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Short Takes

Q: If U.S. automakers didn't have to pay for health insurance, would that lower the sticker price of a new car?

American automakers place part of the blame of their declining market share on the high cost of providing worker health insurance. GM spends $1,500 for each vehicle it makes, says consulting firm A. T. Kearney. Detroit claims foreign manufacturers benefit from government-subsidized national health insurance. So, would U.S. automakers produce cheaper cars if they didn't have to provide health benefits? It's not that simple. Economists say this argument misses important points:

  • Government benefits have to be financed somehow. A likely source of financing for a national health insurance program could be a payroll tax increase. Such a tax currently funds Medicare and Social Security. While this might distribute the cost of such benefits more evenly, the price of a car wouldn't go down a corresponding amount, though it might go down slightly. Instead, workers would end up paying for national health insurance through a payroll tax (either directly or indirectly) and they would push for wage increases as they saw more money coming out of their pockets to fund the program.
  • Employers operate in multiple complicated markets. Automakers buy labor from their workers, while selling the cars produced. National health insurance would affect the labor market, or how workers are paid because money spent on health insurance is part of a worker's total compensation package. Changes in employee compensation, in turn, would have a ripple effect on the so-called product market, where the cars are sold. But what happens to product markets as a result of labor market changes is uncertain and important. Any windfall to firms currently providing insurance from reduced health insurance costs would be hotly bargained over by workers and companies, especially if workers have to pay for insurance differently from how they do now. Auto workers are likely to get some of the windfall, since they can use the bargaining table to reap savings accrued by employers. The competitiveness of the market for cars would then determine whether automakers would retain their piece of the windfall or pass it along to consumers in the form of lower prices. In short, there might be nothing left to pass on to consumers once the workers and the firms had taken their share.

Bottom Line: Probably not. At best, the cost of a new car would drop only marginally. First, money has to come from somewhere to pay for national health insurance. Secondly, even if savings occur, consumers are not likely to reap the benefits through lower car prices.

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Funded by The Robert Wood Johnson Foundation, ERIU is a five-year program shedding new light on the causes and consequences of lack of coverage, and the crucial role that health insurance plays in shaping the U.S. labor market.