“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. Job lock referred to the fact that the U.S. Internal Revenue Code does not tax employees’ health benefits if they are provided through employers’ group plans. However, if employers gave the equivalent amount of cash to their employees, it would be counted as taxable income. Gruber and Madrian figured that people who were ill, and therefore subject to medical underwriting for health insurance if they left their jobs, would stay in jobs they would otherwise have left.

In 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. So, job lock was a problem in the labor market, but it was not a massive problem. In another paper, Gruber and Madrian concluded that laws requiring continuity of coverage greatly minimized the problem. These laws consisted of state laws plus COBRA, a 1986 federal law that allowed a former worker to keep her previous employer’s group plan for a period of time, if she paid the premiums herself.

Further, the portability characteristic of continuation of coverage was enhanced in 1996 through HIPAA, a 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).

The introduction of HIPAA reduced job lock even further below the small level that Madrian had estimated. Indeed, the latest thorough review of the literature, by Inas Rashad and Sara Sarpong (full text by subscription), concluded that the economic evidence of job lock was mixed, largely due to inconsistent use of datasets.

And yet, one justification for Obamacare was that it would end the (perhaps non-existent) problem of job lock.

An article in Bloomberg News on September 9, 2013, asserted that Obamacare would unleash a tsunami of entrepreneurship. The examples in the article were misrepresented, however, because would-be entrepreneurs who quit jobs that came with health insurance already had the option of continuing their coverage without medical underwriting, via COBRA, HIPAA, and state laws. The article also reported the conclusion by two university researchers that Obamacare would unleash almost a million entrepreneurs, freed 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 upon, 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.

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For the pivotal alternative to Obamacare, please see the Independent Institute’s widely acclaimed book: Priceless: Curing the Healthcare Crisis, by John C. Goodman.

John R. Graham is a Senior Fellow at the Independent Institute.
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