Freed from Employment Lock
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Policy Strategy Economics Aug 5, 2013

Freed from Employment Lock

Obamacare may lead people to choose to leave the labor market.

Based on the research of

Craig Garthwaite

Tal Gross

Matthew J. Notowidigdo

In the United States, individuals who do not qualify for public health insurance must either find an employer who offers health insurance or make their way on the individual market. The latter, however, is often a prohibitively expensive prospect. Many economists have suggested that this tight linkage between health insurance and employment has led to employment lock, or “the idea that you work solely for the purpose of getting insurance,” explains Craig Garthwaite, an assistant professor of management and strategy at the Kellogg School.

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Among oth­er things, the Afford­able Care Act (ACA), also known as Oba­macare,” aims to put an end to employ­ment lock. By ensur­ing that any­one can pur­chase afford­able insur­ance through state-based exchanges, the leg­is­la­tion allows peo­ple to change jobs — or even exit the work­force alto­geth­er — with­out giv­ing up health insur­ance. In addi­tion, the ACA involves a large expan­sion of Med­ic­aid that will cov­er every­one whose income is below 138 per­cent of the pover­ty line.

So just how many peo­ple are like­ly to choose to leave the labor mar­ket after the ACA’s imple­men­ta­tion? We esti­mate any­where from 500,000 to 900,000 peo­ple, depend­ing on a range of assump­tions,” says Garthwaite.

The Ori­gins of an Esti­mate

Pub­lic health insur­ance in the Unit­ed States has gen­er­al­ly been reserved for peo­ple with incomes that fall under a fixed amount — a fea­ture that might actu­al­ly serve as an incen­tive against earn­ing more income. With­out a well-func­tion­ing non-employ­er option, some­one earn­ing more than that amount could end up unin­sured. Ten thou­sand dol­lars a year — let’s say that is the lim­it. If you earn $10,001, you lose cov­er­age. If you earn $9,999 you still have cov­er­age,” says Garth­waite. A lot of peo­ple won’t earn more than $10,000.”

Under the ACA, how­ev­er, eli­gi­bil­i­ty for insur­ance comes with no strict income cut­offs: some­one mak­ing more mon­ey will sim­ply pay more in pre­mi­ums. Because the ACA works so dif­fer­ent­ly from most Amer­i­can pub­lic health pro­grams, its impli­ca­tions have proven dif­fi­cult for econ­o­mists to predict.

But though unique, some fea­tures of the ACA are not entire­ly unprece­dent­ed. In 1994, Ten­nessee expand­ed its pub­lic health­care pro­gram Ten­nCare to include any­one — regard­less of income — deemed unin­sured and unin­sur­able,” mean­ing that they did not cur­rent­ly have access to health insur­ance and could not get access on the indi­vid­ual mar­ket. As with the ACA, the pro­gram was free for those with incomes under a fixed amount, while those who earned more paid more.

In 2005, fac­ing ris­ing costs, the state end­ed its expan­sion, dis­en­rolling all users who did not qual­i­fy for tra­di­tion­al Med­ic­aid. Over a peri­od of just a few months, 170,000 peo­ple were kicked off of the state’s insur­ance rolls.

The rise in employ­ment rates can­not be attrib­uted to the region’s econ­o­my more broadly. 

This con­trac­tion, explains Garth­waite, resem­bles the ACA’s imple­men­ta­tion, only in reverse. As such, it pro­vides a good place for Garth­waite — along with his col­lab­o­ra­tors, Tal Gross of Colum­bia Uni­ver­si­ty and Matthew Notowidig­do of the Uni­ver­si­ty of Chica­go — to look for answers. What we do is we look at these peo­ple and we say, Well what hap­pened to them?’” says Garth­waite. That will give us some sense of what might hap­pen when the ACA goes into effect.”

Answers in Ten­nessee

So what did hap­pen in Ten­nessee? Garth­waite and his col­leagues found that between 2004 and 2006 — the two-year peri­od span­ning the Ten­nCare dis­en­roll­ment — Tennessee’s over­all employ­ment rate increased by 2.6 per­cent­age points.

Note: This figure presents the estimated monthly employment rate using data from the Local Area Unemployment Statistics for Tennessee versus other southern states. Before the TennCare disenrollment, Tennessee's employment rate closely follows that of other southern states. After disenrollment, the two rates diverge.

That rate increased to 4.6 per­cent­age points for child­less adults, the demo­graph­ic dis­pro­por­tion­ate­ly affect­ed by the cuts. Com­par­isons with oth­er pop­u­la­tions, includ­ing adults with chil­dren in Ten­nessee (who were less affect­ed by the cuts) and adults with and with­out chil­dren in oth­er south­ern states, sug­gest that the rise in employ­ment rates can­not be attrib­uted to, say, the region’s econ­o­my more broad­ly. This and oth­er evi­dence — includ­ing a spike in the Google search term job open­ings” in Ten­nessee dur­ing the two months after the cuts to Ten­nCare — seem to point the fin­ger square­ly at the loss of pub­lic health insurance.

In all, Garth­waite explains, about half” of the child­less adults cut from Ten­nCare obtained pri­vate health insur­ance with­in a mat­ter of months — many by enter­ing the labor force. The researchers esti­mate that it would take an approx­i­mate­ly 26% increase in wages to gen­er­ate a sim­i­lar increase in the size of the labor force. For many of the dis­en­rolled indi­vid­u­als, the cost of employ­er-pro­vid­ed health­care amount­ed to rough­ly that per­cent­age of their income.

As you might expect, how­ev­er, the researchers found evi­dence that not all dis­en­rollees val­ued health insur­ance equal­ly. Although old­er adults — those above 40 but not yet eli­gi­ble for Medicare — and younger adults lost access to pub­lic health insur­ance at rough­ly the same rate, it’s main­ly the 40- to 65-year-olds who are real­ly mov­ing into the insur­ance mar­ket. Those are peo­ple who prob­a­bly have much high­er expect­ed use,” said Garthwaite.

Impli­ca­tions for Oba­macare

Final­ly, the researchers applied lessons learned from Ten­nessee to esti­mate the like­ly effects of the ACA. They cal­cu­lat­ed how many Amer­i­can adults mak­ing less than 200% of the pover­ty line — the pop­u­la­tion most affect­ed dur­ing the Ten­nCare expan­sion and cuts — were cur­rent­ly work­ing with access to employ­er-pro­vid­ed health insur­ance. They then deter­mined, using esti­mates from Ten­nessee, the num­ber of employ­ment-locked Amer­i­cans who would like­ly choose to leave the labor force if giv­en anoth­er way to obtain afford­able health insur­ance: between 500,000 and 900,000, or about 0.3 to 0.6 per­cent of the workforce.

This is not any com­ment on labor demand or job killing’ or any­thing like that,” Garth­waite is quick to note. This is a choice by peo­ple: Once we open up the mar­ket to non-employ­er-based insur­ance, how are you going to choose to make your labor – leisure trade-off?”

So should we be wor­ried that this exo­dus from the labor mar­ket is bad news for the country’s pro­duc­tiv­i­ty? Not nec­es­sar­i­ly, says Garth­waite. Freed from employ­ment lock, some peo­ple might, of course, do noth­ing at all. But oth­er indi­vid­u­als might move into vol­un­teer work, go back to school, invest in oth­er per­son­al devel­op­ment, or engage in any num­ber of activ­i­ties. There are a lot of pro­duc­tive things for the coun­try you could do that aren’t work. And so we shouldn’t think of this as bad for Amer­i­ca in that sense. We should think of it as peo­ple now hav­ing an option they didn’t use to have.”

Featured Faculty

Craig Garthwaite

Associate Professor of Strategy, Director of Health Enterprise Program, HEMA

Matthew J. Notowidigdo

Associate Professor of Economics, Weinberg College of Arts and Sciences; Associate Professor of Strategy

About the Writer

Jessica Love is the staff science writer and editor for Kellogg Insight.

About the Research

Garthwaite, Craig, Tall Gross, and Matthew J. Notowidigdo. 2013. “Public Health Insurance, Labor Supply, and Employment Lock.” NBER Working Paper No. 19220.

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