The impact of U.S. employer-sponsored insurance in the 20th century

The introduction of employer-sponsored insurance (ESI) in the 1940s led to the largest decline in the uninsurance rate in U.S. history. To study the fiscal and welfare implications of this insurance expansion, we endogenize the selection of workers into jobs with and without ESI in a general equilibrium life-cycle model where consumers face idiosyncratic health shocks. Our model rationalizes non-targeted empirical patterns related to ESI coverage between 1940 and 2010 and in recent cross-sectional data. ESI leads to moderate welfare gains in the short run (0.5 percent of lifetime consumption for the average consumer) but zero gains or even moderate losses in the long run. The reason is that the health insurance benefit provided by ESI dominates in the short run but the tax increase required to offset ESI tax exemptions dominates in the long run. We substantiate these welfare estimates by showing that our model rationalizes both the level and rise in total ESI tax exemptions. Finally, we show that tax-financed universal health insurance — considered among policymakers in the 1930s — would have led to significantly higher welfare gains.