Reliable “public option” to increase robustness of market


Prof. Seema Jayachandran has this great insight in her NYT column.
when we add a public option to a marketplace: The private sector is forced to improve its game to retain customers, so more people benefit than just those who directly use the public services.
While this is intuitively known, she cites two studies from India and Mexico that support this insight.

  1. NREGA: NREGA wages acted as wage floors, which made private employers pay more than NREGA wage.
  2. A study in Mexico where prices dropped in villages when the government started delivering food.
One of the usual criticism is that such intervention, causing wage increases, leads to lower employment. This is found to be untrue in many cases, even in case of NREGA. She notes:

Shaking up the private market is especially useful if the labor market isn’t very competitive to start with. Powerful employers in such a market can get away with paying a lower wage, allowing them to earn fatter profits (although this entails a probable sacrifice in output). Adding a public option to a market like this is not a zero-sum game where higher wages just shift money from employers to workers. Instead, with better-paid workers, the size of the economic pie, or “surplus,” increases.


In fact, there is evidence that India’s workfare program has increased both wages and private employment levels. This result goes against the most familiar supply-and-demand reasoning that by increasing employers’ costs, a higher wage decreases employment. That reasoning breaks down when a market isn’t competitive. Lack of competition also helps explain the related counterintuitive finding that raising the minimum wage sometimesincreases employment in supposedly efficient markets like the United States.
I have two comments:

  1. This is another example to demonstrate that criticisms of minimum wage don’t hold ground in many cases. Therefore, the articles like this on minimum wage that I had criticised earlier, do a disservice by not going beyond 101 and cherry picking one-off studies to reach pre-destined conclusion.
  2. The effect of strong public systems on private market demonstrated above is highly relevant in the context of education and health care. One may allow private schools and hospitals but we can increase the quality of a system overall if we have good public systems. Therefore, private system should not be viewed as an alternative to public system, but only a co-partner.
It follows from this that we shouldn’t stop focusing on public system even if private system exists or people start going there.

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