State Health Insurance Mandates and Labor Market Outcomes: New Evidence on Old Questions

Health insurance mandates increase the employer cost of providing health insurance to employees. Standard economic models predict that, following implementation of a health insurance mandates, employers should reduce their health insurance offers to employees or reduce labor costs.  However, the empirical evidence on the relationship between mandates and labor market outcomes is decidedly mixed.  This disconnect between theory and empirical evidence has puzzled economists for several decades.  Moreover, the impact of mandates on labor market outcomes is relevant as the Patient Protection and Affordable Care Act (ACA) is likely to further increase the costs of health insurance to employers by mandating more generous benefit packages.  

In this study we re-visit the relationship between health insurance mandates and labor market outcomes.  Our contributions are twofold.  First, we focus on a sample of workers for whom employers can most easily adjust compensation (wage and non-wage) – new labor market entrants.  For example, employers may find is more feasible to offer lower compensation to new hires rather than to reduce compensation for current employees. Second, we explore the dynamics of mandate effects across the lifecycle.  Specifically, we model labor market outcomes (an offer of employer-sponsored health insurance, wages, and labor supply) as a function of the number of high cost mandates in place at labor market entrance.  We draw data from the National Longitudinal Survey of Youth 1979 (NLSY79) and exploit variation in high cost state mandates (Gruber, 1994) between 1973 and 1989.  A particular advantage of the NLSY79 is that we are able to examine health insurance offers, not health insurance source.  The later outcome, although commonly studied in the mandates literature, confounds offers with endogenous take-up decision.  Moreover, we are able to track workers from school-leaving through mid-career.  We estimate differences-in-differences models that account for time-invariant and time-varying state-level factors that may be correlated with high cost mandates and our outcomes. 

Consistent with the literature, we find no strong evidence that high cost state health insurance mandates discourages employers from offering employer sponsored health insurance. Consistent with theory, we find evidence that employers adjust wages and hours to offset some of the cost associated with mandates. Overall, wages and hours decline by about 4 percent and 1 percent respectively in response to high cost mandates, and these effects dissipate with time spent in the labor market.  Our results also show that women bear almost all of the incidence of mandate cost.  For women, wages decline by about 5 percent and hours decline by about 1.5 percent, and only wage effects dissipate with time in the labor market.  We find no statistically significant decline in wages or hours for men.  Wage and hours effects are concentrated among workers who began their careers in small firms and non-unionized jobs. These findings offer new evidence on the relationship between health insurance mandates and labor market outcomes.