Freed from Employment Lock
Skip to content
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.

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

Professor of Strategy; Herman Smith Research Professor in Hospital and Health Services Management; Director of Healthcare at Kellogg

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.

Read the original

Most Popular This Week
  1. 3 Things to Keep in Mind When Delivering Negative Feedback
    First, understand the purpose of the conversation, which is trickier than it sounds.
  2. Podcast: Workers Are Stressed Out. Here’s How Leaders Can Help.
    On this episode of The Insightful Leader: You can’t always control what happens at work. But reframing setbacks, and instituting some serious calendar discipline, can go a long way toward reducing stress.
  3. What Went Wrong at Silicon Valley Bank?
    And how can it be avoided next time? A new analysis sheds light on vulnerabilities within the U.S. banking industry.
    People visit a bank
  4. How Are Black–White Biracial People Perceived in Terms of Race?
    Understanding the answer—and why black and white Americans may percieve biracial people differently—is increasingly important in a multiracial society.
    How are biracial people perceived in terms of race
  5. Will AI Eventually Replace Doctors?
    Maybe not entirely. But the doctor–patient relationship is likely to change dramatically.
    doctors offices in small nodules
  6. Leaders, Don’t Be Afraid to Admit Your Flaws
    We prefer to work for people who can make themselves vulnerable, a new study finds. But there are limits.
    person removes mask to show less happy face
  7. Which Form of Government Is Best?
    Democracies may not outlast dictatorships, but they adapt better.
    Is democracy the best form of government?
  8. What Went Wrong at AIG?
    Unpacking the insurance giant's collapse during the 2008 financial crisis.
    What went wrong during the AIG financial crisis?
  9. What Happens to Worker Productivity after a Minimum Wage Increase?
    A pay raise boosts productivity for some—but the impact on the bottom line is more complicated.
    employees unload pallets from a truck using hand carts
  10. At Their Best, Self-Learning Algorithms Can Be a “Win-Win-Win”
    Lyft is using ”reinforcement learning” to match customers to drivers—leading to higher profits for the company, more work for drivers, and happier customers.
    person waiting for rideshare on roads paved with computing code
  11. When You’re Hot, You’re Hot: Career Successes Come in Clusters
    Bursts of brilliance happen for almost everyone. Explore the “hot streaks” of thousands of directors, artists and scientists in our graphic.
    An artist has a hot streak in her career.
  12. Why Do Some People Succeed after Failing, While Others Continue to Flounder?
    A new study dispels some of the mystery behind success after failure.
    Scientists build a staircase from paper
  13. Immigrants to the U.S. Create More Jobs than They Take
    A new study finds that immigrants are far more likely to found companies—both large and small—than native-born Americans.
    Immigrant CEO welcomes new hires
  14. Take 5: Tips for Widening—and Improving—Your Candidate Pool
    Common biases can cause companies to overlook a wealth of top talent.
  15. Why Well-Meaning NGOs Sometimes Do More Harm than Good
    Studies of aid groups in Ghana and Uganda show why it’s so important to coordinate with local governments and institutions.
    To succeed, foreign aid and health programs need buy-in and coordination with local partners.
  16. How Has Marketing Changed over the Past Half-Century?
    Phil Kotler’s groundbreaking textbook came out 55 years ago. Sixteen editions later, he and coauthor Alexander Chernev discuss how big data, social media, and purpose-driven branding are moving the field forward.
    people in 1967 and 2022 react to advertising
  17. How Peer Pressure Can Lead Teens to Underachieve—Even in Schools Where It’s “Cool to Be Smart”
    New research offers lessons for administrators hoping to improve student performance.
    Eager student raises hand while other student hesitates.
  18. How Much Do Campaign Ads Matter?
    Tone is key, according to new research, which found that a change in TV ad strategy could have altered the results of the 2000 presidential election.
    Political advertisements on television next to polling place
  19. Take 5: How Fear Influences Our Decisions
    Our anxieties about the future can have surprising implications for our health, our family lives, and our careers.
    A CEO's risk aversion encourages underperformance.
More in Policy