LABOR MARKET EFFECTS OF EMPLOYER‐PROVIDED HEALTH INSURANCE

I. INTRODUCTION Increasing health insurance coverage is arguably an important policy goal. The Congressional Budget Office (2003) estimates that, in 1998, 20-30 million Americans had no health insurance for the entire year, approximately 40 million were uninsured at a specific point in time in the year, and nearly 60 million were without coverage some time during the year. Most individuals who have health insurance in the United States obtain it through their employer. In 1999, 65.8% of nonelderly Americans had employer-provided insurance, also called group insurance or employer-sponsored insurance, either through their own employer or through the employer of another household member; see Gruber (2001). Employer-provided insurance plans generally have lower premiums and offer more benefits than individual insurance plans. Health insurance providers can offer cheaper and better plans to company employees for at least two reasons. First, the average administrative cost of such plans is lower than individual plans. Second, employment-based plans are typically subject to less adverse selection than individual plans, particularly so for large employers. Furthermore, the tax-subsidy afforded employment-based health insurance renders the effective consumer price substantially lower than the cost; see Pauly (1986) and Gruber (2001). Together, these various factors give a strong incentive for employers to offer and employees to accept coverage as part of their employment contract. As employer-provided insurance is by far the most prevalent form of coverage in the private sector, policy makers look for further expansion of this base as a way to insure the uninsured while avoiding direct public financing. As a way to increase employer-based health insurance coverage, some states either have or are considering government mandates that require employers to provide insurance to certain types of workers. (1) The state of Hawaii requires private sector employers to offer health insurance to all workers who work for more than 20 h a week and requires these workers to have insurance. The state of California is currently considering a similar mandate. There is a considerable interest from policy makers on the effects of such mandates on labor market outcomes. In this study, we report on an experiment that was designed to provide some insights about possible effects of alternative health insurance regulations on the competitive labor market, with a particular focus on mandates. Since we only considered a competitive market setting with complete contracts and no wage rigidities, our results may not be directly applicable to all labor market situations. (2) However, the study provides useful insights about the interaction of health insurance benefit provision, wages, and employment structure for labor markets where the competitive wage setting and the complete contracts assumptions are reasonable. With these limitations in mind, our results can be also generalized to other types of employer-provided fringe benefits such as paid vacations or pension plans. As any government intervention, health insurance regulation may affect the labor market. Theory predicts that in perfectly competitive labor markets, health insurance creates no distortionary effects on the labor market equilibrium as long as the coverage is not mandated and there are no wage rigidities. (3) All workers who value insurance above its cost of provision are offered insurance and accept it; the wages are adjusted downward; see Rosen (1986) and Gruber (2000). Summers (1989) used a simple supply and demand analysis to show that the effect of increases in premiums on equilibrium labor hours and wage depends both on the elasticity of labor demand and labor supply and on how fully workers value changes in the cost of health insurance. If the demand or the supply of labor is completely inelastic, or if workers fully value the insurance, then an increase in the premium would result in an equal decrease (shift) in wages. …