Medicaid, job lock, and moving up the job ladder

Social safety net programs, such as unemployment insurance and government-provided health insurance, are often appropriately characterized as redistribution. But as their names hint at, they are also forms of social insurance: By boosting the earnings of low-income workers, they insure against the possibility of having a low income. And as that insurance provides a cushion against a fall in income, it can also encourage workers to take on more risk—particularly in moving from one job to another.

One of the many arguments for expanding government-provided health insurance is that workers would be less tied to their current jobs for the sole reason of retaining health insurance. Decoupling the two would get rid of “job lock” and allow workers to move to other jobs. But what kind of jobs would these workers move into? In a new National Bureau of Economic Research working paper, economists Ammar Farooq and Adriana Kugler of Georgetown University find that more generous health insurance improves the chance that a worker moves into a new, higher-paying occupation or industry.

Specifically, the two economists explore how differences in the generosity of Medicaid across states affects mobility across occupations and industries. They use the fact that there were statutory changes in the income and age thresholds among the states during the late 1990s and the early 2000s to tease out the effect on the occupational and industry mobility of workers.

Farooq and Kugler find that more generous Medicaid programs boosted the movement of workers into new occupations and industries. But this movement wasn’t random: The workers were more likely to move into occupations that are not only riskier (as measured by the dispersion of wages in the occupation or industry), but also higher-paying (measured by the median wage) and requiring higher education credentials. These results show that a more generous public health insurance system helps reduce job lock and allows workers to move up the occupation or job ladder.

The two economists additionally use a case study to show that the opposite holds as well: When Tennessee reduced the generosity of its Medicaid program, movement to new occupations and industries declined.

Farooq and Kugler’s result is another piece of evidence that reducing the downside risk for workers can help them take risks that will help them and the overall economy in the long run. This research complements other studies demonstrating the role of employer-provided health insurance in employment lock. There’s also evidence that entrepreneurship, for example, is more likely to happen when a potential entrepreneur doesn’t have tremendous downside risk. The same goes for the benefits of a tighter labor market. If there are more jobs available to workers, they’re more likely to take a risk by quitting their old job and jumping to a new one. And of course this could be why high levels of wealth inequality may affect entrepreneurship and dynamism in the U.S. economy. All trends and possibilities to keep our eyes on.