1. This research is funded in part through a U.S. Health Resources and Services Administration, State Planning Grant to the Hawaii State Department of Health, Prime Contract No. 1 P09 OA 00046-01. Sub-Contract Research Corporation of the University of Hawaii, Project No. 659075. Research conducted by the University of Hawaii, Social Science Research Institute in collaboration with the Hawaii State Department of Health, Hawaii Institute for Public Affairs/Hawaii Uninsured Project and the Hawaii Health Information Corporation. Health Insurance and the Labor Market: Theory and Experimental Results Katerina Sherstyuk Yoav Wachsman Gerard Russo University of Hawai`i at Mānoa Hawai`i Coverage For All Project Technical Workshop IV September 26, 2003

2. 26 September 2003 Preliminary results. Please do not quote. Research Questions Study the effects of health insurance regulations (the Prepaid Health Care Act and its policy alternatives) on the labor market Focus on how health insurance regulation affects Insurance rates Market efficiency (Do firms hire workers that are the most productive and best fitted for the job?) Structure of employment (how workers and firms choose between part-time and full-time employment)

3. 26 September 2003 Preliminary results. Please do not quote. Heath Insurance Policy Alternatives 1. Status Quo (the Prepaid Health Care Act): government mandates for employer-based insurance for full-time workers, but not for part-time workers 2. Alternative - Full mandate: extend the mandate to part-time workers; employers bare increased costs of health insurance 3. Alternative - No mandate: eliminate the mandate; insurance is offered by employers on voluntary basis 4. Alternative - Sliding scale: employers are mandated to provide heath insurance coverage for all workers, but only in proportion to worker hours worked

4. 26 September 2003 Preliminary results. Please do not quote. Method of Analysis Build a theoretical model that captures qualitative features of the labor market Analyze the model to obtain predictions Test the predictions using laboratory experiments (simulations with human subjects) Important: The predictions we obtain are qualitative, not quantitative, and depend on the assumptions of the model

5. 26 September 2003 Preliminary results. Please do not quote. Modeling Assumptions 1. Competitive labor market (many firms and workers) 2. Workers differ in their productivities 3. A worker is equally productive at one full-time job or at several part-time jobs 4. Workers also differ in their expected benefits from health insurance: some workers fully value insurance, others under- value insurance 5. Firms bear the cost of providing insurance for each worker insured. The cost per worker is independent on the total number of workers insured 6. No wage rigidities such as minimum wage laws 7. All benefits from health insurance are private, no external social benefits or costs Later we will discuss how relaxing these assumptions may change the model predictions

6. 26 September 2003 Preliminary results. Please do not quote. Theoretical predictions What outcome will maximize labor market efficiency? Firms should hire the workers that are best fitted for the job (the most productive) If there are no external social benefits from health insurance, then only workers whose private benefits from insurance exceed the cost of its provision should be insured How does employer-provided insurance affect worker wages? If there are no wage rigidities, worker competitive wages will be fully adjusted downwards by the cost of health insurance

7. 26 September 2003 Preliminary results. Please do not quote. Theoretical predictions: effects of policy alternatives Under no mandate, the labor market efficiency is the highest: firms hire most productive workers, and sell insurance to those who value it above the cost of provision; The PHCA (the status quo alternative) leads to higher share of part-time workers, but same insurance rate and same market efficiency as with no mandate: workers who under-value insurance work part-time for multiple employers to get higher cash wages without insurance The full mandate and the Sliding Scale lead to full insurance coverage but lower market efficiency: instead of hiring the most productive workers, firms may hire those who value insurance more

8. 26 September 2003 Preliminary results. Please do not quote. Experimental design Non-computerized competitive auction markets for fictitious good (labor) with 5 buyers (firms) and 5 sellers (workers) In addition to labor, buyers may (have to) offer, and sellers may (have to) accept a fictitious service (health insurance), that benefits sellers but is costly for buyers to provide Each seller (worker) has 2 (labor) units to sell Good can be traded as separate units (part-time job) or in packages (full-time job), with or without service (insurance) 4 treatments corresponding to 4 policy alternatives, trading is repeated for 10 periods

9. 26 September 2003 Preliminary results. Please do not quote. Experimental Results

10. 26 September 2003 Preliminary results. Please do not quote. Results Summary We show that under the assumptions of the model, requiring insurance for all workers (Full Mandate) may reduce labor market efficiency Sliding Scale yields the same outcomes as the Full Mandate The PHCA leads to higher percentage of part-time workers but no efficiency losses as compared to No Mandate; workers with low insurance benefits take part-time jobs with higher cash wages and no insurance In contrast to the theoretical prediction, the experimentally observed insurance coverage under PHCA is higher than under No Mandate

11. 26 September 2003 Preliminary results. Please do not quote. Discussion The results are sensitive to the assumptions of the model and may change if the assumptions are altered: If workers are less productive on part-time jobs than on full-time jobs, then high share of part-time workers may lead to efficiency losses Wage rigidities (minimum wage laws) may have a significant effect on outcomes If there are external social benefits of having workers insured, then full mandate may be a desirable policy alternative These are the subject for further studies