News Release

April 13, 1998
Contact: Rob Valletta (415) 974-3271

Health Insurance and the U.S. Labor Market

In the latest Economic Letter, Tom Buchmueller, Assistant Professor at U.C. Irvine, and Rob Valletta, Senior Economist at the San Francisco Fed, discuss the role of employer-provided health insurance, in particular its effects on three key employee decisions: job mobility, retirement, and hours worked.

One potential effect of employer-provided health insurance is "job lock," which is defined as a reduction in workers' willingness to quit their jobs arising from the risk of losing health coverage. Two key sources of job lock are pre-existing condition clauses which may be invoked to deny coverage under a new employer's plan, and a worker's reluctance to be without health insurance while searching for a new job. Buchmueller and Valletta's estimates of job lock suggest that it is important for female workers but probably not for males.

"Retirement is another type of job change decision that is affected by health insurance availability," write Buchmueller and Valletta. This effect is likely to be large because health care expenditures generally increase with age. The authors cite the work of economists Gruber and Madrian, who found that by acting as a "bridge to Medicare" the availability of continuation coverage under the pre-retirement employer's plan substantially reduces the expected age of retirement.

Employer-provided health insurance also affects employees' decisions on hours worked, because most employers grant health coverage only to full-time workers. "The restriction of health benefits to full-time workers...suggests that some workers who prefer to work part-time may instead work full-time in order to acquire health insurance for themselves and their families." Buchmueller and Valletta report that such behavior is widespread among married women.

Two laws passed in the 80s and 90s, COBRA and HIPAA, have made it easier for workers who leave insurance-providing jobs to maintain their coverage. These two laws work in conjunction with state insurance reforms to reduce further the potential loss of insurance associated with changing jobs. As a result of continuation of coverage laws, voluntary job mobility and instances of early retirement have both increased.

However, Buchmueller and Valletta add that the exact economic welfare effects of such changes have not yet been worked out. While continuation of coverage laws have had a potentially salutary effect on labor market decisions, the full implications are not yet fully understood. For example, an unintended side effect of universal coverage reform may be reduced hours worked by married women. The authors conclude: "The potential for such unintended side effects of policy reform suggests a need for additional research on the linkages between the markets for health insurance and labor."