Doctor’s disorders

If Kazakhstanis are nearly affluent, why can’t they afford good health?


Kazakhstan recovered from the troubled transition to markets in the 1990s more successfully than any other nation in post-Soviet Central Asia. Since 2000, when it had finally recovered from the Russian ruble crash of 1998, its economy has galloped at a pace that would double the income of the average resident every decade. In Almaty, shopping malls offer Italian boots and plasma televisions with larger-than-life flat screens.

Yet….

I have an acquaintance who cleans floors for a reputable employer in Almaty. A recent accident of hers required knee surgery. The bill was $6,000.

In the West, her predicament would have posed no problem. Health insurance from the government or the employer could easily have covered $6,000 – and kept her out of a wheelchair.

But this is Kazakhstan. The middle-aged woman’s health insurance through her employer did no more than pay 5,000 tenge ($34) for medication. The employer would not lend her money for the operation, although her paycheck could have served as collateral. The government offers no health insurance worthy of the name. So she had to scrounge among family and friends for $6,000 in cash (dollars, pazhalsta).

Her dilemma is not unique. In Kazakhstan, stories are rife of physicians demanding a payment under the table for emergency surgery.


Under the green knife


This may help explain why the country’s rapid economic growth has barely affected the most important indicator of economic development -- life expectancy at birth. By 2009, the average span of life had stalled at 64 years for males and 74 years for females, virtually the same as the expectancies of 64 years and 73 years, respectively, that prevailed in the Soviet 1980s, according to data from the World Bank and the World Health Organization. The short life spans are due in large part to Kazakhstan’s high rate of infant mortality – 29 deaths in every 1,000 live births in 2010, although the rate has been dropping, according to the World Bank. Rates of roughly 5 deaths or fewer per 1,000 births are common in the West.


One reason for these disparities may be the lack of comprehensive health insurance here. A statistical study by John Ayanian and coauthors suggests that, in the United States, the insured are more likely to buy preventive care – such as a normal checkup in the past two years -- and thus to avoid some hospitalization.

You might think that Kazakhstan’s privatization of much of the health sector over the past 15 years would automatically create profitable opportunities for insurers. Governments in Kazakhstan, which in the late 1990s dedicated one-seventh of their budgets to health care, spent only 11% that way in 2007, according to the World Bank. Since the early 2000s, the burden of paying for health care has been shifting to individuals, who provided two of every five dollars spent on health in 2009, according to World Bank data. The need for private insurance, in a country where the typical hospital visit can cost as much as two months’ worth of individual income, would seem clear.

Nevertheless, private insurance for major illnesses is not available to most Kazakhstanis today. The probable reason is that private health insurance plans are subject to an odd market failure. To make a profit, the insurer must set the premium above the expected cost per policyholder of claims. But this premium will drive away policyholders who have lower-than-average costs of claims. While the insurer thus loses healthy policyholders to cheaper plans (such as self-insurance), it retains the sickest of its old policyholders, since they expect their claims to exceed the premiums that they pay. Since the insurer retains only the sickest, its expected cost of claims per policyholder will rise. To cover this cost, the insurer must raise its premiums -- scaring away the few healthy policyholders that it still has. Eventually, this process of "adverse selection" will bankrupt the insurer.

As a result, few private comprehensive health insurance plans around the world make money.  No such plan seems to exist in Kazakhstan. But the government can resolve the problem by uniformly taxing the populace to finance public insurance. This requirement forces healthy Kazakhstanis to subsidize health care for sick Kazakhstanis, thus avoiding adverse selection. Public insurance also spreads health costs over a large pool of insurees, reducing fluctuations in the income of sick families (since such families pay low premiums in exchange for an annual income that remains stable despite sickness).


Is insurance out of style?


In 1996, the government launched exactly this insurance plan, financed by a 3% tax on payroll. It killed the plan two years later, when firms refused to provide the tax revenues at a time when Kazakhstan was suffering a slowdown. Perhaps Astana can afford public health insurance now, since the National Fund of oil tax revenues has a net international reserve of $33 billion, about $2,000 per Kazakhstani, according to data from the National Bank of Kazakhstan.

Public health insurance here would not be out of step with the West. The only industrialized countries that lack public comprehensive health insurance today are the United States and Turkey – and the former has taken steps in the past two years toward such a policy.

Comprehensive health insurance is no panacea. Because insurance rewards the policyholder for detrimental outcomes, it weakens his incentive to avoid them. The buyer of home insurance, which will fully compensate him for damages due to a house fire, no longer has reason not to smoke in bed. The buyer of health insurance covering the costs of lung cancer may now light up a celebratory cigarette. In fact, the incidence of lung cancer is rising in Kazakhstan, where a pack of Western-style cigarettes costs as little as 30 cents. In the West, “sin” taxes have raised the price of a pack in places such as Manhattan to more than $11.

This source of inefficiency notwithstanding, public comprehensive health insurance could shield families from catastrophic reductions in income. And it may provide needed money to health care providers – especially in rural areas, where midwives (feldsheri) must often go without weight scales and even syringes; and, more generally, throughout a country where the average doctor literally has made less money than the average worker.

In 2009, total spending on health care in Kazakhstan comprised 4.5% of gross domestic product, less than half the proportion that prevails in Europe, according to the World Bank and the World Health Organization. Perhaps Kazakhstanis die young largely because they spend too little on the most critical stock of human capital of all – health. The government has the power to correct this deficiency. – Leon Taylor, tayloralmaty@gmail.com


Good reading


David M. Cutler. Equality, efficiency and market fundamentals: The dynamics of international medical care reform. Journal of Economic Literature 40:3. Pages 881-906. September 2002.

Rexford E. Santerre and Stephen P. Neun. Health economics: Theories, insights and industry studies. Fourth edition. Mason, Ohio: Thomson Higher Education. 2007.


References


John Z. Ayanian, Joel S. Weissman, Eric C. Schneider, Jack A. Ginsburg, and Alan M. Zaslavsky. Unmet health needs of uninsured adults in the United States. Journal of the American Medical Association 284: 16. 2061-9. October 25, 2000.

National Bank of Kazakhstan. Data. www.nationalbank.kz

World Bank. World Development Indicators. www.worldbank.org

World Health Organization. World health report. Various years. http://www.who.int/

A version of this article appeared in the Caspian Business Digest in 2007.

Perils of the minimum wage

Could the minimum wage in Kazakhstan destroy as many jobs as textbook theory predicts?

In the transition to market economies, the ex-Soviet countries did not lift all price controls immediately. One surviving control is the minimum wage -- the lowest legal wage. In Kazakhstan, this wage varies with the industry. In theory, when the minimum wage exceeds the one that clears the labor market, then more workers will seek jobs than firms will hire. Unemployment will result.

In principle, the minimum wage may be most pernicious for workers who already face discrimination, because it cuts the cost to the boss of exercising his prejudices. To paraphrase an example by Walter Williams: Suppose that an employer in Kazakhstan harbors a bias against female workers. Suppose that a female would work for 300 tenge an hour and a male for 400 tenge. In a free labor market, the cost to the boss of discriminating against females is 400 tenge minus 300, or 100 tenge. But if the minimum wage is 400 tenge, then the cost of discriminating is zero.

In addition, the minimum wage may prevent an inexperienced worker – like a teen – from getting a job by offering to work for low pay in exchange for on-the-job training, noted José Gómez-Ibáñez and others.

That the minimum wage may destroy jobs for the unskilled remains standard fare in freshman economics. Two effects may dominate.


First, since the minimum wage applies mainly to the unskilled, it lowers the relative wage paid to the skilled, inducing the firm to substitute them for the unskilled. Suppose that without the minimum wage, the hourly wage paid to the unskilled in Kazakhstan would be 300 tenge; and the wage for the skilled, 600 tenge. Then the relative wage paid to the skilled is 600 / 300, or 2; that is, the actual cost of hiring a skilled worker for an hour is that you must forego two hours of unskiled labor. Now suppose that the government imposes a minimum wage of 400 tenge. The relative wage paid to the skilled falls to 600 / 400, or 1.5. This reduction makes it cheaper now for the firm to hire skilled workers rather than unskilled ones. For that matter, the firm may also substitute machines for unskilled workers.

Second, the minimum wage raises the cost of production for the firm. It will try to pass on this cost increase to consumers. The product price will rise, discouraging sales. Output will fall, so the firm will lay off workers, some of them unskilled.

In short, the minimum wage may injure the very workers that it was intended to help. So says the theory. What are the facts?

Since 1970, economists in the United States have published more than 40 relevant studies. Most found that a higher minimum wage either had no effect on employment or reduced it, particularly among teen workers, concluded a textbook author, William McEachern. The employment effect may have been particularly large – due to automation as well as to the direct destruction of jobs -- when the New Deal introduced the minimum wage in 1938, noted Andrew Seltzer, who studied two low-wage (and labor-intensive) industries -- hosiery and lumber -- in the South, which was the poorest region of the U.S. at that time.  Seltzer viewed his study as a kind of experiment, with low-wage workers as his treatment group and high-wage workers the control group. 

Perhaps some studies found no effect because employers do not always respond to the higher wage by destroying jobs. Instead, they may substitute part-time jobs for full-time ones. Or they may hire better workers than they did when wages were low – say, college students rather than high-school dropouts; this would favor young workers over old. Finally, employers may trim benefits, although William Alpert’s study of U.S. restaurants did not find that the minimum wage clearly affected most fringe benefits, according to Alan Krueger’s review of the book.

By the late 1990s, many studies in the U.S. tended to conclude that the impact on employment of raising the minimum wage was proportionally smaller than the change in the minimum wage itself. In 1982, Daniel Hamermesh concluded that a 10 percent increase in the minimum wage could reduce teen employment by 1 percent. Displacement of adult workers was not a serious problem, he found. A 2000 study, by Richard Burkhauser and coauthors, estimated that the reduction in teen employment was more like 2% to 6%. In short, empirical studies of the minimum wage suggest that the reduction in employment may be less than proportional to the increase in wages.


The Texas riddle


A recent study may pertain to Central Asia. Lawrence Katz and Alan Krueger telephoned fast-food restaurants in Texas – which had plenty of low-wage workers – to find out whether a steep rise in the U.S. minimum wage in 1990-1, from $3.35 to $4.25, caused restaurants to lay off workers. To the contrary, they found that the restaurants that had to raise their wages by the most in order to satisfy the new minimum wage also added the most jobs.

Why? Maybe the restaurants had long paid the workers much less than they were worth, the economists speculated. Forcing the restaurants to pay a little more, by raising the minimum wage, might attract more applicants. And the restaurants would hire them, since the workers would still worth be more than they were receiving.

Or, if the restaurants weren’t tyrannical employers, maybe they were just survivors, Katz and Krueger suggested. The U.S. economy tanked briefly in 1990-91. A higher minimum wage might have bankrupted some fast-food restaurants. The workers then might have taken jobs at the surviving restaurants. Those were the restaurants that Katz and Krueger surveyed, since they focused on firms that were in business both before and after the hike in the minimum wage.

Here’s another possibility: When low-tech employers found that they had to pay their new workers more, they made up for the cost by cutting back on training; their new hands didn’t need to know much to flip burgers, anyway. Thus the cost of hiring a new worker didn’t really change. And so they hired about as many as before. If this is the main reason why firms don’t lay off workers when the minimum wage rises, then we should see that, eventually, a hike in the minimum wage will have a real bite. When fast-food bosses no longer train their new workers, a higher minimum wage will cause them to hire more slowly.

Finally, the higher wage might have encouraged teens to stay longer on the job rather than quit and look for another.

The picture painted by Katz and Krueger is surprisingly Marxist. A few surviving employers squeeze their workers, either by paying them less than they deserve or by training them less. They don’t really compete for workers.

In that sense, the Texas market for unskilled labor may not be competitive from the worker’s point of view. The fast-food bosses can always threaten to hire undocumented immigrants rather than teens. The Texas study is relevant for Kazakhstan, since many local labor markets here too are ruled by employers.


Lemon workers


In Kazakhstan, the minimum wage has been set several times higher than the poverty line, which is the income that one needs in order to survive over time. In principle, the government could set, for groups that would be hurt by the minimum wage, a lower wage that still sustains the worker. Maybe this “subminimum wage” would avoid some unemployment.

In the U.S., a subminimum wage in the 1990s was not wholly successful. In their book, David Card and Alan B. Krueger concluded that the rate at which firms used subminimum options for youths and training was “extremely low.”

Maybe the Nobel laureate George Akerlof identified a reason, in his analysis of lemon cars. Suppose that the auto buyer can’t tell the difference between a good car and a bad one. Then the owner of a bad car will take advantage of that blindness. He will sell his car at the same price as everybody else. Thus good cars and bad will sell at the same price – say, $15,000. The owner of a turnpike turkey will want to sell his car for $15,000, turn around and buy another car for $15,000. After all, the second car would have some chance of being good; he knows that his first car has no chance of lasting another mile on the highway. But the owner of a good car has no reason to sell; he can’t sell the car for what it’s worth, and he might wind up buying a lemon. As a result, nobody buys a car.

In the same way, the owner of a restaurant might not hire any teen at a subminimum wage. He figures that the low wage will attract a lot of kids from bad schools and maybe a few from good schools. Because he can’t tell the difference between a good school and a bad one, he uses the going wage instead as a criterion. If you want to work for only $3 an hour, you must come from a bad school. Hard-working teens don’t get a chance. – Leon Taylor, tayloralmaty@gmail.com


Good reading


George A. Akerlof. The market for “lemons”: Quality uncertainty and the market mechanism. Quarterly Journal of Economics 84: 3. Pages 488-500. August 1970. Reprinted in Akerlof, An economic theorist’s book of tales. Cambridge University Press. 1984.

Charles Brown. Minimum wage laws: Are they overrated? Journal of Economic Perspectives 2: 3. Pages 133-45. Summer 1988.

David Card and Alan B. Krueger. Myth and measurement: The new economics of the minimum wage. Princeton University Press. 1995. From their statistical studies, the authors conclude that “it is very unlikely that the minimum wage has a large, negative employment effect.”

Ronald G. Ehrenberg and Robert S. Smith. Modern labor economics: Theory and public policy. Ninth edition. Boston: Pearson Education. 2006. Surveys work on the minimum wage.

Lawrence F. Katz and Alan B. Krueger, The effect of the minimum wage on the fast-food industry. Industrial and Labor Relations Review 46: 1. Pages 6-21. October 1992.

Review symposium: Myth and measurement: The new economics of the minimum wage.  Industrial and Labor Relations Review 48: 4. Pages 827-849. July 1995.

Andrew J. Seltzer. The effects of the Fair Labor Standards Act of 1938 on the southern seamless hosiery and lumber industries. Journal of Economic History 57: 2. Pages 396-415. June 1997. Ehrenberg and Smith discuss this study.


References


William T. Alpert. The minimum wage in the restaurant industry. New York: Praeger. 1986.

Richard V. Burkhauser, Kenneth A. Couch and David C. Wittenburg. A reassessment of the new economics of the minimum wage literature with monthly data from the Current Population Survey. Journal of Labor Economics 18: 4. Pages 653-680. October 2000.  Ehrenberg and Smith discusses this study.

José A. Gómez-Ibáñez , Vlad Jenkins, Joseph P. Kalt, and Dorothy Robyn. The Urban League and the youth sub-minimum wage. In Gomez-Ibanez and Kalt, eds., Cases in Microeconomics. New York: Prentice Hall. 1990. Discusses the link between the minimum wage and discrimination, including the example from Walter Williams.

Daniel S. Hamermesh. Minimum wages and the demand for labor. Economic Inquiry 20: 3. Pages 365-380. July 1982.

Alan B. Krueger. Review of Alpert, The minimum wage in the restaurant industry. Journal of Economic Literature 25. December 1987. Pages 1891-3.

William A. McEachern. Microeconomics: A contemporary introduction. Mason, Ohio: Thomson Southwestern. Sixth edition. 2003.