Job lock: Entrepreneurship lock

Links to all posts in the series to which this post belongs are in the introductory post

While we’re on the subject of the effect of health insurance on job mobility, there’s a related literature focused on a particular type of job transition: from employment to self-employment. Though it’s now the case that the self-employed can deduct health insurance premiums from income, they still potentially face higher costs on the individual market than they might pay for a group-market product since the former (pre-ACA) could be risk (or experience) rated and also includes a higher loading fee than is typical for group-market products.*

Gruber and Madrian included two papers on this subject in their literature review.

The first paper on this topic, by Holtz-Eakin, Penrod and Rosen (1996), finds no effect of health insurance on the transition from employment to self-employment. However, they find no affect of most other variables on this transition either (e.g. income, race, education), so the lack of an effect for health insurance may speak more to the quality of the data than to the actual effect of health insurance. Madrian and Lefgren (1998) [unpublished] find some evidence that both continuation coverage and spousal health insurance increase transitions to self-employment.

There are, however, other papers to consider, most published since Gruber and Madrian’s review. Wellington (2001) found that coverage through one’s spouse increased the probability of self-employment between 2.3 and 4.4 percentage points for men and 1.2 and 4.6 percentage points for women.

Selden (2009) exploited the temporal variation in tax deductibility of health insurance for the self-employed (25% deductible in 1986, 30% in 1996, and rose in steps to 100% by 2003) to study rates of coverage for self-employed workers and their spouses. He found that the increase in tax subsidization of such coverage over 1996-2004 expanded private insurance by 1.1 to 1.7 million persons. Velamuri (2012) also exploited self-employment health insurance tax deduction policy to examine the rate of self-employment among women. Those with no spousal health insurance were about 10% more likely to be self-employed when the deductibility rate was higher, compared to women with spousal coverage. 

DeCicca (2010) focused on New Jersey’s 1993 Individual Health Coverage Plan, aimed to facilitate non-employer coverage. He found that the New Jersey law increased self-employment by about 15-25%. Heim et al. (2010) found that the increase in deductibility of health insurance for the self-employed increased self-employment by 9.1-14.9%. More recently, Fairlie, Kapur, and Gates (2011) found a nearly 14% increase in business ownership attributed to turning 65 and going on Medicare. (More on that paper in this prior post.) Gurley-Calvez (2011) found that households claiming the self-employment health insurance deduction were less likely to exit self-employment.

More recently, Heim and Lurie published two papers in 2013 on this subject. Overall, neither found evidence of an increase in self-employment in states that implemented guaranteed issue and community rating regulations. But one found differing effects by age: workers over 40 were more likely to be self-employed in states with these insurance regulations. Finally, an unpublished working paper by Nikpay (2013) examines the connection between the tax subsidization of premiums for the self-employment and insurance market underwriting reforms, finding that tax subsidies have no effect on households with preexisting conditions in states where health-based denial of coverage is permitted. In states where denials are not permitted, a self-employed individual’s household is more responsive to tax subsidies if a member of that household has pre-existing conditions.

The preponderance of evidence from the literature is that “entrepreneurship lock” exists, though there are varying estimates of its extent.

* It is possible that some people could pay less  for an individual market product if, for example, they’re substantially healthier than the group at the employer they left and/or they opt for a less generous plan than they had access to within their employer group.


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