Employer Health Insurance Mandates and the Risk of Unemployment


As healthcare costs continue to rise, the growing number of uninsured Americans receives a great deal of attention from policy-makers. In response, state legislatures cross
the country are experimenting with mandates requiring employers to provide health insurance to their employees. Last November, California voters narrowly defeated Proposition 72. This initiative would have required all employers with more than 20
employees to either provide comprehensive health coverage or pay a fee into a fund for the working uninsured. Similar “pay or play” mandates have been debated in several states, and were even passed (but later repealed) in Massachusetts, Oregon, and Washington. Only Hawaii currently has a pay or play mandate affecting private businesses.

Emboldened by the close margin in California—Proposition 72 failed by only 0.8 percent—supporters of mandated healthcare are preparing another ballot initiative in
California and a combination of legislation and ballot initiatives in at least eight additional states over the next year. Facing this resurgence of state-level healthcare legislation, it is important to understand the potential labor market consequences of these plans.

In this paper, Drs. Katherine Baicker and Helen Levy of Dartmouth University and the
University of Michigan analyze who will be affected by this legislation and what potential disemployment effects would result from the passage of these mandates across the country. These facts will provide a richer understanding of the potential economic consequences of plans requiring employers to provide a minimum level of fringe benefits.

Who Are the Working Uninsured?
The scope of employer mandates is often limited to employees who work a minimum level of hours. This level often covers some, but not all, part-time employees, with a common cutoff of approximately 20 hours per week—the same cutoff utilized in this study. Of employees who are working over 20 hours a week, more than 16 percent are currently uninsured. Nearly 67 percent of these employees have their own health insurance and 17 percent have insurance from another source. The employees without insurance are significantly more likely to come from economically vulnerable groups. For example, employees who work but don’t have health insurance are three times as likely to be high school dropouts and twice as likely to be from a minority group than their insured counterparts. In addition, uninsured employees are twice as likely to be single parents as their insured counterparts. While many of the proposed mandates exempt small employers, this paper finds that employees in small firms are disproportionately more likely to lack insurance. Fully 45 percent of uninsured employees work in firms with fewer than 25 employees, while only 19 percent of insured employees work in these small firms. Concentrating on large firms while ignoring the disproportionate presence of the uninsured in small firms is a primary factor in the failure of mandated health insurance laws to reach the majority of the uninsured. The authors find the assumption that the working uninsured, as a group, have no access to insurance is not wholly accurate.

Approximately one-quarter of uninsured employees work in firms where they are eligible for insurance but choose not to enroll. There could be a variety of reasons for this decision, such as a decision to self-insure (particularly for the young and healthy) or the fact that their portion of the premium was too expensive. Employer mandates such as Proposition 72 ignore these rational decisions and force the employee to pay up to 20 percent of the cost of health insurance. If the employees do not value these additional benefits the same as cash—as indicated by their decision not to takeup benefits they qualify for—requiring they pay for healthcare could leave them worse off.

Disemployment Effects
According to United States Census Bureau Current Population Survey (CPS) data, a large fraction of uninsured employees are working either at or close to the minimum wage. As a result, the dramatic increase in costs created by a mandate represents a significant increase in the minimum compensation mandated for these employees. This paper reveals that nearly 43 percent of uninsured employees are working within three dollars of the minimum wage. While this amounts to only 7 percent of the workforce, it is clearly a significant portion of the uninsured population—the intended beneficiaries of the mandate.

As would be expected by the relatively low wages of the uninsured, CPS data reveal that skill level is a key factor in determining insurance status, with low-skill employees being disproportionately likely to be uninsured. Furthermore, among the uninsured, those with the lowest skills are earning the lowest wages and are disproportionately likely to lose their job as the result of a mandate.

The consensus of the economic literature on mandated benefits suggests that employers, where possible, will transfer the cost of a new mandate fully onto employees in the form of reduced wages. This process works smoothly for employees whose wages are high enough above the minimum wage to allow for full wage shifting. Problems arise, however, when employees’ wages are too low to allow for shifting—as is the case for many of the uninsured employees discussed above. When this occurs, the mandated benefit will have the same effect as a minimum wage increase—lower employment as businesses replace workers with machines, self-service, and more efficient employees. The authors use these broad wage definitions and the existing literature on the minimum wage to construct an approximate estimate of the number of employees who would lose their job if healthcare mandates were passed across the country.

The authors find that approximately 315,000 employees would lose their job as a result of these mandates. Traditionally vulnerable groups bear a disproportionate burden of the job loss. For example, more than half of these employees will be nonwhite yet only 25 percent of the workforce in this sample was nonwhite. In addition, one-third of job losers will have less than a high school education.

In order to fully evaluate the potential effects of a proposed employer mandate, it is essential to understand the labor market consequences of such policies. By clearly identifying the potential scope of lost jobs along with the various groups that will be disproportionately harmed, this study provides a fuller understanding of the potential labor market effects. Specifically, it finds that the employees who will be most harmed by mandated employer-paid healthcare are disproportionately less likely to be educated, and more likely to be a minority, a single parent, and unmarried. These are the very groups that supporters of mandated healthcare often cite in support of their efforts.

Craig Garthwaite
Director of Research
Employment Policies Institute