Funding public health care: A flat-rate premium might be bad for employment

Abstract

If "tax progression is good for employment in popular models of trade union behaviour" (Koskela and Vilmunen, 1996), then a flat-rate premium, as proposed as a means of funding for public health care, is bad. This note shows that replacing existing (proportional) social security contributions by a lump-sum payment increases labour costs and thus reduces employment. This result holds - for empirically relevant parameters - even in a more general case than the one considered by Koskela and Vilmunen. Policy advisers should be aware that in imperfect competitive labour markets the prima facie attractiveness of a flat-rate premium is not for sure.