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Thursday, April 29, 2004

Did National Health Insurance Cost Jobs in Canada?

Surprisingly, the answer is no, at least on average, according to health economics guru Jonathan Gruber and Maria Hanratty. National health insurance in Canada started in the province of Saskatchewan in 1962, and later spread to the rest of the country, with different provinces adopting it over the course of several years. Gruber and Hanratty use a sophisticated statistical methodology to control for a number of possible factors affecting employment. The gist of their methodology is simple though. They look at employment growth before and after national health insurance was adopted in each province, and compare provinces with national health insurance to those without.

They find that overall, employment and wages both increased by about 3% following the introduction of national health insurance. But doesn't this contradict the basic economic model I discussed a few days ago? Yes and No.

First, I was discussing national health insurance finance out of general revenues, that is, the income tax. But in many Canadian provinces national health insurance was financed simply by mandating that everybody pay premiums to buy into the national insurance scheme (with low-income people receiving subsidized insurance). Because the cost of insurance didn't vary with work, there was no work disincentive. Low-wage workers were provided with subsidized insurance, with the subsidies reduced as their income rose, so they did face work disincentives. But since subsidized insurance had been available previously, there was little change in their incentives. When looking at different provinces, Gruber and Hanratty find that employment fell in provinces that funded national health insurance entirely out of general taxation, and employment rose in those that relied heavily on mandatory premiums.

But basic economic models would predict that at best, employment would remain constant under a mandatory premium scheme, not rise. Gruber and Hanratty speculate that national health insurance might have reduced "job lock," and hence allowed workers to switch companies more easily, and they also point out that it probably improved the health of Canadians. Workers better able find the right employment match, and healthier workers, are both more productive, and so the demand for labor would increase, with more jobs being created.

The Canadian experience has important lessons for the U.S., Canada is probably the one country in the world most similar to America. Also, the U.S. government already provides free medical insurance to low income families (Medicaid) which has strong work disincentives (since workers lose Medicaid entirely if they make too much). So there is some reason to hope that the U.S. would have Canada's happy outcome if we also adopted national health insurance: higher wages, more jobs, and healthier people. At least, we could have this kind of outcome if we get the details of financing national health insurance right.

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