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Labor Supply Incentives of Medicaid

  • Ponpoje (Poe) Porapakkarm

    (University of Macau)

  • Svetlana Pashchenko

    (Uppsala University)

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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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. Hsu, Minchung, 2011. "Health insurance and precautionary saving: a structural analysis," MPRA Paper 32975, University Library of Munich, Germany.
  2. Jonathan Gruber & Aaron S. Yelowitz, 1998. "Public Health Insurance and Private Savings," JCPR Working Papers 42, Northwestern University/University of Chicago Joint Center for Poverty Research.
  3. Conesa, Juan Carlos & Krueger, Dirk, 2006. "On the optimal progressivity of the income tax code," Journal of Monetary Economics, Elsevier, vol. 53(7), pages 1425-1450, October.
  4. 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.
  5. Kjetil Storesletten & Chris I. Telmer & Amir Yaron, 2000. "Consumption and Risk Sharing Over the Life Cycle," NBER Working Papers 7995, National Bureau of Economic Research, Inc.
  6. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2010. "Quantitative Analysis of Health Insurance Reform: Separating Community Rating from Income Redistribution," MPRA Paper 26158, University Library of Munich, Germany.
  7. 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.
  8. 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.
  9. 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.
  10. 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.
  11. Mikhail Golosov & Aleh Tsyvinski, 2004. "Designing Optimal Disability Insurance: A Case for Asset Testing," NBER Working Papers 10792, National Bureau of Economic Research, Inc.
  12. Karsten Jeske & Sagiri Kitao, 2007. "U.S. tax policy and health insurance demand: can a regressive policy improve welfare?," Working Paper 2007-13, Federal Reserve Bank of Atlanta.
  13. 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.
  14. 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.
  15. 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.
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