“Job Lock” From Employer-Based Health Benefits: What Should Government Do?

Back in 1993, the economists Jonathan Gruber and Brigitte C. Madrian highlighted the problem of “job lock”, a consequence of employer-based health benefits. Gruber and Madrian figured if people with a serious health problem left their jobs, they would be subject to medical underwriting and be charged high premiums or perhaps be denied coverage altogether if they entered the individual market. So they stay in their jobs to buy the insurance their employers provide.

untitled1In one widely cited paper, Madrian estimated that this drawback reduced the proportion of workers who switched jobs in a year from 16 percent of the workforce to only 12 percent. In another paper, they concluded that coverage is greatly minimized by state laws plus COBRA, a 1986 federal law that allows a former worker to keep her previous employer’s group plan for a period of time, if she pays the premiums herself.

The problem is also reduced by HIPAA, a 1996 federal law which required employers to offer benefits to new employees on the same term as incumbent employees, without medical underwriting, if the new employees had previous long-term coverage without a significant lapse (literally, at least six months coverage without a lapse of more than 63 days).

Yet, one justification for ObamaCare is that it will end this (perhaps non-existent) job lock. An article in Bloomberg News on September 9, 2013 asserted that ObamaCare would unleash a tsunami of entrepreneurship, reporting a conclusion by two university researchers that ObamaCare would free almost a million entrepreneurs from the shackles of employment-based health benefits.

This estimate was derived by extrapolating from the experience of TennCare, an expansion of Tennessee’s Medicaid program. Tennessee rolled back TennCare in 2004, dropping 170,000 people, mostly childless adults from the rolls. This was a drop of 6.9 percent in the proportion of childless adults on Medicaid. The result was an increase in the labor supply: The proportion of childless adults with jobs went up by 5.7 percent in the same period, much more than any other state. Remarkably, the authors describe this as “job lock”.

Obviously, losing Medicaid caused these people to seek employment. However, cuts in food stamps or cash welfare would have achieved the same result. Describing this as their having entered into “job lock” is as absurd as describing them as suffering from “wage lock”. It is grotesque to describe their situation in the same breath as that of working people who earn health benefits as compensation for their employment. If those Tennesseans were to lose their employer-based benefits because of ObamaCare, they would not likely become entrepreneurs. Rather, they will become unemployed again.

Of course, working people should be free to take their compensation in whatever form they and their employers agree, without the Internal Revenue Code introducing a bias in favor of health benefits over cash. Fixing this quirk of the tax code should not be rocket science. For example, in Priceless, John C. Goodman recommends a fixed tax credit to each household in the country, which could be paid for by amending the exclusion of employer-based health benefits from taxable income.

ObamaCare neither fixes job lock nor unleashes entrepreneurship. Rather, it will suppress entrepreneurship and employment through tax hikes and increased welfare payments.

Comments (17)

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  1. Perry says:

    The spectre of Perverse Incentives strikes again.

  2. Tee Whang says:

    Clearly, the goal of Obamacare is to fix nonexistent problems and ignore those that plague our health care system.

  3. Hunter Green says:

    I wonder a tax credit would impact low-income workers.

    • Felicia says:

      It may. It’s difficult to say if that would truly be the best solution to replace employer-based health insurance, or if it would perpetuate the problems that already exist.

  4. Brier says:

    It’s ridiculous to equivocate these workers to entrepreneurs.

    • Stan says:

      Precisely. Entrepreneurs have a unique attitude and the successful ones would not be deterred.

      • Tommy says:

        Furthermore, many entrepreneurs who act on a momentary fancy without proper constraints to assess opportunity cost are much more likely to end in ruin.

    • Bryan says:

      I don’t even see a direct correlation to job leaving beyond those with existing conditions, who are likely in poor health and unlikely to actually pursue entrepreneurial opportunities.

  5. Bryan says:

    “Obviously, losing Medicaid caused these people to seek employment. However, cuts in food stamps or cash welfare would have achieved the same result.” Nod.

  6. Bryan says:

    “Obviously, losing Medicaid caused these people to seek employment. However, cuts in food stamps or cash welfare would have achieved the same result.” Nods again.

  7. Stewart says:

    The logic of that study seems shoddy. The TennCare study has way too many omitted variables to be able to declare causal impact.

  8. Bob Hertz says:

    The main beneficiaries of the original Tenn Care were
    adults without children who made very little money.
    In any southern or southwestern state, there are sad to say a very large number of minorities in that category.

    This is why states like Louisiana and Texas and Mississippi are so against the expansion of Medicaid
    (or even publicizing Medicaid to those who could have had it for the last 10 years).

    This is a rocky story, but as John points out it has nothing to do with entrepreneurism.

    For over 50 years there has been great inequality between those who work for big business and those who are self employed when it comes to health care. This has nothing to do with race. Health insurance for white farmers has been awful.

    The ACA makes a few moves to reduce this inequality, with its subsidies. But at the same time, the ACA is destroying some of the pooled plans that did exist for the self-employed. What a mess.

  9. Jimbino says:

    Job lock is a serious problem for the economy.

    When I worked as a contract engineer, without benefits, earning twice the rate of the captive employee doing the same job, I was always free after the termination of the contract (3mo, 6mo, 9mo, to 1 year) to move on to other places where there was a need and good pay. I’ve worked in several states and several foreign countries, including Scotland, Germany, Mexico and Argentina.

    As an engineer, I can’t imagine moving to build a Panama Canal and then sit around stultified, working for benefits, after it’s built.

    It must be my engineer-mindset: I like building things and I suppose those incapable of building things work for benefits. I know I never hire anyone who asks about the benefits or who agrees to a drug screening!

  10. Bob Hertz says:

    I am not sure if it is a different era or a different field, or both……..

    but I seem to know a lot of self-employed programming and web design experts who work for less than half the pay of permanent employees in their field.

    Independents in many fields (not all) are beaten down by employers who take the lowest bid, including the lowest bid from around the world.

    • Jimbino says:

      Maybe the folks you know speak only engineering English, and that poorly. I can understand why nobody would hire them. I never met an engineer who could spell or pronounce “kluge” for example.

      I speak several languages, natural and artificial, and there sure are employers begging for STEM workers in Brazil and Germany, to name two countries.

  11. Rituparna Basu says:

    Government tax policy caused the job-lock problem. Obamacare doesn’t fix the problem. It just hides the destructive effects of previous regulation, and causes problems of its own (e.g., the young entrepreneur who’s guaranteed health insurance but for a price that he can’t afford due to rate restrictions and such).