Health Insurance and the
Labor Market with Wage
Rigidities:
Insights from Experiments
Katerina Sherstyuk, Ph.D
Gerard Russo, Ph.D.
Dolgorsuren Dorj, Ph.D. Candidate
Tomomi Tanaka, Ph.D. Candidate
University of Hawai`i at Mānoa
Technical Workshop VI
17 September 2004
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. Sub-Contract Research Corporation of the University of Hawaii. 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.
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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



Coverage rates among the employed
Market efficiency (Do firms hire workers that are the
most productive and best fitted for the job?)
Level and structure of employment (how workers and
firms choose between part-time and full-time
employment)
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
2
Health Insurance Policy
Alternatives
1.
2.
3.
Prepaid Health Care Act (the Status Quo):
government mandates for employer-based
insurance for full-time workers, but not for
part-time workers
Alternative - Full mandate: extend the
mandate to part-time workers
Alternative - No mandate: insurance is
offered by employers on voluntary basis
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
3
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

17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
4
Modeling Assumptions
1.
2.
3.
4.
5.
6.
Competitive labor market (many firms and workers)
No productivity losses from a worker working
several part-time jobs rather than one full-time job
Workers differ in their expected benefits from
health insurance: some workers fully value
insurance, others under-value insurance
Firms bear the cost of providing insurance for
workers
All benefits from health insurance are private, no
external social benefits or costs
No wage rigidities (previous research) or minimum
wage laws (current research)
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
5
Previous Results Summary
We previously assumed no wage rigidities (such as minimum wage
laws) in the labor market
We showed that policy alternatives represent different trade-offs
between labor market efficiency and insurance coverage rates:
 No mandate: High labor market efficiency, but lower coverage
rate; some workers may under-insure
 Full Mandate: High insurance coverage, but reduced labor
market efficiency (due to regulatory distortions)
 PHCA:
 higher share of part-time workers, but the same labor market
efficiency as compared to No Mandate;
 higher insurance coverage than under No Mandate; no workers
under-insure, and some may over-insure
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
6
New Research: Introducing
Wage Rigidities
We now add wage rigidities (such as minimum
wage laws) in the labor market
Consider 2 cases:
1.
Wage floor BELOW market equilibrium wage;
2.
Wage floor ABOVE market equilibrium wage
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
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ILLUSTRATION: Effect of wage floor on
demand and supply of labor
Cash wage
Supply
W0
Minimum wage
W1
Demand w/o Insurance
Demand with Insurance
L1
17 September 2004
L0
Labor
Preliminary results. Revised September 2004. Subject to further revision.
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Results: Minimum wages BELOW
market equilibrium wage
Theory predicts:
 Wage rigidities below market equilibrium wage do not distort
equilibrium efficiency or wage levels, but may change the structure
of employment:


Under No Mandate or PHCA, there is no part-time employment with insurance
Under Full Mandate, there is no part-time employment, either with or without
insurance
Experiments show (Table 1):
 As predicted, the share of part-time workers is reduced under all
scenarios
 Unless the Mandate is Full, employment is somewhat higher, and
insurance coverage rate is somewhat lower than predicted
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
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Table 1: Experimental results: Wage
Floor BELOW market equilibrium
Policy
alternativ
e
Labor market
surplus, %
efficient
Employment, %
efficient
Share of parttime workers
out of all
workers, %
Coverage rate
among
employed, %
efficient
Predicted
Actual
Predicted
Actual
Predicted
Actual
Predicted
Actual
No
Mandate
100
90.91
(6.80)
100
104.17
(2.89)
0-50
23.55
(11.88)
100
82.89
(17.50)
Full
Mandate
89.29
83.68
(2.62)
100
101.25
(1.77)
0
5.47
(1.36)
200
200
(0.00)
*All percentages are as compared to the efficient outcome. Statistics reported
are means and standard deviations (in parentheses), based on 3 independent
experimental sessions for No Mandate, and 2 sessions for Full Mandate.
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
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Results: Minimum wages ABOVE
market equilibrium wage
Theory predicts:
 Minimum wages ABOVE market equilibrium level reduce efficiency
and decrease, and may fully eliminate voluntary provision of health
insurance by firms:


Under No Mandate or PHCA, fewer firms want to offer insurance, either to
part-time or full-time workers (since wages cannot adjust, firms cannot afford
to offer insurance)
Under Full Mandate, firms provide insurance, but hire less workers, which
leads to unemployment
Experiments show (Table 2):
 Under all scenarios, labor market efficiency losses from regulation
are high and are often higher than predicted
 Insurance coverage rate is very low under No Mandate but higher
than predicted under PHCA
 As predicted, minimum wages under Full Mandate lead to
unemployment
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
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Table 2: Experimental results: Wage
Floor ABOVE market equilibrium
Policy
alternative
Labor market
surplus, %
efficient
Employment,
% efficient
Share of parttime workers
out of all
workers, %
Coverage rate
among
employed, %
efficient
Predicted
Actual
Predicted
Actual
Predicted
Actual
Predicted
Actual
No Mandate
92.86
87.57
(1.19)
100.00
101.19
(4.85)
0-100
19.55
(16.97)
0.00
13.19
(7.28)
PHCA
(Partial
Mandate)
92.86
83.00
(10.48)
100.00
100.16
(9.41)
100.00
71.83
(3.12)
0.00
51.44
(5.65)
Full
Mandate
80.36
68.42
(1.72)
75.00
75.63
(1.25)
0.00
5.77
(4.12)
200.00
200
(0.00)
*All percentages are as compared to the efficient outcome. Statistics reported are means
and standard deviations (in parentheses), based on 4 independent experimental sessions
for each policy alternative.
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
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Results Summary
We show that health insurance regulations in
markets with wage rigidities may lead to
unexpected labor market outcomes:
 Labor market efficiency distortions may be
high under wage rigidities
 If the Mandate is NOT Full, wage rigidities
may result in firms not offering health
insurance to workers
 Full Mandate guarantees high insurance
coverage, but may lead to unemployment
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
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Mahalo!
This research is funded in part by
U.S. Department of Health and Human Services
Health Resources & Services Administration
State Planning Grant
Hawaii State Department of Health.
17 September 2004
Preliminary results. Revised September 2004. Subject to further revision.
14