Tuesday, May 3, 2016

State Line Disputes - Is Federalization the Answer

Economists use a term “comparative advantage” to describe how circumstances may posture one competitor in relation to another. A state with domestic oil production may have a comparative advantage over a state that must import oil. Importation represents expense (shipping, time), and thus the state with local reserves may enjoy lower prices and the advantages of wages associated with local harvesting of that resource. 

Similarly, a country with a large population (India) may experience competition for jobs that results in lower wage rates than in another country such as America. Economists would say of such a comparison that India has a comparative advantage in labor cost. Such advantage can occur in a variety of contexts with an influence on workers’ compensation. In an international setting, workers’ compensation and other regulation plays a role. 

Workers’ compensation in America represents a social cost. The expense (benefits) of caring for those who are injured at work is significant. In 2011, American workers' compensation paid over $60 billion in benefits, see Where did it Come From, Where is it Going, and How “Huge” is it Anyway?, Lex and Verum, June 2014. There are also system costs, for adjusters, facilities, hardware, software, leadership, regulatory compliance, and more. These costs are all passed through to the businesses for which people work (in the form of insurance premiums or money that must be similarly held by "self-insured" companies to pay losses). And, those companies pass on these costs to us in the prices they charge for goods or services.

The price which your corner convenience store charges for a  a loaf of bread is influenced by the cost of workers' compensation. This system likely covers the trucker who hauled the wheat, the miller who ground the flour, the trucker who hauled the flour, the person that unloaded it, who baked and packaged and loaded the bread, the trucker who hauled it and put it on a shelf, and the cashier who rang-up and bagged your purchase. 

The businesses account for these workers' compensation costs as they do any expenses. The expenses are paid from the company’s revenues. Business owners have a variety of expenses for which to account and provide. There are premises (rent, mortgage, maintenance), utilities, labor (payroll, insurance benefits, payroll taxes), regulation compliance (IRS, EPA, OSHA, DOL, etc.), licensing, income taxes (local, state, federal) and more. These expenses all effect the price American society pays for goods and services. Ultimately we pay these expenses as they are integrated into the price of goods and services.

In the absence of workers' compensation, there will not magically be an absence of work injuries. The injuries and disabilities will not disappear. In the absence of workers' compensation those injured at work would still require medical care. Inability to work would still result in various cases. Income replacement would be required, or individual poverty would ensue. There are those who argue that when workers' compensation does not provide benefits, that the "cost" is shifted to society. Others would argue that the cost is born by society in any event.

In American, the reality of this is currently seen as increased application for federal disability benefits. These benefits are paid by the government, but the government has no money. The government is dependent. It has money because people and companies pay taxes (it also has money because it borrows like there is no tomorrow, but that is another issue entirely). Those taxes are paid by people. And, Social Security taxes are also paid by businesses. The employee is paying about 7.5% in Social Security tax, and the employer is matching that, paying another 7.5% in Social Security tax. Despite a 15% combined income tax for Social Security, that system remains insolvent.  

These expenses all influence the extent to which America has or lacks a comparative advantage in relation to other world economies. As costs increase, there is an incentive for American business to avoid employment of Americans if it is feasible to substitute cheaper, foreign, labor therefore. This has been noted by leading economists such as Thomas Friedman. In The World is Flat, he describes the potential for Indian radiologists to work in India reading x-rays for American hospitals, and Chinese drafters to prepare architectural drawings for American engineers and architects. 

These are jobs traditionally done by American employees, but for which the digital age has enabled and encouraged international “outsourcing.” This outsourcing allows the engineer to obtain labor without paying workers' compensation premiums or Social Security taxes. The engineer is avoiding costs of EPA, OSHA, and a host of other regulations. 

These American businesses are acting to minimize cost. If the American engineer can thus outsource the drafting of plans, she/he may enjoy greater profits than a competitor. Likewise, she/he may be able to reduce the cost of services, and compete more successfully against other engineers for business. The engineer in this example is enhancing her/his position by understanding and managing costs.  

In another iteration, some workers' are not "employees." They are "independent contractors." They are often not subject to various government regulations and the resulting costs. They will not enjoy the ADA, FMLA, and other federal protections. They will not be entitled to benefits and pensions. They will pay the full 15% of Social Security themselves, and they are often not protected by workers' compensation. Similarly, employees of "small" companies are often exempt from mandatory workers' compensation.

As workers’ compensation contributes to the cost of American labor, it contributes to the inclination for outsourcing. Certainly, the costs of other American regulatory compliance (IRS, EPA, OSHA, DOL, etc.) also contribute. In free trade, lower-cost economies are allowed to exploit their comparative advantages, such as lower labor cost, and thus compete for jobs, and thereby earnings, that might otherwise be performed and earned in America. There are a multitude of competing countries that do not regulate as America. Their decisions affect the working and living conditions of their people, but result in lower cost that attracts business. 

This is a trade-off. The regulation and enforcement of safe handling for substances, guarding of machines, and age limitations on workers (child labor)(and other regulation) all represent costs, while providing corresponding benefits. When those regulations are uniformly applied, however, all businesses enjoy the benefits of safer workplaces, avoid costs of workplace injuries, and all businesses contribute to the costs of these various regulations. Similarly, all employees enjoy the benefits. Thus, OSHA regulations in America do not affect Hoosiers differently than Sooners. The uniformity means that there is no domestic comparative advantage created by this regulation. 

However, the imposition of these domestic regulations and constraints may nonetheless contribute to a comparative advantage between American employees, independent contractors, and those in other countries. 

Might America condition “free trade” upon some parity in wage levels (resulting from population volumes or even from governmental controls/constraints)? This would be difficult, because the supply of population and competition influence wages. It would also be difficult because cost of living is different, and this plays an undeniable role in wages. 

But might conditioning be more feasible if based upon issues clearly within governmental control. For example, America might enter free trade agreements only with countries which have environmental protection laws similar to ours. Or, in a context closer to home, perhaps America would only enter free trade agreements with countries that provide worker injury and disability programs (workers’ compensation) that are comparable to our own?

Sociologists might argue that such requirements would elevate the lifestyle (safety and health) of workers in those foreign economies. Perhaps such requirements would result in greater regulation in these foreign states as they pursued free trade status with the U.S.? In this outcome, it is possible that regulatory parity would erase some of the comparative labor cost advantage of these foreign states, and thus potentially result in increased American employment (and resulting increased prices for American consumers). 

Economists might argue that while such conditions might encourage regulatory parity, they might as likely instead inspire foreign states to retain their respective "regulatory" comparative advantages and choose instead to trade with markets other than the U.S. This might similarly increase both American employment and consumer prices. 

The effects of comparative advantage, economic competition, and regulatory disparity are complex and intriguing. 

This is not a uniquely international analysis. Many have written about the “race to the bottom,” a phrase coined by some students of American worker’s compensation reform. They perceive a tendency of states to reform their workers’ compensation benefit programs in the later years of the last century. Some decry reform as an evil, believing instead that a Utopian, unlimited system of social benefits can be provided to everyone, and that the burden is not currently being appropriately imposed. 

They advocate federalization of American workers' compensation to prevent any state achieving comparative advantage through the structure of workers' compensation process or benefits. They argue that this will prevent injured workers from becoming a burden on government. They ignore that government is funded by these workers and the businesses for which they work. The process of labor in America contributes 15% of all earnings to the social welfare system, Social Security, they seek to protect. 

In a domestic economy, these critics seek to eliminate state versus state competition, at least with workers' compensation. States would of course continue to seek comparative advantage in other ways (Florida has no state income tax). Why are companies leaving California for Texas? Why are people moving to Florida (hint, the sun, beaches and and friendly people are part of it)?

These workers’ compensation students are critical of states defining procedures and parameters to constrain entitlement to workers’ compensation benefits. 

Such restrictions can be very broad, such as providing diseases and injuries will only be paid for by the employer (compensable) if the work actually caused the disease or injury. Not “contributed something (1%) to the illness or injury, but actually caused it. Some decry this as radical and inappropriate in a benevolent socialist society. 

Other workers' compensation restrictions might be more subtle. An example might be the imposition of a “maximum compensation rate” for disability benefits. Florida has such a restriction, and in 2016 it is $863 per week. To be entitled to that rate, the worker would have earned $1,294.50 per week ($67,314 per year) before the accident. But someone that earned $100,000 before the accident would also get the same $863 per week. Likewise, someone earning $2 million per year before the accident would also get the same $863 per week in workers’ compensation benefits. 

A multitude of workers compensation system parameters can define and refine what is or is not a compensable accident or disease within a particular state. There is a marked degree of state discretion and as a result a marked degree of state individuality. Critics decry that individuality and preach the Utopian goal of a one-size-fits-all American process which they seek to have the federal government force upon the states by mandate. This would be another grand expansion of the limited federal government envisioned by the Constitution and derided by the Utopians. 

Ultimately, the cost for all illness and injury is born by society, at least to some degree. In this limited context, we see that an injury is either workers' compensation or is not (and therefore compensated by workers' compensation or social insurance or other safety nets). But ultimately, all of those safety nets are funded by the existence of American employment, the payment of premiums and the payment of taxes. Without employment, there is no generation of production, wages, taxes and premiums.

The Utopians preach federalization. Their theme is consistency and sufficiency (consistency might mean consistently bad). Some have asked if the Utopians would be as eager for federalized consistency if that meant consistency with the more restrictive or constrained state systems that these Utopians deride as the winners of the race to the bottom? An intriguing question.

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