Working Paper: NBER ID: w11063
Authors: Dana Goldman; Neeraj Sood; Arleen Leibowitz
Abstract: Many companies have defined-contribution benefit plans requiring employees to pay the full cost (before taxes) of more generous health insurance choices. Research has shown that employee decisions are quite responsive to these arrangements. What is less clear is how the total compensation package changes when health insurance premiums rise. This paper examines employee compensation decisions during a three-year period when health insurance premiums were rising rapidly. The data come from a single large firm with a flexible benefits plan wherein employees explicitly choose how to allocate compensation between cash wages and other benefits. Under such an arrangement, higher health insurance premiums must induce changes in the composition of total compensation -- either in lower after-tax wages or in decreased contributions to other benefits. The results suggest that about two-thirds of the premium increase is financed out of cash wages and the remaining one-thirds is financed by a reduction in benefits.
Keywords: health insurance; employee compensation; premium increases
JEL Codes: J33
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Health insurance prices (G52) | Health insurance expenditures (H51) |
| Health insurance prices (G52) | Take-home wages (J31) |
| Health insurance prices (G52) | Other benefits (J32) |
| Health insurance prices (G52) | Total compensation allocation (J33) |
| Health insurance expenditures (H51) | Take-home wages (J31) |
| Health insurance expenditures (H51) | Other benefits (J32) |