Association for Public Policy Analysis & Management

Between 2007 and 2010, the federal minimum wage increased by 40 percent, from $5.15 an hour to $7.25 an hour. Since then, 29 states have further increased their minimum wages, and several states now have minimum wages above $10 per hour. Economic theory suggests that employers may respond to a binding minimum wage increase by reducing the generosity of employer-sponsored insurance (ESI) or other fringe benefits to keep workers’ total compensation unchanged. Previous empirical studies reach differing conclusions about the presence and magnitude of the hypothesized tradeoff between minimum wages and ESI, however, and the impact on employer-sponsored health insurance of minimum wage increases occurring since the Great Recession has not yet been examined.

Besides the broader changes in the labor market that followed the Great Recession, recent minimum wage increases also occurred against the backdrop of the Affordable Care Act (ACA), which had several provisions that could modify employer responses to the minimum wage. While the ACA’s mandate requiring large employers to offer insurance to full-time workers may discourage employers from dropping coverage for workers, the employer mandate leaves large employers free to reduce benefit generosity, increase workers’ premium contributions, drop dependent coverage, or shift workers to part-time status. Smaller employers, meanwhile, can drop coverage without facing penalties. These employer responses could make ESI less available or less attractive to low-wage workers, many of whom have gained access to coverage outside of employment through Medicaid expansion or tax credits for Marketplace plans.

Data and Methods

We use data from the Current Population Survey Annual Social and Economic Supplement to analyze whether minimum wage increases that occurred between 2007 and 2015 affected ESI enrollment for workers likely to be affected by the minimum wage given their education, industry, and occupational classification. We first estimate whether minimum wage increases were associated with changes in enrollment in ESI coverage for workers. We then analyze whether the impact of the minimum wage differed between Medicaid expansion and non-expansion states, for workers versus dependents, and for employees at large versus small firms.

Results

We find robust evidence that minimum wage increases since 2007 were associated with reduced enrollment in ESI. Our linear probability models suggest that a $1 increase in the minimum wage reduced the probability of being enrolled in ESI by 0.8 to 1.2 percentage points; most models are estimated with a high degree of precision. We find suggestive evidence that minimum wage changes have a larger impact on the probability of being covered as a dependent than being covered as through one’s own plan, although these results are sensitive to model specification. We find no evidence that minimum wage changes had different effects in Medicaid expansion versus non-expansion states. Analysis focused on employer size is ongoing.

Implications/Discussion

These results suggest that recent minimum wage increases may have had the unintended effect of reducing employer-sponsored insurance coverage.