Mandated Benefit and Their Impact in the Labor Market
Mandated benefit refers to additional entitlement by the employee beyond salary or wage. According to Baker and Stanger (1999), mandated employee benefits legislation is a basic prerequisite for small and medium enterprise but-not big corporations. There are various categories of mandated benefits. They include contributions to Medicare and social security, Unemployment compensation and Compensation insurance.
In addition, mandated benefit programs are more efficient but less equitable than standard public programs. The existence of mandated benefits and government funded programs arise from government paternalism, the existence of externalities, and adverse selection effects on firm survival if only some firms provide such benefits. As illustrated by Bosch (2008), labor market regulations and policies are introduced with the objective of improving workers welfare. However, Almeida and Carneiro (2008) urged that the outcome of mandatory benefit legislation is that businesses strive to reduce other aspects of their total labor bill. This may lead to lose of jobs among the unskilled workforce.
Small firms and businesses suffer most from mandated benefit laws because the cost per worker of complying with such laws is greater for small firms than their larger competitors. According to Almeida and Carneiro (2008) the costs associated with a fringe benefit package tends to be greater for small businesses as they experience more labor turnover rates and hire more part time and seasonal workers. In addition, there are economies of scale in providing fringe benefits. Because of their smaller risk pool, for instance small firms pay about 20 percent higher health insurance premiums than large businesses.
Mandated benefits improve workers income security for example in case of sickness, accidents and old age. It protects workers from losing employment and the subsequent lose of income. The mandated benefits come with a cost. They may reduce chances of employment and security provisions may discriminate some workers.
Almeida, R.K. and Carneiro, P. (2008), “Enforcement of Labor Regulation and Firm Size.”
SP Discussion Paper 0814, The World Bank.
Baker, M., Benjamin, D., and Stanger, S. (1999), “The Highs and Lows of the Minimum
Wage Effect: A Time-Series Cross-Section Study of the Canadian Law.” Journal of Labor Economics, 17 (2), 318-350.
Bosch, M. (2008), “Minimum Wages and Earnings Inequality in Urban Mexico. Revisiting the Evidence.” Universidad de Alicante, Campus de San Vicente Spain.
