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The Macroeconomic Consequences of Financing Health Insurance

  • Stephen B. DeLoach

    ()

    (Department of Economics, Elon University)

  • Jennifer M. Platania

    ()

    (Department of Economics, Elon University)

Employer-financed health insurance systems, like that used in the United States, distort firms' labor demand and adversely affect the economy. Since such costs vary with employment rather than hours worked, firms have an incentive to increase output by increasing worker hours rather than employment. Given that the returns to employment exceed the returns to hours worked, this results in lower levels of employment and output. In this paper we construct a heterogeneous agent general equilibrium model where individuals differ with respect to their productivity and employment opportunities. Calibrating the model to the U.S. economy, we generate steady state results for several alternative models for financing health insurance: one in which health insurance is financed primarily through employer contributions that vary with employment; a second where insurance is funded through a non-distortionary, lump-sum tax; and a third where insurance is funded by a payroll tax. We measure the effects of each of the alternatives on output, employment, hours worked and inequality.

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File URL: http://org.elon.edu/econ/WPS/wp2008-04.pdf
File Function: First version, 2008
Download Restriction: no

Paper provided by Elon University, Department of Economics in its series Working Papers with number 2008-04.

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Length: 27 pages
Date of creation: Feb 2008
Date of revision:
Handle: RePEc:elo:wpaper:2008-04
Contact details of provider: Postal: 2700 Campus Box Elon College, NC 27244-2010
Phone: +1(336) 278-6000
Fax: +1 (336) 278-5952
Web page: http://www.elon.edu/e-web/academics/business/economics/
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  11. 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.
  12. David M. Blau & Donna B. Gilleskie, 2001. "Retiree Health Insurance and the Labor Force Behavior of Older Men in the 1990s," The Review of Economics and Statistics, MIT Press, vol. 83(1), pages 64-80, February.
  13. David M. Cutler & Brigitte C. Madrian, 1996. "Labor Market Responses to Rising Health Insurance Costs: Evidence on Hours Worked," NBER Working Papers 5525, National Bureau of Economic Research, Inc.
  14. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June.
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  16. Steven P. Cassou & Kevin J. Lansing, 2004. "Growth Effects of Shifting from a Graduated-rate Tax System to a Flat Tax," Economic Inquiry, Western Economic Association International, vol. 42(2), pages 194-213, April.
  17. FitzRoy, Felix R & Hart, Robert A, 1985. "Hours, Layoffs and Unemployment Insurance Funding: Theory and Practice in an International Perspective," Economic Journal, Royal Economic Society, vol. 95(379), pages 700-713, September.
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