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Employment-Based Health Insurance and Aggregate Labor Supply

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  • Zhigang Feng

    (University of Illinois at Urbana-Champaign)

  • Kai Zhao

    (University of Connecticut)

Abstract

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.

Suggested Citation

  • Zhigang Feng & Kai Zhao, 2015. "Employment-Based Health Insurance and Aggregate Labor Supply," Working papers 2015-11, University of Connecticut, Department of Economics.
  • Handle: RePEc:uct:uconnp:2015-11
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    References listed on IDEAS

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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. Svetlana Pashchenko & Ponpoje Porapakkarm, 2013. "Quantitative Analysis of Health Insurance Reform: Separating Regulation from Redistribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 16(3), pages 383-404, July.
    3. 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.
    4. Chakraborty, Indraneel & Holter, Hans A. & Stepanchuk, Serhiy, 2015. "Marriage stability, taxation and aggregate labor supply in the U.S. vs. Europe," Journal of Monetary Economics, Elsevier, vol. 72(C), pages 1-20.
    5. John Rust & Christopher Phelan, 1997. "How Social Security and Medicare Affect Retirement Behavior in a World of Incomplete Markets," Econometrica, Econometric Society, vol. 65(4), pages 781-832, July.
    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.
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    8. William C. Hsiao, 2000. "What Should Macroeconomists Know About Health Care Policy; A Primer," IMF Working Papers 00/136, International Monetary Fund.
    9. Tobias Laun & Johanna Wallenius, 2016. "Social Insurance and Retirement: A Cross-Country Perspective," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 22, pages 72-92, October.
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    11. Didem Tuzemen & Makoto Nakajima, 2014. "Health Care Reform or Labor Market Reform? A Quantitative Analysis of the Affordable Care Act," 2014 Meeting Papers 1325, Society for Economic Dynamics.
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    Cited by:

    1. Nga Le Thi Quynh & Groot, Wim & Tomini, Sonila M. & Tomini, Florian, 2017. "Effects of health insurance on labour supply: A systematic review," MERIT Working Papers 017, United Nations University - Maastricht Economic and Social Research Institute on Innovation and Technology (MERIT).

    More about this item

    Keywords

    Labor Supply; Employment-Based Health Insurance; General Equilibrium;

    JEL classification:

    • E20 - Macroeconomics and Monetary Economics - - Consumption, Saving, Production, Employment, and Investment - - - General (includes Measurement and Data)
    • E60 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook - - - General

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