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The Health Wedge and Labor Market Inequality

Author

Listed:
  • Amy Finkelstein

    (Massachusetts Institute of Technology)

  • Casey McQuillan

    (Princeton University)

  • Owen Zidar

    (Princeton University)

  • Eric Zwick

    (University of Chicago, Booth School of Business)

Abstract
Over half of the U.S. population receives health insurance through an employer, with employer premium contributions creating a flat “head tax†per worker, independent of their earnings. This paper develops and calibrates a stylized model of the labor market to explore how this uniquely American approach to financing health insurance contributes to labor market inequality. We consider a partial-equilibrium counterfactual in which employer-provided health insurance is instead financed by a statutory payroll tax on firms. We find that, under this counterfactual financing, in 2019 the college wage premium would have been 11 percent lower, non-college annual earnings would have been $1,700 (3 percent) higher, and non-college employment would have been nearly 500,000 higher. These calibrated labor market effects of switching from head-tax to payroll-tax financing are in the same ballpark as estimates of the impact of other leading drivers of labor market inequality, including changes in outsourcing, robot adoption, rising trade, unionization, and the real minimum wage. We also consider a separate partial-equilibrium counterfactual in which the current head-tax financing is maintained, but 2019 U.S. health care spending as a share of GDP is reduced to the Canadian share; here, we estimate that the 2019 college wage premium would have been 5 percent lower and non-college annual earnings would have been 5 percent higher. These findings suggest that health care costs and the financing of health insurance warrant greater attention in both public policy and research on U.S. labor market inequality.

Suggested Citation

  • Amy Finkelstein & Casey McQuillan & Owen Zidar & Eric Zwick, 2023. "The Health Wedge and Labor Market Inequality," Working Papers 2023-01, Princeton University. Economics Department..
    • Handle: RePEc:pri:econom:2023-01
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    Cited by:

    1. Zarek Brot-Goldberg & Zack Cooper & Stuart V. Craig & Lev R. Klarnet & Ithai Lurie & Corbin L. Miller, 2024. "Who Pays for Rising Health Care Prices? Evidence from Hospital Mergers," NBER Working Papers 32613, National Bureau of Economic Research, Inc.
    2. Janet Gao & Shan Ge & Lawrence D. W. Schmidt & Cristina Tello-Trillo, 2023. "How Do Health Insurance Costs Affect Firm Labor Composition and Technology Investment?," Working Papers 23-47, Center for Economic Studies, U.S. Census Bureau.
    3. Bozio, Antoine & Breda, Thomas & Guillot, Malka, 2023. "Using payroll taxes as a redistribution tool," Journal of Public Economics, Elsevier, vol. 226(C).

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    More about this item

    Keywords

    Health insurance; inequality; taxation; health insurance tax subsidy; labor market; college premium; nonemployment;
    All these keywords.

    JEL classification:

    • J32 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Nonwage Labor Costs and Benefits; Retirement Plans; Private Pensions
    • J31 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Wage Level and Structure; Wage Differentials
    • I26 - Health, Education, and Welfare - - Education - - - Returns to Education
    • J22 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Time Allocation and Labor Supply
    • J23 - Labor and Demographic Economics - - Demand and Supply of Labor - - - Labor Demand
    • I13 - Health, Education, and Welfare - - Health - - - Health Insurance, Public and Private
    • H24 - Public Economics - - Taxation, Subsidies, and Revenue - - - Personal Income and Other Nonbusiness Taxes and Subsidies
    • M52 - Business Administration and Business Economics; Marketing; Accounting; Personnel Economics - - Personnel Economics - - - Compensation and Compensation Methods and Their Effects

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