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Employment-Based Health Insurance and Aggregate Labor Supply

Listed author(s):
  • Zhigang Feng

    (University of Illinois at Urbana-Champaign)

  • Kai Zhao

    (University of Connecticut)

We study the impact of the employment-based health insurance system on aggregate labor supply in a general equilibrium life cycle model with incomplete markets and idiosyncratic risks in both income and medical expenses. We find that employment-based health insurance provides Americans with an extra incentive to work and is an important reason why they work much more hours than Europeans. In contrast to Europeans, who get universal health insurance from the government, most working-age Americans get health insurance through their employers. Since medical expenses are large and volatile, and there is no good alternative available in the private market, health insurance from employers can be highly valuable to risk-averse individuals (much more than its actuarially fair cost), thus providing them with extra incentive to work. We calibrate the benchmark model to match the US system using the Medical Expenditure Panel Survey dataset. The results of our quantitative experiments suggest that different health insurance systems account for more than half of the difference in aggregate hours that Americans and Europeans work. Furthermore, our model can also match several other relevant empirical observations, that is, the different employment rates and the different shares of full-time/part-time workers in the U.S. and Europe. When our model is extended to include the different tax rates in the U.S. and Europe, a main existing explanation for the difference in aggregate labor supply, the extended model can account for a major portion of the difference in aggregate hours that Americans and Europeans work.

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File URL: http://web2.uconn.edu/economics/working/2015-11.pdf
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Paper provided by University of Connecticut, Department of Economics in its series Working papers with number 2015-11.

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Length: 38 pages
Date of creation: Aug 2015
Handle: RePEc:uct:uconnp:2015-11
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Web page: http://www.econ.uconn.edu/

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  1. Janicki, Hubert P., 2014. "The role of asset testing in public health insurance reform," Journal of Economic Dynamics and Control, Elsevier, vol. 44(C), pages 169-195.
  2. John Rust & Christopher Phelan, 1994. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Public Economics 9406005, EconWPA, revised 06 Jul 1994.
  3. Pashchenko, Svetlana & Porapakkarm, Ponpoje, 2012. "Quantitative analysis of health insurance reform: separating regulation from redistribution," MPRA Paper 41193, University Library of Munich, Germany.
  4. Holter, Hans A & Chakraborty, Indraneel & Stepanchuk, Serhiy, 2012. "Marriage Stability, Taxation and Aggregate Labor Supply in the U.S. vs. Europe," Working Paper Series, Center for Fiscal Studies 2012:7, Uppsala University, Department of Economics.
  5. Laun, Tobias & Wallenius, Johanna, 2013. "Social Insurance and Retirement: A Cross-Country Perspective," SSE/EFI Working Paper Series in Economics and Finance 744, Stockholm School of Economics.
  6. Craig A. Olson, 1998. "A comparison of parametric and semiparametric estimates of the effect of spousal health insurance coverage on weekly hours worked by wives," Journal of Applied Econometrics, John Wiley & Sons, Ltd., vol. 13(5), pages 543-565.
  7. Zhao, Kai, 2014. "Social security and the rise in health spending," Journal of Monetary Economics, Elsevier, vol. 64(C), pages 21-37.
  8. William C. Hsiao, 2000. "What Should Macroeconomists Know About Health Care Policy; A Primer," IMF Working Papers 00/136, .
  9. Svetlana Pashchenko & Ponpoje Porapakkarm, 2012. "Online Appendix to "Quantitative Analysis of Health Insurance Reform: Separating Regulation from Redistribution"," Technical Appendices 11-70, Review of Economic Dynamics.
  10. Jorge Alonso-Ortiz & Richard Rogerson, 2010. "Taxes, transfers, and employment in an incomplete markets model," FRB Atlanta CQER Working Paper 2010-07, Federal Reserve Bank of Atlanta.
  11. Rogerson, Richard & Wallenius, Johanna, 2009. "Micro and macro elasticities in a life cycle model with taxes," Journal of Economic Theory, Elsevier, vol. 144(6), pages 2277-2292, November.
  12. Nakajima, Makoto & Tuzemen, Didem, 2015. "Health-care reform or labor market reform? A quantitative analysis of the affordable care act," Working Papers 15-34, Federal Reserve Bank of Philadelphia, revised 19 Feb 2016.
  13. 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.
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