Effects of Changes to the Health Insurance System on Labor Markets

July 13, 2009

Today CBO released a brief that analyzes the effects of changes in the health insurance system on the U.S. labor market. In 2009, about three out of every five nonelderly American are expected to have health insurance that is provided through an employer or other job-related arrangement, such as a plan offered through a labor union. Changes to the health insurance system could affect labor markets by changing the cost of insurance offered through the workplace and by providing new options for obtaining coverage outside the workplace.

In the current system, employment-based plans are popular largely due to three reasons:

  • They are subsidized through the tax code: Nearly all payments for employment-based insurance are excluded from taxable compensation and thus are not subject to income and payroll taxes.
  • Employers offering coverage usually pay a large share of the premium partly to encourage broad participation among their employees, so as to limit the potential for adverse selection.
  • Larger group purchasers can spread administrative costs over a larger number of people, using these economies of scale to reduce costs imbedded in premiums.

Although employers directly pay most of the costs of their workers health insurance, the available evidence indicates that active workersas a groupultimately bear those costs.

Congress is currently considering proposals that would expand health insurance coverage. Those proposals would affect the labor market because of the close linkage between health insurance and employment. For example:

  • Requiring employers to offer health insuranceor pay a fee if they do notis likely to reduce employment, although the effect would probably be small. Those who would most likely be affected are currently paid close to or at the minimum wage. They would be more vulnerable to job loss because their wages could not be lowered sufficiently to absorb the cost of health insurance (if their firm decides to offer) or the fee (if their firm does not) without bumping into the minimum wage.
  • Proposals that imposed surcharges on employers whose workers received subsidies directly from the government could have a larger impact on employment. (Such provisions are sometimes known as free-rider surcharges.) Many of the affected workers would be paid low wages that could not easily adjust to absorb the full cost.
  • Providing new subsidies for health insurance that decline in value as a persons income rises could discourage some people from working more hours.
  • Subsidies could be targeted to small businesses, but employers or their workers might respond by taking action to qualify for the subsidies. For example, some firms might reorganize into smaller subsidiaries, and workers might move to smaller firms to take advantage of the new subsidies.
  • Increasing the availability of health insurance that is not related to employment could lead more people to retire before age 65 or choose not to work at younger ages. It might also encourage other workers to take jobs that better match their skillsbecause they would not have to stay in less desirable jobs solely to maintain their health insurance.

The overall impact on labor markets, however, is difficult to predict. Although economic theory and experience provide some guidance as to the effect of specific provisions, large-scale changes to the health insurance system could have more extensive repercussions than had previously been observed and also may contain numerous pieces that would interactaffecting labor markets in significant but potentially offsetting ways.