At Slate, Matthew Yglesias takes apart the argument by a Five Guys hamburger franchise owner that the Affordable Care Act (ACA, or “Obamacare”), with its requirements on employee health insurance, will drive up his prices. Yglesias says: no, if it makes sense to increase prices in light of potential increased profits, then that is so whether or not there are increased health insurance costs on the employer. Instead, he argues, the increased costs will simply cut into firm profits.
Is that correct? Not quite. It is worth considering in a bit more depth, since for arts organizations, especially the small ones, an important consideration is whether an increase in costs necessitates an increase in prices. Here are some things to think about.
First, Yglesias points us towards an important point: if the demand for hamburgers is such that an increase in their prices would generate an increase in net revenues (the increased revenue per burger sold minus the decline in revenues from the decline in the number of burgers people will purchase plus the cost savings from producing fewer burgers) then it makes sense to do it regardless of changes to employer-provided health insurance.
Second, there might be secondary effects on wages. Other things equal, we are willing to accept an offer of a lower wage if it comes with the benefit of employer-provided health insurance. Employers previously not providing health insurance had to either (1) pay higher wages, or (2) hire less talented staff, than similar employers who were providing insurance.
Third, suppose that the market was faced with a sudden shortage of beef, which led to an increase in the price of beef. That increase would be shifted forward, at least in part, to consumers, who would both at home and when going out shift their demand to some degree towards other types of food. Lobster is expensive in restaurants because, well, lobster is expensive!
So how is an increase in the cost of beef different than an increase in the cost of labor? The cost of running a restaurant has gone up, particularly in those that were previously not providing health insurance to employees. We would expect that a few restaurants, those that were operating on the brink of going under, will go under. With fewer restaurants left, the equilibrium price of going out for dinner will rise. Profitability will not rise – this is a sector where in the long run firms enter and exit the industry according to profit conditions. If anybody starts making millions running a hamburger joint, then lots of other people will get the bright idea of opening their own place, and the market price for burgers will fall until profits for owners are much the same as they could make in any other venture with similar risk.
And so, in the end, I do expect the cost of going out for a hamburger to rise. The mechanism by which this will occur will not be immediate, and not by any individual franchise owner saying “well, I need to increase my prices now.” After all, he is in a competitive business. But in the long run increasing the costs of hiring burger-making labor will lead to more expensive burgers, and people (slightly!) more often eating at home.
What does it mean to arts organizations? If health insurance was not previously being provided, but now must be, that is of course a real increase in costs. As with the burger story, in the long run increased labor costs (if it is an increase – see my second point above) will translate into extra revenue having to come from somewhere, whether donations or earned revenue.
Now this does not begin to discuss all the relevant aspects of health care reform – the impact on artists and arts managers having increased mobility across jobs, or going independent (which is good), and of the basic justice in ensuring everyone has access to affordable health care regardless of employment status or pre-existing health conditions (which is even more good). But if Americans are going to persist in a system where for working-age individuals health insurance will primarily come through their employment (a persistence which this Canadian continues to find odd), then increases in health insurance costs will increase the costs of services provided by employed labor, and in turn increase the prices of those services.Related