Secretary of Labor
Laura D'Andrea Tyson
Chair, Council of Economic Advisers
October 6, 1993
I. Many features of the plan work to lower employer costs, increase job
opportunities, and improve economic efficiency.
The Health Security plan lowers business spending on health insurance
and thus frees up money for increased wages and salaries or for
The slower growth rate of health care costs means that aggregate
business spending falls over time.
While the business sector as a whole will initially pay more for health
insurance because of the expansion to universal coverage, the reduction
in health care cost growth lowers premiums over time. By the end of the
decade, businesses in aggregate will pay less for health care than they
otherwise would have, even with the increase in coverage (Chart 1).
By the year 2000, aggregate business spending on covered
services alone will fall by $10 billion. This is about 4
percent of baseline spending in that year. In 1989 dollars (the
peak of the business cycle), this is about 3 percent of total
business profits and about 6 percent of net investment in fixed,
non-residential plant and equipment.
2. Many employers who currently offer health insurance will see their
costs drop, freeing up resources for increased wages or additional
Businesses that currently provide insurance pay more than true
cost since providers overcharge them to make up for care to the
uninsured. This "uncompensated care tax" amounts to over 10
percent of premiums. Under the Health Security plan, every
business and individual must contribute something to the cost of
their health care. Ending this cost shifting will lower costs
for businesses that now provide insurance.
Employers now providing insurance will benefit from spreading
the costs over all workers. Currently, about 20 million workers
are insured through a spouse's policy. By eliminating corporate
"free riders", the Health Security plan will lower costs for
Small businesses will see additional price reductions, since
the load on their insurance premiums -- the amount by which the
price exceeds the expected benefits -- will fall by up to 25
Many currently insuring firms will receive discounts on their
3. Insuring firms can respond to cost reductions by:
Hiring more workers.
Raising wages of their existing workers or providing better
pension or other benefits.
Investing more in plant, equipment, education and training, and
research and development.
Increasing dividends to shareholders.
Lowering prices, thereby leaving consumers with more income to
spend on other goods.
Each of these outcomes has a stimulative effect on the economy and will
increase employment. Economic research has not reached clear
conclusions about how to apportion these effects. Almost all models
suggest that wage increases are a likely response, but they differ
about whether all of the savings will result in wage increases, or
whether some of the savings will be allocated to additional investment
or new hiring.
B. Small businesses benefit from other features of the plan as well.
Small businesses, particularly those with low average wages,
receive the largest discounts.
Small businesses will see the largest reductions in their
Many small businesses will benefit from the movement to
community rating. Small businesses have the most variability in
insurance premiums, because of the small size of their groups.
This variability contributes to the difficulty small firms have
in attracting and keeping highly skilled workers. If costs were
independent of each group's risks, small businesses might find
it easier to attract and keep workers.
Health care reform will "level the playing field" among small
businesses, and between large and small businesses.
Small businesses that provide insurance currently pay more for
labor than their competitors that do not insure. They also must
bear the cost, in the form of higher premiums, to finance care
for the uninsured.
Small businesses that insure currently pay up to 35 percent
more than their large business competitors for the same set of
Many small businesses would like to provide health insurance
but cannot. According to a recent study prepared by Charles
Hall of Temple University for the NFIB:
64 percent of small business owners would like to provide some
or better insurance for their workers;
When asked why they do not offer insurance, the most common
reason (65 percent) is that premiums are too high.
92 percent of small business owners agree that the cost of
health insurance is a serious business problem.
C. The reform will result in greater health care employment in the
short run and a more efficient health sector in the long run.
By 1996, as many as 400,000 net new jobs will be created in
the health sector. This net job increase consists of a
significant expansion of employment of health care providers and
a decrease in employment of health administrators and insurance
workers. As the cost savings begin to accrue, employment in the
health sector will level off. By the end of the decade, health
care employment will grow more slowly, although there will be no
absolute decline in the number of employees.
As the health sector becomes more productive, the economy will
be able to produce more output than it could before reform.
This productivity increase will raise living standards.
Prohibiting pre-existing condition exclusions and the ability
of insurers to drop coverage will improve efficiency. While any
one insurer benefits from having these screens, those excluded
are ultimately covered by someone, or receive uncompensated
care. The resources spent "passing the buck" are thus a loss to
D. Health care reform will end one reason firms discriminate among
types of workers.
Firms currently have an incentive to favor workers who have
other health insurance coverage, particularly working spouses in
two earner families, part-time workers, and temporary workers.
In most cases, firms can hire these workers without providing
The Health Security plan will eliminate incentives to hire
people on the basis of their health care costs as opposed to
their job qualifications.
E. By providing health care security, the Health Security plan will
improve the efficiency of the economy.
The reduction in "job lock" will increase people's ability to find
Up to 30% of people report that they are afraid to leave their current
job due to the risk of losing health insurance. Research by Brigitte
Madrian at Harvard has found that mobility rates for married men are
depressed by 25 percent because of job lock. This effect impedes the
ability of workers to move to jobs where they are more productive.
Reducing job lock may also affect employment. Firms may be more
willing to hire qualified workers with pre-existing con- ditions when
they cannot be charged more for them. On the other hand, some workers
may decide to leave the labor force if affordable health care is no
longer tied to staying at a particular job. Evidence suggests that
about 350-600,000 people will decide to retire early following health
care reform. The increase in voluntary retirement is likely to
increase employment opportunities for younger workers.
2. Lower costs for small businesses and the self-employed may make it
easier for people to form new companies.
The difficulty of self-employed workers and small businesses today in
purchasing health insurance creates large disincentives for individuals
to leave covered jobs to start up new businesses. Reform may thus
stimulate new business formation, particularly for small businesses.
There is little economic research on this subject to date.
3. Eliminating the link between welfare and health insurance will
reduce "welfare lock".
One of the barriers to leaving welfare is the loss of Medicaid
benefits. Having universal insurance coverage will end this fear. A
typical mother on welfare, for example, will get to keep about 10 to 15
percent more of any additional earnings as a result of health care
Several studies estimate that eliminating welfare lock could have
substantial employment effects among the welfare population. Robert
Moffitt at Brown University and Barbara Wolfe at the University of
Wisconsin suggest that as many as 1 million of the 4 million welfare
recipients would take jobs if there were continuous health care
benefits. Aaron Yelowitz of MIT also finds that more Medicaid
recipients would work if they could keep more of their income and still
receive health insurance.
II. Existing studies fail to analyze accurately the Health Security plan.
There are two commonly cited studies of the economic impacts of
the President's health care reform proposal: "The Impact of a Health
Insurance Mandate on Labor Costs and Employment", by June and Dave
O'Neill for the Employment Policies Institute; and "The Employment
Impact of Proposed Health Care Reform on Small Business", by The CONSAD
Research Corporation. These studies do not adequately analyze the
economic effects of the President's health care reform proposal:
The studies make several fundamental errors in characterizing the
Health Security plan.
They completely excluded from their analysis the discounts to
small and low-wage businesses that the Health Security plan
The lack of discounts -- coupled with the questionable assump- tion that
firms cannot shift any costs to workers earning less than $25,000 per
year --- lead directly to the massively overstated claims of job loss.
They incorrectly calculate the cost for part-time employees
working 20 or more hours per week.
In the O'Neill study, employers are assumed to pay the full premium for
all workers who work more than 20 hours per week. In the Health
Security plan, however, employers pay a much smaller, pro-rated premium
for part-time workers.
They use a benefit package that costs much more than the
The O'Neill study assumes that employers pay $5,310 per worker with a
family and $2,160 per single worker. Estimates for the Health Security
plan are that employers will pay about $2,500 per worker with a family,
and about $1,500 per single worker. The cost that employers pay for a
family policy is adjusted to take into account that many families will
have two adults in the labor force. In these cases, both employers
will contribute to the cost of health insurance.
B. The assumption about how firms change their employment in response
to cost changes is three to six times higher than most conventional
The O'Neill study assumes that firms will lay off 3% of their workforce
if compensation rises by 10%.
Summary estimates in the economic literature, for example by
Charles Brown and Allison Wellington, suggest that the
responsiveness of firms to cost changes for low-wage workers is
only one-sixth to one-third of the O'Neill assumption.
C. Neither study accounts for job gains from businesses whose costs
fall under the reform.
D. Real world evidence suggests that mandates do not have major adverse
Hawaii imposed an employer health insurance mandate in 1974. From
the 1970s until now:
Total private non-farm employment in Hawaii increased by 90
percent, compared to 54 percent in the United States as a whole.
Retail and wholesale trade employment grew by more in Hawaii
than in the United States as a whole.
Within the health care sector, total health services
employment in Hawaii grew more rapidly than it did in the United
States as a whole. In contrast, health insurance employment
grew less rapidly than it did in the United States as a whole.
2. The increase in health care costs for currently uninsured low- wage
workers in small firms is equivalent to only a very modest minimum wage
increase of $.15 to $.35 per hour. An increase of this magnitude will
still leave the real compensation cost for minimum wage workers below
its average level in the 1980s.
Evidence by Lawrence Katz at Harvard and Alan Krueger and
David Card at Princeton suggests that recent increases in the
minimum wage have had minimal or even positive effects on
E. These studies do not focus on the many beneficial aspects of the
Health Security plan discussed in Part I.
There is no denying that some firms will pay more after reform than
they did prior to reform. The vast majority of Americans, however,
will benefit from the reduction in health insurance costs, the
portability of coverage, the lower administrative costs, the reduction
in job lock, the lower costs for small businesses and the
self-employed, and the reduction in welfare lock. Any study which
ignores these effects cannot be a complete analysis of the employment
effects of health care reform.
III. There are many factors in the health care reform that will tend to
increase employment. There are some factors that will tend to
decrease employment. And there are several factors that will
change the composition of employment. Overall, the net effect on
employment is likely to be small. Over time, the beneficial effects
on employment are likely to strengthen.
Existing models do not allow us to quantify the net effect on
employment. Estimating these effects would require precise answers to
a wide range of questions, including:
How will individuals respond to the incentives in the plan,
particularly those affecting small business formation, job
mobility, welfare reduction, and retirement?
Will firms respond to reductions in health care costs by
increasing wages dollar-for-dollar, or in part by increasing
employment, increasing investment, or reducing prices?
Will decreased uncertainty in the growth of health care costs
encourage firms to hire more workers or encourage more
individuals to become self-employed?
There are no existing models that can address all of the relevant
issues. The range of uncertainty is too great to use precise numbers.
For this reason, we will not present specific estimates of the
employment effects of the Health Security plan.
Charles Brown, "Minimum Wage Laws: Are They Overrated?" Journal of
Economic Perspectives, Summer 1988.
Charles Brown, Curtis Gilroy, and Andrew Kohen, "The Effect of the
Minimum Wage on Employment and Unemployment" Journal of Economic
Literature, June 1982.
Charles Brown, Curtis Gilroy, and Andrew Kohen, "Time Series Evidence on the
Effects of the Minimum Wage on Youth Employment and Unemployment", Journal
of Human Resources, Winter 1991.
David Card and Alan B. Krueger, "Minimum Wages and Employment: A Case
Study of the Fast Food Industry in New Jersey and Pennsylvania", Working
Paper #315, Industrial Relations Section, Princeton University, April
David Card, "Do Minimum Wages Reduce Employment? A Case Study of California,
1987-89", Industrial and Labor Relations Review, October 1992.
David Card, "Using Regional Variation in Wages to Measure the Effects of
the Federal Minimum Wage", Industrial and Labor Relations Review,
Charles P. Hall, Jr. and John M. Kuder, Small Business and Health Care: Results
of A Survey, The NFIB Foundation, 1990.
Lawrence F. Katz and Alan B. Krueger, "The Effect of the Minimum Wage on
the Fast-Food Industry", Industrial and Labor Relations Review, October
Brigitte Madrian, "Employment-Based Health Insurance and Job Mobility: Is There
Evidence of Job Lock?", forthcoming in Quarterly Journal of Economics, February
Robert Moffitt and Barbara Wolfe, "The Effect of the Medicaid Program on
Welfare Participation and Labor Supply", Review of Economics and
Statistics, November 1992.
Aaron S. Yelowitz, "The Medicaid Notch, Labor Supply, and Welfare Participation:
Evidence from Eligibility Expansion", September 1993.
Allison J. Wellington, "Effect of the Minimum Wage on the Employment
Status of Youths: An Update", Journal of Human Resources, Winter 1991.