How Do Health Insurance Costs Affect Low- and High-Income Workers?

Abstract

Given that employer-sponsored health insurance constitutes a significant component of labor costs, we examine the causal effect of insurance premiums on worker outcomes across the income distribution. To address endogeneity concerns, we instrument premiums using idiosyncratic variation in insurers' recent losses, which is plausibly exogenous to worker outcomes. Analyzing US administrative data, we demonstrate that firms reduce employment following premium increases. Importantly, higher premiums adversely affect lower-income workers but not high-income workers. Following instrumented premium increases, low-income workers face higher risks of job separation, unemployment, large earnings losses, transitions to staffing arrangements, and reduced wage growth even when retained. In contrast, high-income workers experience minimal or opposite effects.

Keywords: Health insurance, insurer losses, worker skills, firm employment, inequality, technology investment, low-income workers, unemployment, job separation, staffing, wages

JEL Classification: G22, G31, G28, G18, J01, J08, J32, J22, J23