The Iron Law of Benefits: GM Edition

I know I'm a bit late to the party on this one, but about a month ago, Kevin Drum had this to say:

GM's management faces higher costs than its competitors in other countries because it has to pay its employees' healthcare costs and Toyota and Volkswagen don't.

To which Jane Galt responded thus:

This is a persistent meme on liberal sites, and with good reason: the logic is compelling. The only problem---and it is a slight one---is that this meme is not true. In both Japan and Germany, workers at large corporations get their health insurance via joint contributions from employeer and employee, just as they do in the United States. Big corporations in both countries also have pension schemes, just as in the United States, and higher social security contributions.

Miss Galt makes a good point, but she ignores a more fundamental error in this argument. The logic isn't compelling---it's dead wrong. Explanation below the fold.

As I pointed out back in June, wages are a function of supply and demand, and are not significantly influenced by cost of living. If the US adopted a single-payer health care system, all companies could afford to pay higher wages, and competition would ensure that they did, but the higher wages would be offset by the higher taxes needed to pay for the new health care system. Assuming no change in efficiency of providing health care or in labor force participation, total cost of employment, after-tax wages, and health care consumption would remain unchanged.

But these are naive assumptions. The higher tax rates would reduce returns to labor, and it's likely that some people would drop out of the labor force if they had access to free health care from the government. If so, this would reduce the supply of labor and ultimately make US companies less, not more competitive.

I've been calling this fallacy---the idea that employee compensation is a function of cost of living---the Iron Law of Wages, but I realize now that I was probably incorrect to do so, since the Iron Law of Wages actually does take into account the fact that wages are a function of supply and demand. Does this fallacy have a name? If not, does anyone have any suggestions?

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