3/30/2014

The notion of revealed preference: Why employers are not indifferent between providing insurance and giving workers a higher wage to compensate them for buying insurance themselves

  1. From the oral argument in Sebelius v. Hobby Lobby Stores, Inc.

  2. MR. CLEMENT:  . . . If they take away the health care insurance, they are going to have to increase the wages to make up for that. And they're going to have to pay the $2,000 penalty on top of it, plus they're going to have to violate their ­­ their own interest which is, we actually ­ we believe it's important to provide our employees with qualified health care.

  3.  JUSTICE KENNEDY: Okay, the last is important. But just assume hypothetically that it's  a wash, that the employer would be in about the same position if he paid the penalty and the employer pardon me, an employee went out and got the insurance and that the employee's wages were raised slightly and then it's ­­ and that it's a wash so far as the employer are concerned, other than the employer's religious objection, but just on the financial standpoint. Can we assume that as a hypothetical. Then what would your case be? 
If Hobby Lobby were really indifferent between these two outcomes, would they be willing to spend all the money and time on fighting this case in court?  There is the general issue of revealed preferences, and in this case employers are clearly indicating which choice they prefer by their actions.  If it wasn't for the law, we know which choice they would prefer.  We also know how that choice changes with the law in place.  

Finally, Clement is clearly right that in order for Hobby Lobby's employees to be the same, they would not only have to have higher wages to compensate them for the lost insurance, but the firm would also have to pay $2,000 per employee.  $2,000 per employee might not seem like much to the Justices, but say an employee is receiving $40,000 per year.  Everything else equal in terms of insurance, would they be indifferent to their wages being cut by 5% to $38,000?

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