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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
Date of revision:
Handle: RePEc:red:sed013:1082
Contact details of provider: Postal: Society for Economic Dynamics Marina Azzimonti Department of Economics Stonybrook University 10 Nicolls Road Stonybrook NY 11790 USA
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  1. 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.
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  4. 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.
  5. Juan Carlos Conesa & Dirk Krueger, 2005. "On the Optimal Progressivity of the Income Tax Code," NBER Working Papers 11044, National Bureau of Economic Research, Inc.
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  9. Mariacristina De Nardi & Eric French & John Bailey Jones, 2009. "Why do the Elderly Save? The Role of Medical Expenses," NBER Working Papers 15149, National Bureau of Economic Research, Inc.
  10. 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.
  11. David M. Cutler & Jonathan Gruber, 1995. "Does Public Insurance Crowd Out Private Insurance?," NBER Working Papers 5082, National Bureau of Economic Research, Inc.
  12. Jonathan Heathcote, 2003. "The Macroeconomic Implications of Rising Wage Inequality in the United States," Working Papers gueconwpa~03-03-19, Georgetown University, Department of Economics.
  13. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
  14. 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.
  15. 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.
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