Casey McQuillan (Ph.D. Candidate, Princeton) presents The Health Wedge and Labor Market Inequality (with Amy Finklestein (MIT), Owen Zidar (Princeton) & Eric Zwick (Chicago)) at Loyola-L.A. today as part of its Tax Policy Colloquium hosted by Katie Pratt:
The uniquely American approach to providing health insurance through employers is a little-recognized but important driver of increasing labor market inequality, suggests a paper discussed at the Brookings Papers on Economic Activity (BPEA) conference on March 31.
The authors—Amy Finkelstein of the Massachusetts Institute of Technology, Casey McQuillan and Owen Zidar of Princeton University, and Eric Zwick of the University of Chicago—use a stylized model of the labor market to compare the current system, in which about half of Americans are covered by employer-provided health insurance, to a hypothetical system in which health insurance is financed by a payroll tax, similar in spirit to the universal health insurance in countries such as Germany and Canada.
The model shows that, in 2019, under a payroll-tax financed system, employment of full-time workers without a college degree (ages 25 to 64) would have been nearly 500,000 greater, average annual earnings for those workers would have been about $1,700 higher, and the gap between the average earnings of college-educated workers (with a bachelor’s degree or higher) and workers without a college degree would have been 11% smaller.
“These calibrated labor market effects … are in the same ballpark as estimates of the impact of other leading drivers of labor market inequality” such as increased trade, outsourcing, use of robots, decreased unionization, and the declining inflation-adjusted minimum wage, according to the paper, The Health Wedge and Labor Market Inequality.
Employer-provided health insurance discourages the hiring of non-college educated workers because the per-worker cost is the same, regardless of how much a worker earns, and is thus proportionately higher for lower-paid workers. Average premiums were about $12,000 a year in 2019. That was about 25% of the average annual earnings (about $50,000) of a non-college educated worker but only about 12% of the average annual earnings of a college-educated worker (about $100,000), according to the paper.