Links to all posts in the series to which this post belongs are in the introductory post.
Theory tells us that job lock can affect labor force participation, but not its extent. For that we need evidence.
It’s natural to hypothesize that job lock might be more pronounced for older workers who might otherwise consider retirement. Medical issues and costs increase with age, making employer-sponsored insurance (ESI) more valuable to, say, a 60 year old than, say, a 30 year old, on average. Poorer health at an older age makes working more difficult and retirement more attractive. However, before the age of Medicare eligibility, ESI generally provides the best route to affordable coverage.*
Even after the age of Medicare eligibility, the existence of more generous ESI could influence participation in the workforce. Consequently, workers who might prefer retirement might continue to work exclusively for ESI benefits. That’s a form of job lock. A corollary is that offers of employer-sponsored retiree health insurance (RHI) might reduce job lock. Older workers not yet eligible for Medicare but who place high value on health insurance might be more likely to retire early if they can do so and still be covered by RHI.
Gruber and Madrian found 16 papers on the effect of health insurance on retirement. The studies considered one or several of the situations described above. Based on them, Gruber and Madrian concluded,
Despite using a variety of estimation techniques and several different types of datasets, almost every examination of the topic has found an economically and statistically significant impact of health insurance on retirement.
Indeed, of the 16 papers surveyed, 12 found a statistically significant result consistent with job lock, one found a statistically significant result inconsistent with job lock, and the three others included results that were mixed or that could not be evaluated. In summary, findings consistent with job lock include:
- RHI delays retirement until age of eligibility for it and accelerates retirement thereafter.
- RHI reduces the age of retirement by 3.9-18 months, depending on data source.
- RHI increases the probability of retirement before age 65 by 4.3-15 percentage points, depending on data source.
- RHI decreases the probability of working past age 62 by 5.3%.
- Medicare increases the probability of retirement by 280%.
- Each year of continuation coverage (i.e., COBRA) increases retirement hazard by 30 percent, increases probability of self-reported retirement by 5.4%, and increases probability of not being in the labor force by 2.8%.
- EHI increases the probability of working past age 65 by 5.3%
- Poor health increases probability of retirement by 88% and decreases full time work by 5.1-6.3%, depending on age.
- Private health insurance, RHI, and Medicaid decrease full-time work by 12-25%, depending on age.
- A 10% decrease in the cost of health insurance in retirement increases retirement hazard by 1.1-1.4% for men and 1.4-1.9% for women.
- The reduction in retirement health insurance cost associated with RHI increases retirement hazard by 25% for men and 28% for women.
(The 2011 survey of the literature by GAO found six more studies all consistent with these results.)
That’s a lot of results, and some cover a wide range of effect sizes. A formal meta-analysis would be handy, but none has been done and one is beyond the scope of this series. It’s worth mentioning, however, that all studies have limitations. Gruber and Madrian discuss some potential pitfalls. For example,
Many companies have pension plans that encourage retirement at ages before individuals are eligible for Medicare. These companies, however, are also more likely to offer retiree health insurance benefits. Thus, the pension-related incentives for early retirement are correlated with the health insurance incentives for early retirement. […] If pension-related early retirement incentives are positively correlated with retiree health insurance provision, it is likely that  reduced form estimates of the effect of retiree health insurance on retirement are too large. Similarly, the selection of individuals with strong preferences for leisure into jobs that offer retiree health insurance will also lead to an upward bias in the reduced form estimates of the effect of retiree health insurance on retirement.
This critique applies to studies by Madrian (1994), Karoly and Rogowski (1994), Headen, Clark and Ghent (1997) [unpublished], Hurd and McGarry (1996) [also unpublished], and Rogowki and Karoly (2000). Some, though not all, of the mid-range and higher estimates listed above are from these studies.
Before concluding, it’s worth mentioning that delaying retirement due to ESI is, from one point of view, not different from delaying it due to wages. That is, ESI, like wages, is a form of compensation. People like working for compensation, and would otherwise—wait for it—not work. The difference in the case of insurance is that, in principle, people could demand additional wages instead of ESI and then buy individual-market coverage. Were that practical, one could divorce labor market participation decisions from health insurance. In practice, that’s very hard for some older workers given the per-ACA dysfunctions of the individual-market. It’s on this very margin that “job lock” is meaningful with respect to labor force participation. That is, we want to know to what extent people continue working because that’s the only practical way to obtain coverage, not for the compensation effects of ESI. It’s not immediately clear to me to what extent this distinction is made in the literature.
So far, I have considered the effect of health insurance on retirement decisions. Another strand of the literature addresses the effect of health insurance on the pre-retirement labor supply of married couples, which I consider in the next post.
* Here and throughout, we’re considering a pre-ACA world unless otherwise specified. In a future post, we will consider how the ACA changes the landscape.