these drivers and sending copies to the IRS. There’s no way for them to avoid paying the required taxes when the IRS has the 1099 from Uber.

82 Andre July 20, 2015 at 8:41 am

That’s a powerful analogy, but I think it breaks down if you expand it to consider employers misclassifying full-time employees — and that, not a preference for hiring true contractors, is the major problem politicians have raised lately, and that I think you’re alluding to. You’ve compared benefits to fries that employees want alongside the burger of basic employment, but whose concealed costs discourage hiring. But it only makes sense to imagine a restaurant misclassifying the happy meal of full-time status as a simple burger if doing so saves the restaurant money.

To my mind, misclassifying full-time employees more closely resembles one of two different situations. In the first, the restaurant charges a customer for a happy meal but provides only a burger, which they classify as an independent happy meal the customer is expected to augment with fries and a drink sourced as they see fit. In the second, employers behave like the customers and the employees like the restaurant. The customer demands the restaurant devote labor and materials to assembling a burger, fries, and a drink, but then pays only for the burger. Perhaps they classify the employee as an independent contractor competing for their business and suggest they throw in the fries to keep the customer from looking elsewhere. Perhaps they tell the fast-food worker to pass the cost on to the public welfare programs that support him or her. In any of these scenarios, employers demand more from employees while compensating them with less than they, having either paid or worked, are entitled to.

The fast-food analogy also invites reflection on restaurant employees who are not only unable to afford food at their own (cheap) restaurants, but whose low wages force them to rely on public money: http://www.forbes.com/sites/laurashin/2013/07/18/why-mcdonalds-employee-budget-has-everyone-up-in-arms/

83 MOFO. July 20, 2015 at 8:54 am

The fast-food analogy also invites reflection on restaurant employees who are not only unable to afford food at their own (cheap) restaurants, but whose low wages force them to rely on public money”

Force them? How would things be different if they didnt have that job?

84 triclops41 July 20, 2015 at 11:34 am

Helping someone less than the prescribed amount is identical to hurting someone equal to the difference between the actual and prescribed amounts.

85 Mike Hunter July 20, 2015 at 2:22 pm

That’s a powerful analogy, but I think it breaks down if you expand it to consider employers misclassifying full-time employees — and that, not a preference for hiring true contractors, is the major problem politicians have raised lately…

We have a winner!

86 Boonton July 20, 2015 at 8:50 am

Just to make everyone mad, this seems like another example of why the ACA works. How should people be covered? Some people say everyone should buy their own health insurance with gov’t paying for some type of ‘vouchers’ for those who can’t afford it. Others say that the boss should provide insurance. The ACA seems to say the answer is both. ‘Gig’ workers should be able to buy their own policies leaving them free to hop from gig to gig instead of trapping themselves in one job for the health benefits while workers who are less inclined to job hop settle down with insurance provided by their work.

87 BenK July 20, 2015 at 9:13 am

It’s a good point, and it is a bit hard to deal with; because the ‘gig economy’ is something of a direct individual choice, perhaps, to escape government labor ‘protections’ as a laborer. The way the government has been dealing, in many ways everyone is a government labor asset on loan to industry. This is a problematic perspective overall, yet selective break downs of the system create additional complexity.

88 Alain July 20, 2015 at 11:47 am

I agree. Liberalism worked in this case. It worked to destroy a functioning part of the economy where both buyers and sellers willingly were entering into mutually beneficial contracts. However since these contracts did not conform to your, and liberalism’s, believies they had to be destroyed.

89 Dan Lavatan July 20, 2015 at 12:19 pm

No, first of all the employer mandate is a horrible idea. Even if you like insurance, it should be independent of employment and all employer-sponsored coverage should be ended. Second, insurance is a horrible way to pay for healthcare. The ACA should be replaced with a system of health savings accounts that are normally independent of all insurance.

90 JonFraz July 21, 2015 at 4:45 pm

In the long run employer coverage should end– however it is not politically practical to do so, and sudden changes on a massive scale are hugely disruptive in and of themselves and so should be avoided in all except true crises.
We should probably remove the employer mandate, then in another ten years convert the employee tax deductibility for employer insurance into a general tax deduction regardless of how one obtains coverage. If (crucial word!) the ACA provides acceptable coverage this would gradually result in people moving to individual policies (and employers hurrying them along)

And no, HSAs are not a good way to pay healthcare in toto. For basic care expenses like an office visit, simple diagnostic tests and generic prescriptions they do work– but healthcare expenses can very easily mount well beyond what any person of modest means could hope to save on his own.

91 JWatts July 20, 2015 at 12:34 pm

“Just to make everyone mad, this seems like another example of why the ACA works.”

ACA partially works in this case. It allows the Gig worker to purchase insurance independently of an employer. However, the ACA through community rating, maximum age differentials and a high level of minimal coverage raised the cost to the point that it’s probably not worth the costs to a lot of younger employees who are most likely to be Gig workers in the first place.

92 The Original D July 20, 2015 at 2:51 pm

The fundamental flaw in practically all health reform plans is begins with basic terminology. The goal is health care financing, but they call it health insurance. They’re not the same, and it muddies the waters considerably.

93 JonFraz July 21, 2015 at 4:47 pm

Most people understand that health insurance at some level is really healthcare financing. The water is not really muddied.

94 Boonton July 20, 2015 at 1:46 pm

Dan

No, first of all the employer mandate is a horrible idea. Even if you like insurance, it should be independent of employment and all employer-sponsored coverage should be ended. Second, insurance is a horrible way to pay for healthcare. The ACA should be replaced with a system of health savings accounts that are normally independent of all insurance.

It has pluses and minuses. A big plus is that you get negotiating power AND competition. Single payer systems give you one but not the other.

We seem to be moving towards a state of chronic, expensive illnessess as the new norm. That’s a good thing since for most of human history medicine has been useful for a few things and after that providing you a bit of comfort before you die. Savings accounts are not practical IMO, instead a better analogy would be something like a subscription fee, which brings you back to the insurance model which is evolving today. Why shouldn’t healthcare be paid for by insurance? Because you say so?

JWatts

ACA partially works in this case. It allows the Gig worker to purchase insurance independently of an employer. However, the ACA through community rating, maximum age differentials and a high level of minimal coverage raised the cost to the point that it’s probably not worth the costs to a lot of younger employees who are most likely to be Gig workers in the first place.

Aren’t older workers typically higher skilled and higher paid? Wouldn’t it make more sense for the ‘gig economy’ to orient away from younger workers and towards older ones? Think about it, ten companies probably need some type of labor every day but only need the services of a wizzened expert in the filed on occassion. It seems like it makes more sense then for the older, highly skilled workers to end up doing most of the gig work (they know the field, they probably know more people in the field, etc.) part time for all the companies in the field while the less skilled, younger workers take full time jobs with one company or another until they get enough gravitas in their resumes to be plausible ‘gig workers’. Perhaps younger works making up the gig economy is just an initial fad, esp. since lots of gig jobs are in the tech sector which often require novel skills (such as newer programming languages) that you won’t find many vetern experts in anyway.

Also, I don’t buy your beef with community rating. Young and old love employer provided benefits. But insurance you get from work is even more ‘community rated’ than plans you can buy on the exchange. The ACA plans allow *some* variation for age and smoking status, with workplace plans everyone pays the same. Clearly that is a worse deal for younger workers who are less likely to need expensive healthcare. Strictly speaking, the ACA is actually a small step away from community rating.

95 JonFraz July 21, 2015 at 4:49 pm

Besides which young people do not stay that way (much as we all wish life did work like that). Young people become old people eventually, save some few unlucky ones that become dead people instead. There’s no injustice being done here, only the amortization of healthcare expenses over an entire (adult) lifetime.

96 BenK July 20, 2015 at 9:08 am

To take a less liberal tact, the issue is this: if society decides that every thirsty person will be given a large soda fountain drink and a small fries, perhaps with a side of baby carrots (pretty similar to our emergency room situation, in some ways), then the question is whether people should be allowed to buy the burger without sides and a drink.

There is a good question whether the choice of drink and sides is appropriate; whether default choices will drive out other options for people who would otherwise get an unsweetened tea and sweet potato fries, for example.

97 Oboewan July 20, 2015 at 2:45 pm

To take a MORE liberal tact, I’d be perfectly happy letting those who WON’T pay into the healthcare system just bleed out and die from whatever leads to needing emergency room services that they just can’t afford out of pocket.

98 dearieme July 20, 2015 at 9:22 am

“Addendum: The theory of compensating differences in wages with benefits was pioneered by Adam Smith.”

It might be simpler to mention those bits of economics not “pioneered” by Smith.

99 ibaien July 20, 2015 at 9:23 am

if you could choose between a system where everyone was provided with a government funded small burger, fries, and fountain soda or one in which some people could buy Kobe beef burgers, truffle fries, and a bottle of champagne but there would be starving bodies for them to step over while waiting in line, which would you prefer?

100 y81 July 20, 2015 at 9:29 am

Prof. Tabarrok is making an argument against pretty much all labor market regulation, since workers at any job can make their own decisions about trading benefits for pay. (Maybe there is a place for restrictions on child labor.) That argument has been decisively rejected by the public, the courts, and pretty much every organ of society except a small minority of economists.

Prof. Tabarrok and his allies have a plan to circumvent the multitudinous legal protections afforded workers by restructuring their work arrangements such that the workers can be classified as independent contractors. For a variety of historical reasons, independent contractors receive less legal protection than employees, but if working arrangements are restructured to turn people who used to be employees into independent contractors, then society is likely to decide that independent contractors require the same protections as employees.

101 Rich Berger July 20, 2015 at 10:16 am

I suggest you go up to members of the public and quiz them about the size, scope and authority for these labor regulations. I’ll bet only a small minority will have any idea what is being done on their behalf. Sure, why should an individual be able to freely contract with his employer, when the smarter people can do that for him? Wasn’t that what unions were supposed to be for? How much of the private workforce is covered by unions? 6.6% in 2012. For the the so-called “public sector” is was down to 35.9%

As James Thurber once wrote, you could look it up: http://www.nytimes.com/2013/01/24/business/union-membership-drops-despite-job-growth.html?_r=0

102 y81 July 20, 2015 at 11:41 am

Every poll I have ever seen shows that labor market regulations (e.g., overtime pay requirements, mandated benefits, statutory job protections, pension regulation) are very popular, and the general public would like to see more such regulation. They general public may be misguided, but it’s demonstrably false to say that they are clamoring for deregulation of the labor market. It’s beyond false and into the realm of pure fantasy to think that society will move in that direction. More likely, one consequence of the “gig economy” will be substantially greater regulation of independent contractor relationships.

103 Alain July 20, 2015 at 11:50 am

Lol.

Note how you only talked about the benefit side of the equation. I like free stuff too!

104 JWatts July 20, 2015 at 12:39 pm

Everyone knows that corporations have an endless supply of money and that there’s no downside to making them comply with any regulation or mandate a politician can dream up! /sarcasm

105 Boonton July 20, 2015 at 3:01 pm

Popular? Yes but that popularity falls off very sharply. Beyond policies that ‘mandate’ a semi-acceptable standard of living and what most people view as issues of general fairness (i.e. discrimination prohibitions, sexual harassment laws etc.) the actual amount of “Happy Meal” type laws that can get passed drops off very fast. Consider only the most liberal jurisdictions are even toying with serious ‘living wage’ laws and even then it is a tough sell.

That hints that there are some counter mechanisms at work that act as a check on unlimited ‘happy mealing’ every job in the economy. At least in the US.

106 Veron July 20, 2015 at 10:18 am

> “Prof. Tabarrok is making an argument against pretty much all labor market regulation…”

Bingo !

And it’s a highly valid argument against all Progressive concepts & government interventions for the past 125 years.

The fundamental issue is subjective ‘values’ … and who should make the value judgments and economic tradeoff decisions for your life.

Progressives demand that wise, noble politicians should impose their value judgments on society… covering virtually all aspects of human economic and social life. Libertarians favor the freedom to follow personal value judgments.

Politicians have overwhelmingly defeated individual choice in America — and everything is really going well for Americans in 2015 (?)
But their are still stubborn pockets of individual liberty that the politicians need to clean up.

107 prior_approval July 20, 2015 at 12:03 pm

‘And it’s a highly valid argument against all Progressive concepts & government interventions for the past 125 years.’

That crazy Prussian progressive Bismarck would disagree, actually. But then, what would one expect of the man that first implemented what became later known as the hallmarks of any social welfare state.

Here is an example of his thinking – ‘The real grievance of the worker is the insecurity of his existence; he is not sure that he will always have work, he is not sure that he will always be healthy, and he foresees that he will one day be old and unfit to work. If he falls into poverty, even if only through a prolonged illness, he is then completely helpless, left to his own devices, and society does not currently recognize any real obligation towards him beyond the usual help for the poor, even if he has been working all the time ever so faithfully and diligently. The usual help for the poor, however, leaves a lot to be desired, especially in large cities, where it is very much worse than in the country.’ https://en.wikipedia.org/wiki/Otto_von_Bismarck#Social_legislation

Even worse, such policies resulted in this – ‘The social legislation implemented by Bismarck in the 1880s played a key role in the sharp, rapid decline of German emigration to America. Young men considering emigration looked at not only the gap between higher hourly “direct wages” in the United States and Germany but also the differential in “indirect wages”—social benefits, which favored staying in Germany. The young men went to German industrial cities, so that Bismarck’s insurance system partly offset low wage rates in Germany and furthered the fall of the emigration rate.’

At least those Germans seem to have preferred something more than just wages – oops, hamburgers without fries and a coke.

It really isn’t hard to mock such simplistic scenarios by referring to something outside of the ever so wishfully created GMU econ bubble.

108 y81 July 20, 2015 at 2:46 pm

The problem with Prof. Tabarrok’s argument, and that of his friends on the comment thread, is that the ship has sailed. It’s as if someone came from the 18th century and began explaining that only those with freehold estates in real property and/or guild membership should be allowed to vote, because they are the only people with an actual stake in society. There’s some logic to that position, but it isn’t going to happen. So instead Prof. Tabarrok is driven to defensive maneuvers trying to preserve isolated anomalies of freedom from regulation. In fact, the paradox of the second best tells us that in a pervasively regulated arena, those anomalies may be sub-optimal.

109 libert July 20, 2015 at 9:33 am

Three points/questions:

1) How does the story change if you relax the assumption of perfect competition?

2) How does the story change if the cost of providing a good is a decreasing function of number of people who buy the good?

(Spoiler alert: either one raises the possibility of a “free lunch” from the Happy Meal Act, pardon the pun)

3) The evidence cited (Gruber) specifically finds no change in labor supply in response to a mandated benefit, despite a fall in wages. This implies that the workers must value the mandated benefit by at least as much as the drop in wages (otherwise, compensation would be lower and labor supply would fall), in turn suggesting no efficiency costs from the policy.

110 Justin July 20, 2015 at 9:41 am

Good post. There are also coordination and free rider problems at work. Workers might like to have benefits but they have no low transaction cost method of expressing these preferences. The easiest path is to simply take whatever contract Uber offers as is. Secondly there are free rider problems. Workers might like benefits but asking for them puts them in jeopardy of appearing to be a “bad type” to employers so they remain silent. I’m not sure that this is a significant problem with Uber though.

111 Justin July 20, 2015 at 9:37 am

I dub the “Lazy Libertarian Fallacy” to be when someone makes an argument for free markets on the unstated and undefended assumption of perfect competition.

112 Jim July 20, 2015 at 10:12 am

The argument in this post does not at all rely on perfect competition.

113 Justin July 20, 2015 at 10:26 am

Yes it does:

“If firms are required to provide benefits to contractors they will lower the contractor wage. But how do we know the extra benefits aren’t worth the reduction in wages? If the extra benefits were worth more to workers than they cost firms, firms would have eagerly provided these benefits as a way of increasing profits. Firms can profit whenever buyers are willing to pay more for a product than its cost. Benefits are a product that workers buy from firms. ”

That’s pure a priori reasoning from perfect competition.

114 Rich Berger July 20, 2015 at 11:19 am

Sorry but no soap. Would hold even if there were only one firm. What Alex has defined is profit seeking by a firm, not perfect competition.

115 Justin July 20, 2015 at 1:17 pm

The deductions are only necessarily true given perfect competition.

1. In monopolistic competition firms make a profit and government could enhance the bargaining power of workers to shift some profit from Uber to the workers

2. Perfect competition assumes zero transaction costs, which allows the market to seamlessly change from one basket of goods to offering a different basket of goods if that’s what employees prefer. Given perfect competition, the mere fact that this does not occur is proof that employees prefer the status quo. But with imperfect competition, high transaction costs can prevent this from happening so we cannot deduce that consumers prefer benefits.

3. Perfect competition (First Fundamental Theorem of Welfare Economics) assumes actors cannot harm themselves or others, but speaking out for more benefits puts employees in a position of being deemed a “bad type” by their employee. So employees chose the basket of “standard salary and being deemed a good type” over “ask for different compensation package and being deemed a bad type”.

116 Justin July 20, 2015 at 1:28 pm

Whups, in item #1 I should have written imperfect competition, not monpolistic competition because a firm’s monopoly power is actually pretty low given monopolistic competition.

Also, I might as well point out that #3 is about signaling. (Isn’t everything?)

117 Petrov July 20, 2015 at 5:35 pm

Rich is correct, perfect competition is not assumed or required. Justin’s initial statement was simply wrong. What Justin is correct about is that under perfect competition Tabarrok’s argument is true but it’s far from the only set of assumptions that work.

118 Justin July 21, 2015 at 11:02 am

There are also many sets of assumptions for which the argument doesn’t work. Therein lies the rub.

With perfect competition, Tabarrok’s argument is always correct. With imperfect competition it may or may not be correct. That can only be resolved through empirical means.

Which brings me back to the lazy libertarian fallacy. If Tabarrok had really wanted to make his argument he should have done the empirical work necessary to show that Uber workers are the types of workers who would choose high pay over lower pay with benefits. If all Uber workers are stay-at-home moms, free lancers, college kids, etc… then that is *likely* true. But if they are people who want a fulltime job (with benefits) but can’t get it then it is *likely* false.

But libertarians never do this work. They make logical arguments that hold under the assumptions of perfect competition and write QED at the end, which is simply wrong.

119 Shaky bogey July 20, 2015 at 10:29 am

What do you call the fallacy of responding to a point not made?

120 Rich Berger July 20, 2015 at 12:40 pm

The Obama Maneuver.

121 Nick July 20, 2015 at 9:53 am

“Indeed, this must the case since consumers could have bought the meal before the Act but chose not to.”

Here’s at least one part where the analogy breaks down. In comparing full-time employee status vs contractor status as full meals vs only burgers, you’re assuming that workers can freely and easily get the exact same job but as an employee rather than a contractor, and they just choose to be a contractor. This isn’t the case very often. Companies have much more power in labor markets than any individual potential employee, especially with labor unions on the way out.

So really, the analogy is that McDonald’s tells you you can either eat a burger or starve to death.

Given that the entire point of the analogy is that contractors must have a net loss in welfare because (it’s assumed) they’re contractors by choice, I think this makes the entire thing fall apart.

122 Ryan Miller July 20, 2015 at 9:59 am

This analogy is misleading because under current law, “contractor” and “employee” are different but overlapping bundles, see: https://www.angelo.edu/services/sbdc/documents/library_resources/IRS%2020%20Factor%20Test.pdf — note that while Uber may be toeing the line on this, they’re not obviously across it. If they are found in violation, the most likely remedy would be to *stop* providing certain benefits like car leasing services. Also, yellow cab drivers are also often independent contractors (!) and while they seem even more like employees (equipment provided, hours set, harder to work for competitors), that’s been found legal: https://www.bostonglobe.com/metro/2015/04/21/mass-high-court-rejects-bold-challenge-structure-boston-taxi-industry/wfFKI50KI0Qo35h6BZUr5L/story.html

123 Grant July 20, 2015 at 10:18 am

This is great analysis and I like the comparison to the happy meal. The biggest problem I see in the debate about companies like Uber and in general the debate over what are fair wages and benefits for employees, is that it only takes one article about how the CEO of a company lives in a 40,000 Sqf house, drives a Lamborghini, and has a corporate jet to get people to stop thinking analytically about the issues. Emotion takes over and the basic instinct of jealous wins out. People see the wealth of the executives and think its unfair that they have that much while a driver has to pay out of pocket for his kid’s surgery.

124 mishka July 20, 2015 at 10:19 am

An empty hand-waving argument that completely ignores labor supply/demand elasticity. It may be valid. It may be BS. But there’s no way to tell from the data (not) provided.

125 er July 20, 2015 at 10:45 am

this is more like paying for the happy meal and only getting the burger.

126 er July 20, 2015 at 10:47 am

actually I like it more the other way around, paying for the happy meal and only getting the drink and fries.

127 er July 20, 2015 at 10:51 am

I just think it is unfair competition when the main barrier to entry is ability to resist government regulations. Uber/air bnb are more based on the strength of their legal/lobbying teams than any innovation.

128 The Original D July 20, 2015 at 2:55 pm

Given how many places Uber and AirBnB are banned, they’re not getting their moneys’ worth from those lobbyists.

129 er July 20, 2015 at 5:03 pm

you don’t think so?

130 er July 20, 2015 at 10:51 am

we’re in a situation where there is a happy meal law. this isn’t a hypothetical law.

131 Jonathan Tappan July 20, 2015 at 10:52 am

Quibble: What you call a “Happy Meal” McDonald’s calls a “Value Meal.” A “Happy Meal” includes small-sized portions and a toy.

More substantially, this argument could be used against any government-mandated employment rules including minimum wage, overtime pay and workplace safety. Given the unequal bargaining power of employers and employees, is this really where you want to go?

132 efcdons July 20, 2015 at 11:10 am

If you don’t know if that is where Alex really wants to go you haven’t read this blog before. And ignoring unequal bargaining power is the whole point. It makes it a lot easier to come to certain conclusions when you pretend the actual world doesn’t exist.

133 dsgntd_plyr July 20, 2015 at 11:06 am

I thought this post would be about Obamacare.

134 John July 20, 2015 at 11:22 am

I wonder if the comparison between happy meal and employment relationship is legitimately one of apples to apples. While I agree with some of the logic it’s also true that market interaction in mot merely that of prices — people actually do talk and complain and look for law and regulation to address relational issues that are not well mediated via the price mechanism.

So while I can easily see that the happy meal is more a economicly uninformed (or simply not considererd aspect) political stunt more than anything I’m not sure the same is true in the question of contract versuse employee status setting. I think the complexities here make the latter different in knd from the former.

135 mike July 20, 2015 at 11:24 am

How could an analogy so simple be wrong? Do you have one for Isis? Preferably one involving a lemonade stand, or a neighbor who borrows your lawn mower.

136 Zach Groff July 20, 2015 at 11:26 am

A number of assumptions here that might be false.

1) “It’s implausible that firms and workers will overlook mutually profitable exchanges.” Not really. The initial legwork of researching plans, etc. might be more salient even if the long-term benefits outweigh the costs. This could lead firms not to provide benefits. This still needs an explanation of how the case differs for firms working with contractors rather than employees, but the concentration of workers in the employee case could create greater pressure to seek out the long-term benefits through formal or informal collective bargaining.

2) Workers might not value the benefits as much as they rationally should because of overlooking the long-term benefits in favor of short-term costs. This would create a paternalistic case for providing benefits.

3) Perhaps there is a social norm of firms irrationally over-providing benefits to employees. Employees, in turn, have an irrational tendency not to work for a firm that tries to break with the norm by providing a higher salary and fewer benefits. But for contractors, there is no such norm. This leads to contractors being paid less than they would if they were employees. Firms should be able to compensate contractors, but contractors are more dispensable and hence lack the power to extract the compensation.

137 Yancey Ward July 20, 2015 at 11:47 am

As expected, Tabarrok got a lot of pushback from people who seem to be unable to think very clearly.

Here is the problem- there is nothing in the argument for mandated benefits that doesn’t apply generally to everything else a worker might purchase with his wages.

138 Justin July 20, 2015 at 1:23 pm

“there is nothing in the argument for mandated benefits that doesn’t apply generally to everything else a worker might purchase with his wages.”

That’s the problem with so many people who have only read a book by Sowell or Rand or Hazlitt. They are working with a coherent but oversimplified model of reality. Goods are heterogeneous. What is true for one good is not necessarily true for another.

Low value consumer products like burgers and electronics are usually very close proxies for perfect competition (ok, more accurately monopolistic competition). But goods like wages are not. You get all sorts of weirdness from a whole host of factors (backwards bending supply curve, imperfect imformation, monopoly power, signalling, etc…)

139 Yancey Ward July 20, 2015 at 7:36 pm

You are just full of shit, then. Where people draw the line between mandated benefits and wages is simply arbitrary, and you can always tell this is happening when a dumbass like you comes along pontificating about heterogenous this, and perfect competition that. None of the arguments you are going to use can’t be applied just as rationally/irrationally to any good or service a worker might want, or not want, to purchase. At the bottom of it all is this- someone like you wants the worker to purchase something in a quantity the worker might not want to purchase, or wants the good or service subsidized by workers that don’t really want it, and for the benefit of those that do.

So go fuck yourself.

140 Dan Lavatan July 20, 2015 at 12:22 pm

While it is obvious that contracting is important to the economy and we should not employee status on contractors, the more important questions is why we have benefits imposed on employees. Most of us would be much better off if all employee-sponsored “benefits” were ended, our cash salaries were dramatically increased, and taxes were adjusted to make the result non-discriminatory and tax neutral. We all should be advocating clearly and consistently for this outcome.

141 collin July 20, 2015 at 12:29 pm

I am so confused about the post. So the hamburger is job, french fries are benefits and drink is the flexibility of hours. Is Obamacare the apple pie?

I still say in the long run libertarians, especially Bryan Caplan, are going to be upset that young people are working low wage flexible jobs and not getting married and having children.

142 A Definite Beta Guy July 20, 2015 at 6:59 pm

“I still say in the long run libertarians, especially Bryan Caplan, are going to be upset that young people are working low wage flexible jobs and not getting married and having children. ”

Nah, people in other nations are perfect substitutes. Japanese and Americans are basically the same, so were Germans and Soviets, that’s why there was so much competition back in the 1940s, just natural competition between close substitutes.

143 Soho July 20, 2015 at 12:46 pm

For anyone who’s confused by this post, I’m a living example of what he’s talking about. As a 30 year old male working as an independent consultant, I am compensated entirely in cash. I have literally no benefits whatsoever. And it’s a great deal! The key is that my total compensation costs the client roughly the same as what they spend on a full time employee, except I have full control. Health insurance? As a (fortunately) healthy individual I don’t need a platinum plan, and pocket about $300 per month by buying a silver one instead. Training? I use coursera rather than attending the expensive seminars corporations typically use, and again pocket the difference. That’s a few thousand dollars a year. And on and on.

Basically, if you give a healthy, single, young person all of their compensation as cash they’ll be better off than if they got any benefits. The reverse is currently true for the elderly, ill, or those with families to support.

144 David Cohen July 20, 2015 at 12:57 pm

The entire argument rests upon this premise: “It’s implausible that firms and workers will overlook mutually profitable exchanges.” I believe that this is true only if, at the very least, the owners and the employer know the exact nature of the benefits, their exact cost, and exactly by how much and for how long wages will be cut if the benefits are provided. While employers might obtain this information, I think that it is implausible to believe that employees would have ready access to this information.

145 TMC July 21, 2015 at 12:52 am

I’ve negotiated many hires. The applicants are well aware of the trade offs. This is easier than it seems as they can compare existing offers, and a current offer to previous jobs.

146 mike July 20, 2015 at 1:34 pm

If only there were some sort of laboratory where we could see what happens if workers and management were completely free to negotiate wage and benefits without government interference. But what would we call it? How about “History”.

147 Jason Smith July 20, 2015 at 2:07 pm

I think this reading of the issue is way off. It’s not that contractors are being forced to get burger and fries (wages + benefits), it’s that contractors are paying the same price as employees (i.e. they have as little freedom as an employee — wearing a uniform, strictly scheduled hours, etc) and getting only a burger (no health insurance).

Overall, these econ 101 arguments about minimum wages, minimum benefits, etc are strongly model dependent.

http://informationtransfereconomics.blogspot.com/2014/06/seattles-new-minimum-wage-and.html

148 Rob July 20, 2015 at 7:37 pm

In my experience as a CPA and tax practitioner, most independent contractors are paid above what the standard rate would be for an employee, in a similar position with the same company. For example, it’s not uncommon for an independent contractor to charge $50/hour but be paid $30/hour if an employee. There are advantages to each but as far as net, after-tax pay, an independent contractor can often make more money, given the numerous write-offs afforded to them.

149 Jason Smith July 21, 2015 at 6:31 pm

I’d agree that in many models of the contractor/employee designation effect, employees take some of the resulting ‘consumer surplus’ as a bump in pay (because they have e.g. a high discount rate for future benefits) … but if they took 100% of it, employers would never worry about the distinction.

Employee makes p pay and b benefits: total compensation = p + b = total cost to employer (ignoring taxes right now). Say the contractor takes half the regulatory arbitrage benefit so contractor total compensation = p + 0.5 b < p + b. Now that 0.5 b comes as money instead of not-liquid health insurance, so maybe that is a benefit for them individually. In that case, the contractor must have some market power to negotiate that 0.5.

But this isn't really the case we're talking about with the classification problem — we're talking about the situation where total compensation ~ p + 0.0 b = p … where the contractor doesn't have market power. The government here is looking for signs where someone is classified as a contractor, but has zero market power: unable to choose hours, having to wear a uniform, etc.

150 spencer July 20, 2015 at 4:49 pm

Interestingly, the BLS provides data on total compensation including required benefits and not require benefits.

In the first quarter of 2015 benefits accounted for some 31%% of total compensation in the US but required benefits only accounted for 7.5% of compensation. So 24% of compensation is provided in the form of benefits that the private market determined was to the firms and employees advantage to take this much of their compensation in the form of benefits rather than wages and salary.
Some of these benefits, like paid vacations would be hard to take as salary and there is a widespread social consensus that people deserve and earn paid vacations. When I read all the many comments in this blog post I see comment after comment ranting against things the private market economy has created for good and valid reasons– yes sometimes it for tax reasons.

But I cannot help but wonder why so many of the commenters here are so opposed to so many of the private market results that have evolved in the US economy.

151 James Bookchin July 20, 2015 at 7:32 pm

Happy Meal Act is just poorly written, needs to include penalties for increasing price of burgers in response to provisions

152 Peter Gerdes July 20, 2015 at 9:40 pm

The obvious objection is that laws mandating benefits have the effect of:

1) Rectifying irrational (or at least overly high discounting) tendencies on the part of the worker. Given the low contribution to employee matched savings programs we know that workers are tempted to favor cash in hand over greater longer term benefit. Forcing employers to pay using benefits might discourage irrationally trading off things like health insurance for immediate cash.

2) Along the same lines there is the potential for a public harm (the state picks up the medical tab/elder care etc…) if people choose not to purchase benefits.

Of course, this is still all inefficent. If we really think it’s so important to force people to have things like health care, retirement plans etc.. just mandate it based on taxable income and provide a market to buy them on.

Still, one might contend that government standards and mandates for acceptable benefit packages would stop innovation and produce more red tape. By insisting the employer provide the benefit package one leverages the mental/transaction cost of purchasing supplemental benefits and thus let the prudent employees pressure employers to offer benefits that best meet their needs at that price.

153 v July 22, 2015 at 3:12 pm

But employees are the burgers, drinks and fries, they are inputs. I don’t understand this analogy that workers are buying benefits with labor. Maybe TRADE, but not purchase. Because then you start talking about prices and then inevitably inflation and that’s just confusing too many concepts.

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