Medicaid and the Incentive to Work

The Affordable Care Act is â€" to state the obvious â€" aimed at bolstering insurance coverage in the United States. But the law is so big that it will necessarily have widespread economic ramifications, economists think, including an effect on the labor market.

For instance, the Congressional Budget Office has surmised that the law may lead more workers to choose early retirement, since they would not fear losing their insurance coverage if they did so. It might also lead certain employers to hire more part-time workers, to avoid the so-called “employer mandate.” (There is no evidence that is happening yet, and the effect would most likely be small in a labor force of 156 million, by the way.)

But economists and policy researchers have been divided on the effect that the Medicaid expansion in the health care law might have on workers. Amy Finkelstein, a professor at the Massachusetts Institute of Technology and a recipient of the John Bates Clark Medal for young economists, laid out the arguments. “People have made the argument that expanding Medicaid could be great stimulus, by improving people’s health and productivity and security, and making it easier for them to find employment,” she said in an interview. “Others have argued the opposite: People were seeking employment in order to get access to health insurance, and they might stop working” once covered by law.

A new paper - the latest to come out of the famed Oregon Health Insurance Experiment â€" finds that neither of those arguments seems to hold up. Medicaid turns out to have little short-term effect on the labor-force participation or earnings of low-income Americans.

It is worth stepping back for a moment to understand why the Oregon study is unique. Back in 2008, Oregon, like many states, did not provide Medicaid coverage to all poor adults. (Generally, adults qualified only if they had a disability or a dependent child, no matter how poor they were.) The state found itself with enough money to cover some, but not all, of those uncovered adults. It decided the fairest way to allot the coverage would be through a lottery.

That gave researchers a rare opportunity to isolate the effects that insurance coverage â€" and insurance coverage alone â€" had on the lives of its recipients. A team of all-star researchers surveyed lottery winners and losers, and compared them. Prior papers coming out of the study have found that Medicaid coverage increased health spending and financial security, but had a limited effect on health outcomes in the short term.

In a new batch of findings, Ms. Finkelstein and her co-authors say that Medicaid had no significant effect on labor-force participation or earnings. That means that the newly covered were not leaving or joining the labor force much more than their uncovered peers were, nor were they making much more or less. (The nitty-gritty result: “Our 95 percent confidence intervals allow us to reject that Medicaid causes a decline in labor-force participation of more than 4.4 percentage points, or an increase of more than 1.2 percentage points.”) The study also found that Medicaid increased enrollment in the food-stamp program, but did not have much effect on the receipt of other government benefits, including disability and welfare.

What might the lessons be for the half of states currently expanding their Medicaid programs, including Oregon? (It is joining the federal expansion in the Affordable Care Act, meaning it will cover all poor adults.) Well, Oregon a few years ago is not the United States today. And the Oregon study looks at relatively short-term effects of the Medicaid expansion, not measurements like lifetime earnings. But it would be reasonable to think that those states might see similar effects after expanding their programs, too.