General Equilibrium Effects of Insurance Expansions: Evidence from Long-Term Care Labor Markets

Martin Hackmann, Joerg Heining, Roman Klimke, Maria Polyakova and Holger Seibert
Additional contact information
Martin Hackmann: UCLA, NBER, and CESifo
Joerg Heining: Institut für Arbeitsmarkt-und Berufsforschung (IAB)
Roman Klimke: Harvard University
Maria Polyakova: Stanford University, NBER and CESifo
Holger Seibert: Institut für Arbeitsmarkt-und Berufsforschung (IAB)

No 21-357, Upjohn Working Papers from W.E. Upjohn Institute for Employment Research

Abstract: Arrow (1963) hypothesized that demand-side moral hazard induced by health insurance leads to supply-side expansions in healthcare markets. Capturing these effects empirically has been challenging, as non-marginal insurance expansions are rare and detailed data on healthcare labor and capital is sparse. We combine administrative labor market data with the geographic variation in the rollout of a universal insurance program—the introduction of long-term care (LTC) insurance in Germany in 1995—to document a substantial expansion of the inpatient LTC labor market in response to insurance expansion. A 10 percentage point expansion in the share of insured elderly leads to 0.05 (7%) more inpatient LTC firms and four (13%) more workers per 1,000 elderly in Germany. Wages did not rise, but the quality of newly hired workers declined. We find suggestive evidence of a reduction in old-age mortality. Using a machine learning algorithm, we characterize counterfactual labor market biographies of potential inpatient LTC hires, finding that the reform moved workers into LTC jobs from unemployment and out of the labor force rather than from other sectors of the economy. We estimate that employing these additional workers in LTC is socially efficient if patients value the care provided by these workers at least at 25% of the market price for care. We show conceptually that, in the spirit of Harberger (1971), in a second-best equilibrium in which supply-side labor markets do not clear at perfectly competitive wages, subsidies for healthcare consumption along with the associated demand-side moral hazard can be welfare-enhancing.

Keywords: long-term care; universal insurance expansion; Germany; LTC labor market; second-best efficiency (search for similar items in EconPapers)
JEL-codes: D61 I11 I13 J21 J23 (search for similar items in EconPapers)
Date: 2021-11
New Economics Papers: this item is included in nep-age, nep-big, nep-cmp, nep-eur, nep-hea, nep-ias and nep-lma
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Citations: View citations in EconPapers (1)

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