Mandated benefits

A mandated benefit is a benefit that employers must provide by law, such as paid sick days, vacation pay, health insurance or accommodations for workers with disabilities. If it costs the firm $$C$ per hour of work and workers value it at $$B$, labour demand shifts down by $C$ and labour supply shifts down by $B$. When $B = C$, the wage falls by exactly $C$ and employment does not change: workers pay for the benefit through lower wages and are no worse off.

Why both curves move

A firm cares about the total cost of an hour: the wage plus the benefit. With a benefit costing $C$, the most it will pay in wages for any hour is $VMP_E - C$, so the demand curve shifts down by $C$. A worker cares about the total value of the job: the wage plus the benefit. If workers value the benefit at $B$, they will supply each hour for $B$ less in wages, so the supply curve shifts down by $B$.

Suppose a law requires paid sick days that cost employers 50 cents per hour worked, and workers would give up exactly 50 cents an hour of pay to have them. Wages fall by 50 cents, employment is unchanged, firms pay the same total per hour, and workers hold a package they value as much as before.

The model

Start from a competitive labour market. Demand is $w = a - bE$ and supply is $w = c + dE$, so $E_0 = (a - c) / (b + d)$. The mandate makes them $w = a - C - bE$ and $w = c - B + dE$, so $E_1 = (a - c + B - C) / (b + d)$ and

$$E_1 - E_0 = \frac{B - C}{b + d}.$$

Employment moves only by the gap between what the benefit costs and what it is worth to workers.

Cost of the benefit to firms, C (per hour)

$4.00

Value of the benefit to workers, B (per hour)

$4.00

Employment

60.0k hrs

Wage, w₁

$11.00

Wage plus benefit value, w₁ + B

$15.00

Firm's cost per hour, w₁ + C

$15.00

Change in total surplus (per week)

$0.0k

Open in Graph Lab

Figure 1. A mandated benefit costing $4 an hour that workers value at $4. Demand shifts down by C and supply by B, so employment stays at 60 thousand hours and the wage falls by exactly $4, from $15 to $11. With B below C, employment falls and a deadweight loss appears; with B above C, employment rises.

Three cases follow.

• B = C. Employment is unchanged and the wage falls by exactly $C$. The firm’s cost per hour, $w + C$, and the value of the job to the worker, $w + B$, are both unchanged. The mandate swaps cash for the benefit one for one, and there is no deadweight loss.
• B less than C. Supply shifts down by less than demand, so employment falls. The wage falls by more than $B$ but less than $C$, so workers are worse off and firms’ cost per hour rises. There are two losses: the triangle of hours no longer worked, and, on every hour still worked, a benefit worth $B$ that costs $C$ to provide.
• B greater than C. Supply shifts down by more than demand: employment rises and the wage falls by more than $C$. Both sides gain. But in a competitive market a firm would offer such a benefit without being told to, since it could cut the wage by more than $C$ and still attract workers. A mandate makes a difference in this case only if something stops the market from providing the benefit, for example workers not knowing its value, or adverse selection, where the workers most likely to use a benefit seek out the firms that offer it.

Wage if B = $1 (less than C)

$12.50

Wage if B = $5 (equal to C)

$10.00

Wage if B = $9 (more than C)

$7.50

Open in Graph Lab

Figure 2. One benefit costing $5 an hour, valued three ways. Valued at $1, employment falls from 60 to 50 thousand hours; valued at $5, employment is unchanged and the wage falls by $5; valued at $9, employment rises to 70 thousand.

Key idea

A mandate shifts demand down by its cost $C$ and supply down by its value $B$. Employment moves only by the difference, which is why a benefit that workers value at its full cost costs no jobs.

Mandates and payroll taxes

A payroll tax also shifts labour demand down, but workers receive nothing in return for working, so supply stays put. The useful comparison is between two ways of delivering the same benefit:

• Public provision financed by a payroll tax of $C$. Workers get the benefit whether or not they work, so it does not change the wage they require. Only demand shifts: employment falls and the full payroll-tax triangle is lost.
• A mandate costing $C$. The benefit comes with the job, so it raises the value of working and supply shifts down by $B$. Employment falls by less, and not at all if $B = C$.

	Payroll tax of C	Mandate, B = C	Mandate, B less than C
Demand shift	down by C	down by C	down by C
Supply shift	none	down by C	down by B
Employment	falls	unchanged	falls, but less than under the tax
Cash wage	falls by less than C	falls by exactly C	falls by more than B, less than C
Lost hours (triangle)	largest	none	smaller than under the tax

Employment with a payroll tax (T)

50.0k hrs

Employment with a mandate (M)

55.0k hrs

Deadweight loss from lost hours, tax

$20.0k

Deadweight loss from lost hours, mandate

$5.0k

Open in Graph Lab

Figure 3. A benefit costing $4 an hour, financed by a payroll tax (T) or mandated on employers and valued by workers at $2 (M). Employment falls to 50 thousand hours under the tax and to 55 thousand under the mandate; the deadweight-loss triangle shrinks from $20 thousand to $5 thousand a week.

Summers argued that mandates are like public programs financed by benefit taxes, which makes them more efficient but less equitable.¹ In his framework a mandate acts as a tax only on the gap between what the benefit costs the employer and what the worker thinks it is worth. He also flagged two limits: a mandate helps only people who have jobs, and where a binding minimum wage keeps the wage from falling, the cost cannot be passed on through lower pay, so employment falls instead.¹

Worked example

Labour demand is $w = 30 - 0.25E$ and labour supply is $w = 6 + 0.15E$, with $E$ in thousands of hours a week. A new mandate costs employers $4 per hour.

1. Find the starting point. $30 - 0.25E = 6 + 0.15E$ gives $E_0 = 60$ and $w_0 = 15$.

2. Shift both curves. Demand becomes $w = 26 - 0.25E$. If workers value the benefit at $4, supply becomes $w = 2 + 0.15E$.

3. Case B = C. $26 - 0.25E = 2 + 0.15E$ gives $E_1 = 60$, no change. The wage is $26 - 0.25(60) = 11$, exactly $4 lower. Firms still spend $15 per hour in total and workers still hold a package worth $15.

4. Case B = $2. Supply is $w = 4 + 0.15E$, so $26 - 0.25E = 4 + 0.15E$ gives $E_1 = 55$ and $w_1 = 12.25$. Firms’ cost per hour is $12.25 + 4 = 16.25$, up $1.25. The package is worth $12.25 + 2 = 14.25$ to workers, down $0.75. The triangle of lost hours is $\tfrac{1}{2} \times (4 - 2) \times (60 - 55) = 5$ thousand dollars a week.

5. Compare a payroll tax of $4. Supply stays at $w = 6 + 0.15E$, so $26 - 0.25E = 6 + 0.15E$ gives $E_1 = 50$ and $w_1 = 13.5$. The triangle is $\tfrac{1}{2} \times 4 \times (60 - 50) = 20$ thousand dollars a week, four times the mandate’s. The cash wage falls less under the tax, but workers receive no benefit tied to their jobs.

Evidence

Maternity coverage in the United States. In 1976 several US states required health insurance plans to cover childbirth comprehensively, which raised the cost of insuring women of childbearing age by as much as 5 percent of their wages. Gruber found substantial shifting of this cost onto the wages of the targeted group, with little effect on their total labour input: hours rose while employment fell. A 1978 federal mandate provided a second test that confirmed the result.² Shifting of this kind, with little change in labour input, is what the model predicts when workers value a benefit at close to its cost.

Mandates in Canada. Employment standards in Canada include several mandated benefits. Federally regulated employers must provide up to 10 days of paid medical leave a year, a requirement in force since December 1, 2022.³ British Columbia requires up to five paid sick days a year once an employee has worked 90 days.⁴ Alberta requires two weeks of paid vacation after each of an employee’s first four years and three weeks after five years, with vacation pay of 4 and 6 percent of wages.⁵ The model predicts that, to the extent workers value these benefits, their cost shows up as slower wage growth rather than fewer jobs; that is a prediction, not a measured result for these laws.

Common mistakes

Traps on exams

• Shifting only the demand curve. That is a payroll tax. A mandate that workers value also shifts supply down, by $B$.
• Concluding that employers bear the cost. With $B = C$ the wage falls by the full cost: workers pay for the benefit, and are no worse off.
• Treating a benefit worth more than its cost as an argument for a mandate. A competitive firm would already offer it; a mandate matters only when something stops the market from providing it.
• Counting only the triangle when B is less than C. Every hour still worked also carries a benefit that costs more than it is worth.

On the exam

Draw demand shifting down by $C$ and supply shifting down by $B$, with arrows labelled. For $B = C$, show the new equilibrium directly below the old one: same employment, wage lower by $C$. Then contrast it with a payroll tax, where only demand shifts and employment falls.

Check yourself

1.

A mandated benefit costs employers $C per hour, and workers value it at exactly $C. In a competitive labour market, what happens?

1The wage falls by C and employment does not change2Employment falls and the wage does not change3The wage falls by half of C and employment falls a little4The wage and employment both fall, as with a payroll tax

Check answer

2.

Why does a mandated benefit that workers value reduce employment by less than a payroll tax that costs firms the same amount?

1The benefit comes with the job, so workers accept a lower wage and labour supply shifts down2The mandate shifts labour demand down by less than the tax does3The payroll tax shifts labour supply up as well as labour demand down4Firms are legally barred from lowering wages in response to a mandate

Check answer

3.

A mandated benefit costs firms $C per hour and workers value it at exactly $C. Which statements are true in a competitive labour market? Select all that apply.

Select all that apply.

1Employment does not change2Firms' total cost per hour, wage plus benefit, does not change3Workers are worse off because their wage falls4There is no deadweight loss5Employers bear the cost of the benefit

Check answer

Practise more questions on this topic

Sources

1. Summers, L. H. (1989). Some simple economics of mandated benefits. American Economic Review, 79(2), 177 to 183. JSTOR. ↩ ↩²

2. Gruber, J. (1994). The incidence of mandated maternity benefits. American Economic Review, 84(3), 622 to 641. Earlier version: The efficiency of a group-specific mandated benefit: Evidence from health insurance benefits for maternity, NBER working paper 4157. ↩

3. Government of Canada, Leaves: federal labour standards. ↩

4. Government of British Columbia, Leaves of absence. ↩

5. Government of Alberta, Vacation and vacation pay. ↩