Health Insurance and “Unemployment Lock”: evidence from China

The potential impact of health insurance on labor mobility has been extensively studied in the U.S. and elsewhere. As health insurance becomes a more important means of financing health care, and as individual choice is playing a greater role in allocating labor, this issue is beginning to be recognized in China as well. In this paper, we investigate the effects of the introduction of the subsidized China Urban Resident Basic Medical Insurance (URBMI) insurance plan on people’s job market entry decisions, using data from a of new survey of the population eligible to enroll in this plan. In order to deal with an endogeneity problem, we use the enrollment rates of each community as an instrumental variable of the individual probability of participation in the plan. Our results show that URBMI, which is mainly available to people not in formal employment, leads to a significant 4.8% reduction in the individual probability of entering labor market, an effect we term “Unemployment Lock”. We also find that the negative effects of health insurance on labor force participation are larger for less healthy people than for healthy ones. The results indicate that China Urban Resident Basic Medical Insurance, whose availability is related to employment status, may lead to a specific type of moral hazard; namely, that people who are not in formal employment become more reluctant to enter the job market because of the insurance program. Further research could involve separate analyses of full-time employees and temporary employees.