Health Insurance and the Labor Market: Theory and Experimental Results Katya Sherstyuk Yoav Wachsman Jerry Russo The Hawaii Coverage for All Project Technical Workshop 05/23/03 all results are preliminary; do not quote

Research Questions l Study the effects of health insurance regulations (the Prepaid Health Care Act and its policy alternatives) on labor market l Focus on how health insurance regulation affects –Insurance rates –Which workers are hired (Do firms hire workers that are the most productive and best fitted for the job?) –How workers and firms choose between part-time and full-time employment

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 fractional workers 2. Alternative - Full mandate: extend the mandate to fractional 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 * For future analysis

Method of analysis l Build a theoretical model that captures qualitative features of the labor market l Analyze the model to obtain predictions l 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

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 expect high benefits, others expect lower benefits 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 minimal 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

Theoretical predictions What outcome will maximize social welfare? l Firm should hire the workers that are best fitted for the job (the most productive) l 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? l If there are no wage rigidities, worker competitive wages will be fully adjusted downwards by the cost of health insurance

Theoretical predictions: effects of policy alternatives l Under no mandate, the social welfare is maximized: firms hire most productive workers, and sell insurance to those who value it above the cost of provision; l The PHCA (the status quo alternative) leads to higher share of part-time workers, but same insurance rate and same social welfare as with no mandate: workers who under-value insurance choose to work part-time for multiple employers to get higher cash wages without insurance l The full mandate leads to full insurance coverage but may lead to lower social welfare: instead of hiring the most productive workers, firms may hire those who value insurance more

Experimental Results

Results summary l We show that under the assumptions of the model, requiring insurance for all workers (full mandate) may not be socially desirable l The PHCA leads to higher percentage of part-time workers but no welfare losses as compared to no mandate; workers with low insurance benefits may opt for higher cash wages with no insurance by taking part-time jobs l In contrast to the theoretical prediction, the experimentally observed insurance coverage under PHCA is higher than under no mandate

Discussion l 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 welfare losses –Wage rigidities (minimal 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 l These are the subject for further studies