Rising Health Care Premiums Lead To Lower Wages and More Part-Time Employment

Rising Health Insurance and Employment

In the United States, two-thirds of the nonelderly population is covered by employer-provided health care, either directly or as a dependent. In an important new study forthcoming in the July issue of the Journal of Labor Economics, Katherine Baicker (University of California, Los Angeles) and Amitabh Chandra (Harvard University) demonstrate that the rise in health insurance premiums may increase the ranks of the uninsured and the unemployed by as many as 7 million workers.

"Understanding the relationship between health insurance costs and labor markets is of growing policy importance," write the authors. "Together [our] estimates demonstrate that the labor market effects of rising health insurance are far from neutral."

Baicker and Chandra calculate that a 20% increase in health insurance premiums (smaller than the increase seen in many areas in the past three years) would reduce the probability of being employed by 2.4 percentage points--the equivalent of approximately 3.5 million workers. Annual income is reduced by $1,700 for those who are employed and have employer-provided coverage.

In situations where a firm is constrained from offering lower compensation by minimum wage, union rules, or other provisions of labor law, an additional 3.5 million workers will likely be moved from full-time jobs to part-time without benefits.

"As malpractice costs rise, the price of purchasing health care through any source - employer insurance, nongroup insurance, or out of pocket - will increase," explain the authors. "Workers may be willing to accept lower wages in exchange for costlier health insurance because they would have to pay more on the open market for it, whether or not the increase in premiums is associated with higher value health care."