If we didn’t have a giant tax subsidy for employer-provided health insurance, then the health insurance market wouldn’t work for anyone under the age of 65. But insuring the majority of our working-age population through a giant tax subsidy for employer-provided health insurance is a double-whammy to entrepreneurship. On the one hand, it means that people who don’t work for firms that provide insurance are being taxed to subsidize those who do. And on the other hand, it means that failing to work for such a firm basically shuts you out of the insurance market if you’re at risk of needing health care.
So via Ezra Klein here’s an interesting study from Robert W. Fairliea, Kanika Kapurb and Susan Gates that attempts to measure the extent of this “job lock” by comparing the business ownership rate of males just-before and just-after they become eligible for Medicare:
We use difference-in-difference models to estimate the interaction between having a spouse with employer-based health insurance and potential demand for health care. We find evidence of a larger negative effect of health insurance demand on business creation for those without spousal coverage than for those with spousal coverage. We also take a new approach in the literature to examine the question of whether employer-based health insurance discourages business creation by exploiting the discontinuity created at age 65 through the qualification for Medicare. Using a novel procedure of identifying age in months from matched monthly CPS data, we compare the probability of business ownership among male workers in the months just before turning age 65 and in the months just after turning age 65. We find that business ownership rates increase from just under age 65 to just over age 65, whereas we find no change in business ownership rates from just before to just after for other ages 55–75. We also do not find evidence from the previous literature and additional estimates that other confounding factors such as retirement, partial retirement, social security and pension eligibility are responsible for the increase in business ownership in the month individuals turn 65. Our estimates provide some evidence that “entrepreneurship lock” exists, which raises concerns that the bundling of health insurance and employment may create an inefficient level of business creation.
This kind of study can’t capture the impact of the differential taxation, so it’s underestimating the total scale of the effect.