Health Insurance and
the Labor Market:
Theory and Experimental
Results
Katerina Sherstyuk
Yoav Wachsman
Gerard Russo
University of Hawai`i at Mānoa
Hawai`i Coverage For All Project
Technical Workshop IV
September 26, 2003
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, Prime Contract No. 1 P09 OA 00046-01. Sub-Contract Research Corporation of the University of Hawaii, Project
No. 659075. 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.
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



Insurance rates
Market efficiency (Do firms hire workers that are the
most productive and best fitted for the job?)
Structure of employment (how workers and firms
choose between part-time and full-time employment)
26 September 2003
Preliminary results. Please do not quote.
Heath Insurance Policy
Alternatives
1.
2.
3.
4.
Status Quo (the Prepaid Health Care Act):
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; employers bare increased costs of
health insurance
Alternative - No mandate: eliminate the mandate;
insurance is offered by employers on voluntary basis
Alternative - Sliding scale: employers are mandated
to provide heath insurance coverage for all workers,
but only in proportion to worker hours worked
26 September 2003
Preliminary results. Please do not quote.
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

26 September 2003
Preliminary results. Please do not quote.
Modeling Assumptions
Competitive labor market (many firms and workers)
2.
Workers differ in their productivities
3.
A worker is equally productive at one full-time job or at several
part-time jobs
4.
Workers also differ in their expected benefits from health
insurance: some workers fully value insurance, others undervalue insurance
5.
Firms bear the cost of providing insurance for each worker
insured. The cost per worker is independent on the total number
of workers insured
6.
No wage rigidities such as minimum wage laws
7.
All benefits from health insurance are private, no external social
benefits or costs
Later we will discuss how relaxing these assumptions may
change the model predictions
1.
26 September 2003
Preliminary results. Please do not quote.
Theoretical predictions
What outcome will maximize labor market efficiency?

Firms should hire the workers that are best fitted for
the job (the most productive)

If there are no external social benefits from health
insurance, then only workers whose private
benefits from insurance exceed the cost of its
provision should be insured
How does employer-provided insurance affect worker
wages?

If there are no wage rigidities, worker competitive
wages will be fully adjusted downwards by the
cost of health insurance
26 September 2003
Preliminary results. Please do not quote.
Theoretical predictions:
effects of policy alternatives



Under no mandate, the labor market efficiency is the
highest: firms hire most productive workers, and sell
insurance to those who value it above the cost of
provision;
The PHCA (the status quo alternative) leads to higher
share of part-time workers, but same insurance rate and
same market efficiency as with no mandate: workers
who under-value insurance work part-time for multiple
employers to get higher cash wages without insurance
The full mandate and the Sliding Scale lead to full
insurance coverage but lower market efficiency: instead
of hiring the most productive workers, firms may hire
those who value insurance more
26 September 2003
Preliminary results. Please do not quote.
Experimental design

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

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Non-computerized competitive auction markets for
fictitious good (labor) with 5 buyers (firms) and 5
sellers (workers)
In addition to labor, buyers may (have to) offer, and
sellers may (have to) accept a fictitious service (health
insurance), that benefits sellers but is costly for buyers
to provide
Each seller (worker) has 2 (labor) units to sell
Good can be traded as separate units (part-time job)
or in packages (full-time job), with or without service
(insurance)
4 treatments corresponding to 4 policy alternatives,
trading is repeated for 10 periods
26 September 2003
Preliminary results. Please do not quote.
Experimental Results
No. of
Policy
sessio
alternative
ns
Mean market
efficiency, %
Share of parttime workers out
of all workers, %
Insurance rate
among
employed, %
Predicted Actual Predicted Actual Predicted Actual
No
Mandate
4
100.00
89.68
0-100
12.92
50.00
44.00
PHCA
(Partial
Mandate)
4
100.00
87.49
50-100
63.39
50.00
60.46
Full
Mandate
4
89.29
81.56
0-100
41.89
100.00
100.00
Sliding
Scale
4
89.29
83.86
0-100
24.05
100.00
100.00
26 September 2003
Preliminary results. Please do not quote.
Results Summary




We show that under the assumptions of the model,
requiring insurance for all workers (Full Mandate) may
reduce labor market efficiency
Sliding Scale yields the same outcomes as the Full
Mandate
The PHCA leads to higher percentage of part-time
workers but no efficiency losses as compared to No
Mandate; workers with low insurance benefits take
part-time jobs with higher cash wages and no
insurance
In contrast to the theoretical prediction, the
experimentally observed insurance coverage under
PHCA is higher than under No Mandate
26 September 2003
Preliminary results. Please do not quote.
Discussion

The results are sensitive to the assumptions of the
model and may change if the assumptions are altered:




If workers are less productive on part-time jobs than on full-time
jobs, then high share of part-time workers may lead to efficiency
losses
Wage rigidities (minimum wage laws) may have a significant
effect on outcomes
If there are external social benefits of having workers insured,
then full mandate may be a desirable policy alternative
These are the subject for further studies
26 September 2003
Preliminary results. Please do not quote.