Health

The US Health Care System and Labor Markets summarizes the relationship between health care in the United States and the labor market. The current system relies on the employer providing health insurance to his or her employees, and the advantage of this system is that government budget is less tied to it. However, because not everyone is part of the labor market, there must be government programs to fill in the gaps for those not covered by work. Madrian argues that this interplay between employer and government agencies results in distortions of the labor market decisions of individuals and firms and leads to inefficiencies like under-investment in preventative medicine.

Health insurance does not have to come through the employer and in many countries it does not. One popular form of health care is a socialized system. This type of system has been proposed several times in the United States, most recently by Clinton, but has not garnered enough support for its use. The reasons why employers provide the health insurance in the U.S. today are because of the current market forces. There is a substantial price advantage given to employers through the tax code because the health insurance costs are deducted from taxable income to the firm and employee, a significant economy of scale is derived from providing coverage to large groups instead of individuals, and the fact that pooling individuals into groups overcomes the problem of adverse selection that affects especially sick individuals. Currently, 63% of the non-elderly have insurance coverage through their employer—but this number is dropping rapidly. Roughly 18% of the population is completely uninsured.

One way health insurance affects labor markets is when people choose to retire. Portable health insurance, which allows someone to keep their health insurance after they retire, gives individuals the freedom to retire when and how they want. Workers who have portable coverage from their job are more likely to retire earlier than people who do not. At age 65 virtually everyone is eligible for Medicare, and therefore, many people retire at this age. The difference in retirement rates between those with portable versus non-portable insurance disappears at age 65 because either way the individual is covered. Because health insurance is generally contingent upon full-time employment, many people contemplating retirement are unable to gradually decrease their workload while maintaining coverage. These workers are much more likely to go from full-time to 65 to retirement without a period of part-time work. Employees with portable insurance have the ability to gradually decrease their workload.

Another margin of employees that many think are affected by health coverage is the potential public assistant recipients. Medicaid is the primary public assistance program. However, because most of the potential recipients (single mothers, the disabled, high school drop-outs etc) will likely only find low-skilled jobs that lack health insurance anyways, Medicaid appears to be at most a small deterrent on labor force participation. The same cannot be said for unemployment welfare programs which provide a much stronger incentive to remain unemployed.

Another group of note is married women, who due to the income of their spouse usually exhibit large labor supply elasticity. Married women who are covered through their husband’s employer are 7%-20% less likely to work. Women who receive their health insurance through their own employer are far less likely to stop working or only work part-time. Married men who are put in the same position (i.e. has a wife with health insurance that covers the husband) also work less but the impact is only half that estimated for married women.

Another issue affected besides the question of working full-time, part-time, or not at all is whether a worker decides to switch jobs. Economists generally agree that job turnover is good because workers are re-allocated away from jobs where they are less productive/paid less to job where they are more productive/paid more. Therefore, barriers to turnover are bad. Job turnover should not be confused with a worker being fired and having to find a new job which could be better or worse and is at the very least costly in the short-term. All jobs do not provide health insurance, and this affects the job package and attractiveness of the job. For example, when the wife becomes pregnant, the husband is twice as likely to switch to a job that pays for both of their health insurance then when she is not pregnant. Sick employees are also far more likely to be laid-off because they add two expenses: 1) they are less productive because they are sick, 2) they cost their health insurance company extra money and this is passed down in the company’s premiums.

Health insurance also affects the demand side by providing two market inefficiencies. First, because health insurance is a fixed cost that is dependent only on the number of workers, there is an incentive to minimize costs by hiring fewer workers and making them work longer hours. Empirical evidence supports this idea. As the cost of health insurance rises, the number of workers is substituted for fewer workers working longer hours. A 10% increase in health premiums reduces the aggregate unemployment by 1.6%. The second inefficiency is that the current system makes it cheaper for a company to replace full-time employees who require coverage to part-time employees who are legally exempt for requiring coverage. It is likely not a coincidence that the rise of health premiums is concomitant with the rise in part-time workers.

Another effect of health coverage is wage determination. The question is how the cost of the insurance to employer matches the benefit to the worker. Clearly, health insurance improves the job package to a worker but how much more attractive does it make it? Madrian says that there is little data here, and the results are mixed. She cites studies that show that the full cost is passed onto the workers in the form of lower wages and others that show an incomplete tradeoff between salary and health insurance.

The current system also changes incentives in the type of care received. Preventive medicine with immediate fixed costs and benefits down the road is discouraged. Because people change jobs, any investment in health by the provider/employer that will have a payoff beyond the worker’s expected tenure with them is unwarranted. Also, the workers, who are immune to the price of the medical care because they are insured, have little incentive to take personal measures that reduce costs in the future.