Health Insurance Reform and the Labor Market

One of the most under-discussed aspects of health reform is the extent to which our current system creates labor market rigidities and may stifle entrepreneurship and job creation. As is well known, despite the lack of guarantee, most people actually have health insurance. But they don’t just have health insurance by accident, nor do they just have health insurance in virtue of having a job. Rather, people engage in a far amount of insurance-seeking behavior — refusing to allow themselves to go uninsured for even a brief period of time, lest they lose the protections the law grants to people who maintain a continuous record of coverage.

Can you really quantify this impact? Well, based on Ezra Klein’s post on the subject it seems you sort of can’t:

But it’s pretty well understood that inadequate access to health coverage among the working and middle class also harms job creation. Unable to risk losing their employer-sponsored health insurance, would-be entrepreneurs don’t start small businesses, they stay in jobs that don’t maximize their productivity, they remain in positions that another worker would be better suited to. The magnitude of this sort of thing is hard to measure: It’s tough to tell how workers who do have health insurance would act if they did not have health insurance. Harvard’s Brigitte Madrian and MIT’s Jon Gruber have taken a stab at it, but they basically concluded that the evidence conflicts, and the best you can say is that “health insurance plays an important role in job mobility decisions.” More anecdotally, surveys show that workers say their health benefits are the number one reason they fear losing their jobs. But though you can argue over the precise size of the effect — just as you can argue over the precise effect of slightly higher taxes on the rich — it’s pretty clearly there, and it’s not obvious to me at least that it doesn’t totally overwhelm the labor market impact of the tax changes.

Well, it’s too bad there’s not more definitive evidence on this score. But to think about it another way, there’s a theory that shows how higher taxes ought to stifle growth. There’s also an empirical finding that plenty of high-tax countries are rich. This bit about health insurance is, most likely, part of the reason. The US system reduces labor market flexibility and biases the economy toward incumbents and large firms.