The effect of employer-provided health insurance on labor market participation

While the offer of health benefits with a job is an incentive to induce employment, the monetary wage accompanying this offer must be lower than it would be for an identical job without insurance benefits in order to compensate the employer for the costs of insurance. This dissertation attempts to quantify these opposing effects and measure the net incentive effect of an employer-provided group insurance offer on a person's decision to be employed. Using quadratic state-dependent utility functions defined over work and leisure in different health states, I derive state-specific labor supply functions, which depend on the offered wage and on whether health insurance is offered with the job. The employment decision is described in terms of expected labor supply. Profit-maximizing firms offer wages that are based on employee productivity and on whether insurance is offered to employees. I derive an expression to measure the employee's valuation of health insurance, or the risk-premium associated with employer-provided insurance. Data from Round 1 of the 1996 Medical Expenditure Panel Survey is used to simultaneously estimate the determinants of wages and the probability of employment. Owing to the endogeneity of wages, I simultaneously estimate wage-offer and employment-probability equations. In order to accommodate the inability to observe wage and insurance offers for those who are not employed, the unobserved variables for the unemployed are integrated out. The likelihood function specified for the maximum likelihood estimation assumes jointly normally distributed errors in the wage and employment equations. Since employer-provided group insurance offers are determined on the basis of medical costs for the entire employee group and should not, therefore, depend on personal characteristics, the insurance-offer variable is assumed to be an exogenous variable affecting the determination of wage offers and employment probability. Finally, using the estimated coefficients from this system of equations, I calculate the compensating wage differential, the marginal impact of insurance offers on the probability of employment, and the risk premium associated with employer-provided health benefits.