The U.S. health care system and labor markets

This session will explore the impact of the U.S. health care system on U.S. labor markets. ; Why do employers believe that rising health care costs are a major cause for concern when economists insist that workers are the ones who actually bear the costs? What are the implications of large health care liabilities for the long-run viability of U.S. employers? How do rising health care costs affect employment and compensation decisions and labor mobility? Do behavioral insights shed any light on these issues?Health care reform

Limited Insurance Portability and Job Mobility: The Effects of Public Policy on Job-Lock

The link between health insurance and the workplace in the U.S. has led to concern over the possibility of insurance-induced reductions in job mobility or 'job-lock". Designing health insurance reforms which retain employer-based insurance coverage but mitigate the extent of job-lock requires an understanding of the policy dimensions to which job-lock is most receptive. We study a policy of limited insurance portability which has been adopted by a number of states and the federal government over the last 20 years. These "continuation of coverage' mandates grant individuals the right to continue purchasing health insurance through their former employers for some period of time after leaving their jobs. We find that the passage of these mandates caused a significant increase in the job mobility of prime age male workers. This suggests that a sizeable share of job-lock arises from short run concerns over portability rather than from long run problems.

Health Insurance, Labor Supply, and Job Mobility: A Critical Review of the Literature

This paper provides a critical review of the empirical literature on the relationship between health insurance, labor supply, and job mobility. We review over 50 papers on this topic, almost exclusively written in the last 10 years. We reach five conclusions. First, there is clear and unambiguous evidence that health insurance is a central determinant of retirement decisions. Second, there is fairly clear evidence that health insurance is not a major determinant of the labor supply and welfare exit decisions of low income mothers. Third, there is fairly compelling evidence that health insurance is an important factor in the labor supply decisions of secondary earners. Fourth, while there is some division in the literature, the most convincing evidence suggests that health insurance plays an important role in job mobility decisions. Finally, there is virtually no evidence in the literature on the welfare implications of these results. We present some rudimentary calculations which suggest that the welfare costs of job lock are likely to be modest. Our general conclusion is that health insurance has important effects on both labor force participation and job choice, but that it is not clear whether or not these effects results in large losses of either welfare or efficiency.

A Note on Longitudinally Matching Current Population Survey (CPS) Respondents

In this paper, we propose an approach for evaluating the trade-offs inherent in different approaches used to match Current Population Survey (CPS) respondents across various CPS surveys. Because there is some measurement error in both the variables used to identify individuals over time and in the characteristics of individuals at any point in time, any procedure used to match CPS respondents has the possibility of both generating incorrect matches and failing to generate potentially valid matches. We propose using the information contained in the variable on whether an individual lived in the same house on March 1 of the previous year as a way to gauge these trade-offs. We find that as measured by reported residence one year ago, increasing the fraction of 'invalid' merges that are rejected usually comes at a cost of decreasing the fraction of 'valid' merges that are retained. However, there are clearly some approaches that are superior to others in the sense that they result in both a higher fraction of 'invalid' merges being rejected and a higher fraction of 'valid' merges being retained. The programs to implement CPS matching across years in this paper are available .

Employee Stock Purchase Plans

Employee stock purchase plans (ESPPs) are designed to promote employee stock ownership broadly within the firm and provide another tax-deferred vehicle for individual capital accumulation in addition to traditional pensions, 401(k)s, and stock options. We outline the individual and corporate tax treatment of ESPPs and the circumstances under which ESPPs will be preferred to cash compensation from a purely tax perspective. We then examine empirically ESPP participation using administrative data from 1997-2001 for a large health services company that employs approximately 30,000 people. The picture that emerges from the analysis of these data suggests that there is substantial non-participation in these plans even though all employees could increase gross compensation through participation. We discuss a number of potential explanations for non-participation.

The Power of Suggestion: Inertia in 401(k) Participation and Savings Behavior

In this paper, we analyze the 401(k) savings behavior of employees in a large U.S. corporation before and after an interesting change in the company 401(k) plan. Before the plan change, employees were required to affirmatively elect participation in the 401(k) plan. After the plan change, employees were automatically and immediately enrolled in the 401(k) plan unless they made a negative election to opt out of the plan. Although none of the economic features of the plan changed, this switch to automatic enrollment dramatically changed the savings behavior of employees. We have two key findings. First, 401(k) participation is significantly higher under automatic enrollment. Second, the default contribution rate and investment allocation chosen by the company under automatic enrollment has a strong influence on the savings behavior of 401(k) participants. A substantial fraction of 401(k) participants hired under automatic enrollment exhibit what we call default' behavior--sticking to both the default contribution rate and the default fund allocation even though very few employees hired before automatic enrollment picked this particular outcome. This default' behavior appears to result both from participant inertia and from many employees taking the default as investment advice on the part of the company. Overall, these results are consistent with the notion that large changes in savings behavior can be motivated simply by the power of suggestion.' These findings have important implications for the optimal design of 401(k) savings plans as well as for any type of Social Security reform that includes personal accounts over which individuals have some amount of control. They also shed light more generally on the importance of both economic and non-economic factors in the determination of individual savings behavior.

Mental Accounting in Portfolio Choice: Evidence from a Flypaper Effect

Consistent with mental accounting, we document that investors sometimes choose the asset allocation for one account without considering the asset allocation of their other accounts. The setting is a firm that changed its 401(k) matching rules. Initially, 401(k) enrollees chose the allocation of their own contributions, but the firm chose the match allocation. These enrollees ignored the match allocation when choosing their own-contribution allocation. In the second regime, enrollees simultaneously selected both accounts’ allocations, leading them to mentally integrate the two. Own-contribution allocations before the rule change equal the combined own- and match-contribution allocations afterwards, whereas combined allocations differ sharply across regimes.