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Labor Supply Incentives of Medicaid

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  • Ponpoje (Poe) Porapakkarm

    (University of Macau)

  • Svetlana Pashchenko

    (Uppsala University)

Abstract

The employment rate among Medicaid beneficiaries is much lower than the employment rate among the rest of the population. To what extent this difference is due to the incentives created by Medicaid? We use general equilibrium heterogeneous agents model to evaluate labor supply distortions created by Medicaid eligibility rules and quantify its welfare effects. Using Medical Expenditure Panel Survey Dataset we calibrate the model to replicate the life-cycle patterns of employment and insurance take-up behavior as well as the key aggregate statistics for the US. We use the model to estimate potential labor income of people whom we do not observe working in the data. We find that around 23% of Medicaid enrollees will lose their eligibility if they start working. More than half of these people will choose to work if they are able to keep public insurance. These distortions are costly for the economy: if Medicaid eligibility could be linked to (unobservable) exogenous productivity the resulting ex-ante welfare gains are equivalent to 1% of the annual consumption. We explore several policy reforms and show that the best outcome is achieved if only workers can enroll in Medicaid through the categorical eligibility channel while non-workers enroll through the Medically Needy channel.

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Bibliographic Info

Paper provided by Society for Economic Dynamics in its series 2013 Meeting Papers with number 1082.

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Date of creation: 2013
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Handle: RePEc:red:sed013:1082

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  1. Mikhail Golosov & Aleh Tsyvinski, 2006. "Designing Optimal Disability Insurance: A Case for Asset Testing," Journal of Political Economy, University of Chicago Press, vol. 114(2), pages 257-279, April.
  2. Strumpf, Erin, 2011. "Medicaid's effect on single women's labor supply: Evidence from the introduction of Medicaid," Journal of Health Economics, Elsevier, vol. 30(3), pages 531-548, May.
  3. Storesletten, Kjetil & Telmer, Chris & Yaron, Amir, 2002. "Consumption and Risk Sharing Over the Life Cycle," Seminar Papers 702, Stockholm University, Institute for International Economic Studies.
  4. Cutler, David M & Gruber, Jonathan, 1996. "Does Public Insurance Crowd Out Private Insurance?," The Quarterly Journal of Economics, MIT Press, vol. 111(2), pages 391-430, May.
  5. Jonathan Heathcote & Kjetil Storesletten & Giovanni L. Violante, 2008. "The Macroeconomic Implications of Rising Wage Inequality in the United States," NBER Working Papers 14052, National Bureau of Economic Research, Inc.
  6. Juan Carlos Conesa & Dirk Krueger, 2004. "On the Optimal Progressivity of the Income Tax Code," Working Papers 131, Barcelona Graduate School of Economics.
  7. Jeske, Karsten & Kitao, Sagiri, 2009. "U.S. tax policy and health insurance demand: Can a regressive policy improve welfare?," Journal of Monetary Economics, Elsevier, vol. 56(2), pages 210-221, March.
  8. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the elderly save? the role of medical expenses," Working Paper Series WP-09-02, Federal Reserve Bank of Chicago.
  9. Ponpoje Porapakkarm & Svetlana Pashchenko, 2011. "Quantitative Analysis of Health Insurance Reform: Separating Community Rating from Income Redistribution," 2011 Meeting Papers 1254, Society for Economic Dynamics.
  10. Gary D. Hansen & Minchung Hsu & Junsang Lee, 2012. "Health Insurance Reform: The Impact of a Medicare Buy-In," NBER Working Papers 18529, National Bureau of Economic Research, Inc.
  11. Anne E. Winkler, 1991. "The Incentive Effects of Medicaid on Women's Labor Supply," Journal of Human Resources, University of Wisconsin Press, vol. 26(2), pages 308-337.
  12. Hsu, Minchung, 2011. "Health insurance and precautionary saving: a structural analysis," MPRA Paper 32975, University Library of Munich, Germany.
  13. Montgomery, Edward & Navin, John C, 2000. "Cross-State Variation in Medicaid Programs and Female Labor Supply," Economic Inquiry, Western Economic Association International, vol. 38(3), pages 402-18, July.
  14. J. Gruber & A. Yelowitz, . "Public Health Insurance and Private Savings," Institute for Research on Poverty Discussion Papers 1135-97, University of Wisconsin Institute for Research on Poverty.
  15. Sandra Decker & Frederic Selck, 2012. "The effect of the original introduction of Medicaid on welfare participation and female labor supply," Review of Economics of the Household, Springer, vol. 10(4), pages 541-556, December.
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