Employment Effect of Mandated Health Benefits

by Jacob Alex Klerman

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Employers provide the overwhelming share of private health insurance to the non-elderly. Nevertheless 17 percent of workers do not have health insurance. To correct this, recent proposals would mandate that employers provide health insurance for their workers and their workers' non-working dependents. With minimal direct government expenditure, these proposals could greatly reduce the problem of the uninsured. Serious concerns exist, however, about the indirect effects of mandated coverage. Because employers will bear much of the cost of mandated health benefits, they might respond by laying off employees. The potential decrease in employment must be weighed with the expansion of insurance coverage in evaluating mandated health benefits. This study assesses the magnitude of the employment effects and identifies the legislative details that are likely to have the largest employment consequences. It contains four sections, including an overview of the problem of the uninsured and the legislative proposals; a theoretical analysis of the employment effects of mandated benefit legislation, in which it argues that the first order effects would be similar to those of raising the minimum wage; a review of the work of Brown, Gilroy and Cohen (1983) on the minimum wage; and an examination of the potentially affected population. The author concludes that the employment effects of mandated benefits alone are likely to be small--about two to three percent of teenage employment and even smaller for older workers. These employment effects, however, will follow a sizable (30 percent) increase in the minimum wage. That increase combined with the mandated benefit would take the real minimum from the lowest it had been since the mid-1950s to above the range that has been observed.

Originally published in: Health Benefits and the Workforce, 1992, pp. 145-168.

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