Do Minimum Wage Changes Affect Employer-Sponsored Insurance Coverage?

Introduction

Between 2007 and 2010, the federal minimum wage increased by 40 percent, from $5.15 an hour to $7.25 an hour. Since then, 29 states have further increased their minimum wages, and several states now have minimum wages above $10 per hour. Economic theory suggests that employers may respond to a binding minimum wage increase by reducing the generosity of employer-sponsored insurance (ESI) or other fringe benefits to keep workers’ total compensation unchanged. Previous empirical studies reach differing conclusions about the presence and magnitude of the hypothesized tradeoff between minimum wages and ESI, however, and the impact on employer-sponsored health insurance of minimum wage increases occurring since the Great Recession has not yet been examined.

Besides the broader changes in the labor market that followed the Great Recession, recent minimum wage increases also occurred against the backdrop of the Affordable Care Act (ACA), which had several provisions that could modify employer responses to the minimum wage. While the ACA’s mandate requiring large employers to offer insurance to full-time workers may discourage employers from dropping coverage, the employer mandate leaves large employers free to reduce benefit generosity, increase workers’ premium contributions, drop dependent coverage, or shift workers to part-time status. These employer responses could make ESI less available or less attractive to low-wage workers, many of whom have gained access to coverage outside of employment through Medicaid expansion or tax credits for Marketplace plans.

Data & Methods

We use data from the Current Population Survey Annual Social and Economic Supplement to analyze whether minimum wage increases that occurred between 2004 and 2015 affected ESI enrollment for workers with incomes below 300 percent of the federal poverty line. We run separate regressions for dependent coverage and own-name ESI, and for Medicaid expansion and non-expansion states. We also conduct sensitivity analyses with alternative samples (e.g., defining the at-risk population based on firm size and industry characteristics rather than family income), and robustness checks to ensure that our analysis is not sensitive to CPS questionnaire changes that occurred between 2013 and 2014.

Results

We find robust evidence that minimum wage increases since 2004 were associated with reduced enrollment in ESI. Our linear probability models suggest that a $1 increase in the minimum wage reduced the probability of being enrolled in ESI by approximately 1 percentage point; most models are estimated with a high degree of precision. We find suggestive evidence that minimum wage changes have a larger impact on the probability of being covered as a dependent than being covered as through one’s own plan, although these results are sensitive to model specification. The effect of minimum wage is larger for expansion than non-expansion states, a finding that may reflect that expansion states had greater variation in the minimum wage than non-expansion states over the time period studied.

Implications

These results suggest that recent minimum wage increases may have had the unintended effect of reducing employer-sponsored insurance coverage.