1. Health Insurance and the Labor Market with Wage Rigidities: Insights from Experiments
Katerina Sherstyuk, Ph.D
Gerard Russo, Ph.D.
Dolgorsuren Dorj, Ph.D. Candidate
Tomomi Tanaka, Ph.D. Candidate
University of Hawai`i at Mānoa
Technical Workshop VI
17 September 2004
This research is funded in part through a U.S. Health Resources and Services Administration, State Planning Grant to the Hawaii State Department of Health. Sub-Contract Research Corporation of the University of Hawaii. Research conducted by the University of Hawaii, Social Science Research Institute in collaboration with the Hawaii State Department of Health, Hawaii Institute for Public Affairs: Hawaii Uninsured Project and the Hawaii Health Information Corporation.

2. Research Questions
Study the effects of health insurance regulations (the Prepaid Health Care Act and its policy alternatives) on the labor market
Focus on how health insurance regulation affects
Coverage rates among the employed
Market efficiency (Do firms hire workers that are the most productive and best fitted for the job?)
Level and structure of employment (how workers and firms choose between part-time and full-time employment)
17 September 2004
Preliminary results. Revised September Subject to further revision.

3. Health Insurance Policy Alternatives
Prepaid Health Care Act (the Status Quo): government mandates for employer-based insurance for full-time workers, but not for part-time workers
Alternative - Full mandate: extend the mandate to part-time workers
Alternative - No mandate: insurance is offered by employers on voluntary basis
17 September 2004
Preliminary results. Revised September Subject to further revision.

4. Method of Analysis
Build a theoretical model that captures qualitative features of the labor market
Analyze the model to obtain predictions
Test the predictions using laboratory experiments (simulations with human subjects)
Important: The predictions we obtain are qualitative, not quantitative, and depend on the assumptions of the model
17 September 2004
Preliminary results. Revised September Subject to further revision.

5. Modeling Assumptions Competitive labor market (many firms and workers)
No productivity losses from a worker working several part-time jobs rather than one full-time job
Workers differ in their expected benefits from health insurance: some workers fully value insurance, others under-value insurance
Firms bear the cost of providing insurance for workers
All benefits from health insurance are private, no external social benefits or costs
No wage rigidities (previous research) or minimum wage laws (current research)
17 September 2004
Preliminary results. Revised September Subject to further revision.

6. Previous Results Summary
We previously assumed no wage rigidities (such as minimum wage laws) in the labor market
We showed that policy alternatives represent different trade-offs between labor market efficiency and insurance coverage rates:
No mandate: High labor market efficiency, but lower coverage rate; some workers may under-insure
Full Mandate: High insurance coverage, but reduced labor market efficiency (due to regulatory distortions)
PHCA:
higher share of part-time workers, but the same labor market efficiency as compared to No Mandate;
higher insurance coverage than under No Mandate; no workers under-insure, and some may over-insure
17 September 2004
Preliminary results. Revised September Subject to further revision.

7. New Research: Introducing Wage Rigidities
We now add wage rigidities (such as minimum wage laws) in the labor market
Consider 2 cases:
Wage floor BELOW market equilibrium wage;
Wage floor ABOVE market equilibrium wage
17 September 2004
Preliminary results. Revised September Subject to further revision.

8. ILLUSTRATION: Effect of wage floor on demand and supply of labor
Cash wage
Supply W0
Minimum wage W1
Demand w/o Insurance
Demand with Insurance L1 L0
Labor
17 September 2004
Preliminary results. Revised September Subject to further revision.

9. Results: Minimum wages BELOW market equilibrium wage
Theory predicts:
Wage rigidities below market equilibrium wage do not distort equilibrium efficiency or wage levels, but may change the structure of employment:
Under No Mandate or PHCA, there is no part-time employment with insurance
Under Full Mandate, there is no part-time employment, either with or without insurance
Experiments show (Table 1):
As predicted, the share of part-time workers is reduced under all scenarios
Unless the Mandate is Full, employment is somewhat higher, and insurance coverage rate is somewhat lower than predicted
17 September 2004
Preliminary results. Revised September Subject to further revision.

10. Table 1: Experimental results: Wage Floor BELOW market equilibrium
Policy alternative
Labor market surplus, % efficient
Employment, % efficient
Share of part-time workers out of all workers, %
Coverage rate among employed, % efficient
Predicted
Actual
No Mandate
100
90.91 (6.80)
(2.89)
0-50
23.55 (11.88)
82.89 (17.50)
Full Mandate
89.29
83.68 (2.62)
(1.77)
5.47 (1.36)
200
200 (0.00)
*All percentages are as compared to the efficient outcome. Statistics reported are means and standard deviations (in parentheses), based on 3 independent experimental sessions for No Mandate, and 2 sessions for Full Mandate.
17 September 2004
Preliminary results. Revised September Subject to further revision.

11. Results: Minimum wages ABOVE market equilibrium wage
Theory predicts:
Minimum wages ABOVE market equilibrium level reduce efficiency and decrease, and may fully eliminate voluntary provision of health insurance by firms:
Under No Mandate or PHCA, fewer firms want to offer insurance, either to part-time or full-time workers (since wages cannot adjust, firms cannot afford to offer insurance)
Under Full Mandate, firms provide insurance, but hire less workers, which leads to unemployment
Experiments show (Table 2):
Under all scenarios, labor market efficiency losses from regulation are high and are often higher than predicted
Insurance coverage rate is very low under No Mandate but higher than predicted under PHCA
As predicted, minimum wages under Full Mandate lead to unemployment
17 September 2004
Preliminary results. Revised September Subject to further revision.

12. Table 2: Experimental results: Wage Floor ABOVE market equilibrium
Policy alternative
Labor market surplus, % efficient
Employment, % efficient
Share of part-time workers out of all workers, %
Coverage rate among employed, % efficient
Predicted
Actual
No Mandate
92.86
87.57 (1.19)
100.00
(4.85)
0-100
19.55 (16.97)
0.00
13.19 (7.28)
PHCA (Partial Mandate)
83.00 (10.48)
(9.41)
71.83 (3.12)
51.44 (5.65)
Full Mandate
80.36
68.42 (1.72)
75.00
75.63 (1.25)
5.77 (4.12)
200.00
200 (0.00)
*All percentages are as compared to the efficient outcome. Statistics reported are means and standard deviations (in parentheses), based on 4 independent experimental sessions for each policy alternative.
17 September 2004
Preliminary results. Revised September Subject to further revision.

13. Results Summary
We show that health insurance regulations in markets with wage rigidities may lead to unexpected labor market outcomes:
Labor market efficiency distortions may be high under wage rigidities
If the Mandate is NOT Full, wage rigidities may result in firms not offering health insurance to workers
Full Mandate guarantees high insurance coverage, but may lead to unemployment
17 September 2004
Preliminary results. Revised September Subject to further revision.

14. This research is funded in part by Hawaii State Department of Health.
Mahalo!
This research is funded in part by
U.S. Department of Health and Human Services Health Resources & Services Administration State Planning Grant
Hawaii State Department of Health.
17 September 2004
Preliminary results. Revised September Subject to further revision.