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

Abstract

Employer-sponsored health insurance is a significant component of labor costs. We examine the causal effect of health insurance premiums on firms’ employment, both in terms of quantity and composition, and their technology investment decisions. To address endogeneity concerns, we instrument for insurance premiums using idiosyncratic variation in insurers' recent losses, which is plausibly exogenous to their customers who are employers. Using Census microdata, we show that following an increase in premiums, firms reduce employment. Relative to higher-income coworkers, lower-income workers see a larger increase in their likelihood of being separated from their jobs and becoming unemployed. Firms also invest more in information technology, potentially to substitute labor.

Keywords: Health insurance, insurer losses, worker skills, firm employment, labor composition, inequality, technology investment, automation

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