Friday, July 19, 2013

Health Insurance and Labor Supply

I just ran across an interesting paper, "Public Health Insurance, Labor Supply, and Employment Lock" by  Craig Garthwaite,  Tal Gross and my Booth colleague Matthew Notowidigdo.

They study an interesting event
... In 2005, Tennessee discontinued its expansion of TennCare, the state’s Medicaid system. ... Approximately 170,000 adults (roughly 4 percent of the state’s non-elderly, adult population) abruptly lost public health insurance coverage over a three-month period.
The result was
a large and immediate labor supply increase....we find an immediate increase in job search behavior and a steady rise in both employment and health insurance coverage. 

They call the phenomenon "employment lock." This is different from "job lock," people with preexisting conditions who stay with jobs they didn't want in order to keep health insurance. "Employment lock" is the choice by healthy people to work at all in order to get  insurance, or put in academic prose, "strong work disincentives from public health insurance that are unrelated to strict income-based eligibility limits."

The converse is a new danger for the ACA
Additionally, our estimates may provide useful guidance regarding the likely labor supply impacts of the ACA...

If such individuals could instead acquire affordable health insurance apart from their employer, many of them would exit the labor force entirely. As a result of employment lock, policies that expand access to health insurance apart from employers (such as the ACA) may have large labor market effects

... Using CPS data, we estimate that between 840,000 and 1.5 million childless adults in the US currently earn less than 200 percent of the poverty line, have employer-provided insurance, and are not eligible for public health insurance.Applying our labor supply estimates directly to this population, we predict a decline in employment of between 530,000 and 940,000 in response to this group of individuals being made newly eligible for free or heavily subsidized health insurance. 
They are quick to point out that this is not necessarily a bad thing."the effects do not necessarily imply a welfare loss for individuals choosing to leave the labor force after receiving access to non-employer provided health insurance." If people only work at a job they hate in order to get health insurance, then people may be better off not working. The policy world often just assumes more employment is always a great thing, which isn't true.

However, less employment is not necessarily a good thing either. These are childless adults. How are they supporting themselves if they don't work? Can it possibly be optimal for them to just sit around the house? We surely don't want to compare employer-provided health insurance with highly subsidized individual insurance for the unemployed-- that's a subsidy to leisure and obviously skewing the scales.

Most of all, low-income single people face extraordinarily high marginal tax rates and other disincentives to work. So, an artificial incentive to work in order to get health insurance may offset some of the otherwise irresistible incentives not to work. (A good calculation for Casey Mulligan!)

And whether the people are in the end better off working or staying home and receiving larger subsidies, the government and taxpayers are clearly worse off, as the people and their employers are not paying taxes any more.

In sum, academic caution aside, inducing a million childless adults to leave legal employment doesn't look like a good thing to me.  

The evidence is pretty cool. Here are some pictures lifted from the paper.


  1. I like this study..and yet and yet.

    Does a health care system based on a dissolving social norm of employer-provided health care make sense? The social norm is rapidly eroding btw, as health care becomes too expensive...

    1. Does a system based on dissolving employer-provided car insurance, home insurance, and life insurance make sense? YES! Employer-provided (in lieu of higher wages) insurance is the root of most of our problems. Employer-provided health insurance is a relic of a little subsidy enacted after WWII, itself a fudge to price controls. Individual-based insurance is the only way to make insurance portable and competitive.

    2. So isn't ObamaCare exactly that? taxes on cadillac plans to discourage higher compensation in benefits vs cash, exchanges where individuals can buy insurance and the mandate which is necessary because of the adverse selection problem. I think your claim is that due to increased ability to data mine adverse selection is not a problem - but this claim is not based on any actual evidence as far as I know - hence empirically, we get Romney Care or ObamaCare if that's what you prefer

    3. What we have here is a failure to communicate.

      "Does a system based on a dissolving social norm" is not the same as "Does a system based on dissolving [a social norm]."


    4. Well if the working conditions are hazardous company should provide a health insurance policy to their employees. But i do not find any fact in providing all the insurance policies to employees.

      William Martin

      PPI Claims Made Simple

  2. I agree...but, of course, there are problems with people who (through luck of the draw) are genetically inclined to illnesses and cannot get coverage.

    I suspect in pure free markets insurers would require DNA testing before providing insurance, or would someday. They would also determine terms of insurance. It would be cheaper, I am sure.

    The secret issue: The health insurance terms in pure free markets might have wording such as, "When primary doctor and insurer conclude that further efforts will not result in an enhancement of life, coverage will cease."

    Ironically, this is the much dreaded "death panel."

    Maybe pure free markets are the right way to go, even for such a touchy issue as medical care. I suspect the religious right and many others would draw a line though.

    As to what would really work in the USA? Egads, who knows. Obamacare is a mess, and so is using emergency rooms as uncompensated coverage for the poor.

    1. Read here for answers to all these questions on how a free market in health care and insurance can work

    2. I have a job where I can tear up a pair of bib overalls in a couple of days and hunt as I might, I can't seem to get any clothing insurance.

  3. Interesting paper!

    There's an issue that you hint at only at the end - fewer adults having "legal" employment. Many will, of course, just work off the books. Perhaps one factor that has kept our underground economy relatively limited is the tie between health insurance and legal employment. That doesn't justify linking the two, of course, but it's a side effect I hadn't thought about before.

  4. As the health care stories and studies you highlight have consistently as their raison d'ĂȘtre criticism of the ACA, it's time again to check out the underlying reality, courtesy of the WSJ:

    U.S. health care is much more expensive (and much less inclusive) without better outcomes than what's available from any other advanced country, and that's not because other countries implement the libertarian or free market policies you advocate. Far from it.

    Also there are number of studies and developments which suggest that the ACA is having positive cost control effects. For example:

    "Health Plan Cost for New Yorkers Set to Fall 50%
    Individuals buying health insurance on their own will see their premiums tumble next year in New York State as changes under the federal health care law take effect, Gov. Andrew M. Cuomo announced on Wednesday. State insurance regulators say they have approved rates for 2014 that rare at least 50 percent lower on average than those currently available in New York . . . ."

    As often as not when the Grumpy Economist finds something "interesting," or "intriguing," or (especially) "lovely," what readers get is a nice illustration of confirmation bias, even when, like the Oklahoma hospital piece, the story is substantially bogus.

    The ACA is a good faith attempt to bring significant cost control and universality to our health care system. The approach it embodies originated with a conservative think tank. Of course it's not perfect but fundamentally it deserves support, not carping and pot shots from the sidelines.

  5. Your right ACA is doing great in NY, only it's because NY screwed it up worse two decades before.

    1. Okay. The WSJ opinion piece is kind of hostile, but the fact remains, and the lower rates come as a result of ACA fostered deregulation. Here's a less tendentious evaluation of the ACA's effect in California.

  6. the effects do not necessarily imply a welfare loss for individuals choosing to leave the labor force after receiving access to non-employer provided health insurance.

  7. "If people only work at a job they hate in order to get health insurance, then people may be better off not working. The policy world often just assumes more employment is always a great thing, which isn't true."

    While this is true, the social costs almost certainly outweigh the benefits. From the perspective of the people making payments, they could purchase at least as much welfare through direct transfers, and probably more. Eg, fixing the desired social gains, workers would be better off cutting the slackers a check.

    Providing public insurance as a welfare-maximizing game is a losers endeavor. Find a new argument (like, public health externalities).

  8. I conclude, have selected a smart and surprising website with fascinating material.

    Discover Lews-a-Chris


Comments are welcome. Keep it short, polite, and on topic.

Thanks to a few abusers I am now moderating comments. I welcome thoughtful disagreement. I will block comments with insulting or abusive language. I'm also blocking totally inane comments. Try to make some sense. I am much more likely to allow critical comments if you have the honesty and courage to use your real name.