Health Insurance and the Labor Market: Theory and Experimental Results

1. 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Yoav Wachsman Jerry Russo The Hawaii Coverage for All Project Technical Workshop 05/23/03 all results are preliminary; do not quote

2. Research Questions • Study the effects of health insurance regulations (the Prepaid Health Care Act and its policy alternatives) on labor market • 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

3. Heath Insurance Policy alternatives • Status Quo (the Prepaid Health Care Act): government mandates for employer-based insurance for full-time workers, but not for fractional workers • Alternative - Full mandate: extend the mandate to fractional workers; employers bare increased costs of health insurance • Alternative - No mandate: eliminate the mandate; insurance is offered by employers on voluntary basis • 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

4. 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. Modeling assumptions • Competitive labor market (many firms and workers) • Workers differ in their productivities • A worker is equally productive at one full-time job or at several part-time jobs* • Workers also differ in their expected benefits from health insurance: some workers expect high benefits, others expect lower benefits • Firms bear the cost of providing insurance for each worker insured. The cost per worker is independent on the total number of workers insured* • No wage rigidities such as minimal wage laws* • 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. Theoretical predictions What outcome will maximize social welfare? • Firm 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. Theoretical predictions: effects of policy alternatives • 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; • 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 • 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

8. Experimental Results

9. Results summary • We show that under the assumptions of the model, requiring insurance for all workers (full mandate) may not be socially desirable • 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 • In contrast to the theoretical prediction, the experimentally observed insurance coverage under PHCA is higher than under no mandate

10. 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 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 • These are the subject for further studies