Equilibrium Labor Market Search and Health Insurance Reform

We empirically implement an equilibrium labor market search model where both wages and health insurance provisions are endogenously determined and use it to predict the impact of the 2010 U.S. health insurance reform on health insurance coverage and labor market outcomes. In our model, employers make a health insurance coverage decision by taking into account health composition of their employees. By offering health insurance, they may attract unhealthy workers who both increase their health insurance costs and decrease their labor productivity, generating an adverse selection problem. On the other hand, because health insurance coverage can improve employees' future health status, the cost generated by the adverse selection will be reduced over time. In equilibrium, more productive employers benefit more from the latter channel, leading to a positive correlation among wage, health insurance coverage, and employer size, which is consistent with the data. We estimate the model using Survey of Income and Program Participation, Medical Expenditure Panel Survey, and Robert Wood Johnson Employer Health Insurance Survey. We use the model estimates to evaluate the equilibrium effects of several features of the health insurance reform.