Rising Health Insurance Costs and the Trade-off Between Hours and Employment

Rising health care costs could have important negative effects on labor markets if they result in changes in the quantity of labor employed.  While the share of employees covered by employer-sponsored health insurance has fallen over time, the share of compensation paid in this form has risen markedly, increasing 15% over the last 10 years.   In labor demand models that distinguish between the number of workers and hours of work, increases in per-employee fixed costs are predicted to result in a reduction in employment and an increase in hours per employee.  Thus, if employer-sponsored health insurance acts as a quasi-fixed cost per employee, an increase in its cost could shift labor demand towards hiring fewer workers, and having each of those hired work longer hours.  But potential effects are more complicated if employers can avoid paying such fixed costs for part-time workers.

Several studies using household data have found evidence of changes in employment and hours of work in response to rising health insurance costs, with Cutler and Madrian (1998) finding evidence of reductions in hours, and Baicker and Chandra (2006) finding evidence of reduced employment.  Here we exploit longitudinal data on approximately 25,000 establishments per year from the Census Bureau’s Annual Survey of Manufacturers (ASM) to examine this question using 2006-2011 data.  These ASM data provide us with establishment-level measures of hours and employment levels, health insurance costs, the value of output, and detailed industry.  We use these data to examine the extent to which employers who face particularly large changes in health insurance costs decrease employment and increase hours of work.