Minimum Wages, Employer-Provided Health Insurance, and the Non-discrimination Law

Transcription

1 Minimum Wages, Employer-Provided Health Insurance, and the Non-discrimination Law MINDY S. MARKS* This article exploits cross-state variation in minimum wages to investigate the impact of minimum wage changes on employer-provided health insurance. In contrast to the existing empirical literature, this article considers an environment where some firms are constrained by non-discrimination laws that govern the provision of health insurance. For these firms, minimum wage changes do not reduce the probability that workers will receive employer-provided health insurance. For firms not covered by the non-discrimination law, and free to tailor their fringe benefits, low-skilled workers experience a disproportionate reduction in the availability and generosity of health insurance after a minimum wage increase. Introduction MOST OF THE EXISTING EMPIRICAL RESEARCH ON THE ECONOMIC IMPACTS of minimum wage laws has focused on the effects of such laws on the availability of jobs for low-wage workers. Despite decades of study, this vast literature 1 has yet to reach a consensus concerning the employment consequences of minimum wage changes. One drawback of this focus is that it provides too narrow a basis for policy evaluation. Employment contracts are multidimensional agreements which, in addition to providing wages, furnish workers with numerous non-wage (or fringe) benefits, including flexible working hours, training, health insurance, pensions, and paid leave. As long as the wage and non-wage portion of total compensation are substitutes, firms can respond to mandates that increase the wage portion of compensation by reducing the non-wage component. In fact, the state of Nevada recognizes this trade-off and allows a lower minimum wage for those firms that offer health insurance. * The author s affiliation is Department of Economics, University of California-Riverside, 4110 Sproul Hall, Riverside, CA. mmarks@ucr.edu. 1 See Card and Kruger (1995) for an overview. INDUSTRIAL RELATIONS, Vol. 50, No. 2 (April 2011). Ó 2011 Regents of the University of California Published by Wiley Periodicals, Inc., 350 Main Street, Malden, MA 02148, USA, and 9600 Garsington Road, Oxford, OX4 2DQ, UK. 241

2 242 / MINDY S. MARKS There is a small but growing empirical literature on the relationship between the minimum wage and the provision of fringe benefits. 2 A common approach for determining the relationship between minimum wage increases and the provision of health insurance is a difference-in-differences methodology where mid-to-high-wage workers serve as a control group to guard against unmeasured factors that may be correlated with minimum wage increases and benefit provision. This work argues that this methodology is flawed due to enactment of non-discrimination rules in 1978 that govern the provision of health insurance. Non-discrimination rules have been shown to limit the within-firm inequality in benefit provision (Carrington, McCue, and Pierce 2002). In particular, non-discrimination rules in section 105 of the Internal Revenue Tax Code state that in order to receive tax-exempt status for the health insurance plans of highly compensated employees, self-insured firms must offer health insurance plans that do not discriminate in favor of highly compensated employees (Collins 1999). 3,4 As Gruber (1998:7) notes, for firms covered under the non-discrimination rules: it is impossible to selectively offer insurance to only some employees, without making it a workplace wide option. This is in contrast with other fringe benefits, such as sick leave or on-the-job training, where the firm can tailor offerings to individual workers. For firms covered by the non-discrimination rule, all employees are potentially affected if the firm alters its availability or generosity of health insurance in response to a change in the minimum wage. In this case, it would be incorrect to use employees earning above the minimum wage as a control group as is common in the literature on the minimum wage and non-wage compensation. Health insurance is the largest and most expensive of the non-legally required benefits offered by firms. According to the Employer Costs for Employee Compensation series, the average hourly cost of providing health 2 The benefit that has received the most attention is on-the-job training. Hashimoto (1982) uses timeseries variation in the minimum wage and finds support for the prediction that increases in the minimum wage reduce on-the-job training for white men. Two recent papers have used cross-state variation in the minimum wage to investigate this issue. Neumark and Wascher (2001) conclude that minimum wages significantly reduce the amount of training received by young workers. Acemoglu and Pischke (2003), in contrast, do not find that minimum wages reduce the extent of training. 3 More specifically, non-highly compensated employees must constitute at least 50 percent of the group of eligible employees; at least 90 percent of the non-highly compensated employees must be eligible for a plan that is at least 50 percent as valuable as the plan made available to the highly compensated employee with the most valuable benefit; and the plan must not contain any eligibility provision that suggests discrimination in favor of highly compensated employees. A plan also qualifies if at least 80 percent of non-highly compensated employees benefit from the plan (Gruber 1998). 4 The distinction between self-insured and third-party-insured health plans is based on risk. Employers who are responsible for the underlying insurance risk are considered self-insured even if a third-party company administers the health insurance plan. Employers have an incentive to self-insure to be exempt from their state s health insurance mandates.

3 Minimum Wages, Health Insurance, and the Non-discrimination Law / 243 insurance for workers in the private sector in 2007 was $1.85 or 7.1 percent of total compensation (Bureau of Labor Statistics 2007). Furthermore, about 42 percent of all private sector workers without a high school education receive health insurance through their employer. Thus, there is scope for reducing total compensation by cutting the availability or generosity of health insurance in response to minimum wage increases. The minimum wage, by constraining the compensation package employers can offer, may lower the receipt of employer-provided health insurance. However, whether or not workers lose coverage depends critically on if the firm is subject to the non-discrimination law. Using data from the March Current Population Survey (CPS) for and , this article exploits cross-state variation in the minimum wage and finds employer-provided health insurance coverage is unchanged in firms covered by the non-discrimination law. Firms not covered by the non-discrimination law, however, can tailor their health insurance offerings to individual employees. For these firms, reductions in the availability and generosity of health insurance are therefore concentrated among low-skilled workers. Furthermore, the reduction in employer-provided health insurance is larger for those workers in predominately low-skilled industries. Previous Literature The idea that firms reduce the non-wage portion of compensation in response to increases in the minimum wages has been investigated previously by Royalty (2000) and Simon and Kaestner (2004). Both papers examine an array of benefits. The fringe benefits Royalty investigates are health insurance, pensions, and sick leave. Using two years of data from the 1988 and 1993 CPS s Survey of Employee Benefits and cross-state variation in the minimum wage, she finds no effect on fringe benefit eligibility for small increases in the minimum wage. However, she demonstrates that minimum wage increases of at least $0.50, decrease the probability that low-skilled workers are eligible for pensions and health insurance. 5 Simon and Kaestner include health insurance and pensions in their analysis. They use data from the Annual Demographic Surveys of the CPS. Both cross-state and federal changes in the minimum wage are used to identify 5 Royalty s analysis focuses on how the minimum wage affects eligibility for fringe benefits. This article, in contrast, focuses on how the minimum wage affects the number of workers who receive (i.e., are eligible and accept) health insurance from their employers. As such, it implicitly includes potential channels of minimum wage influence on employer-provided health insurance that the Royalty paper does not address, such as requiring the employee to bear a larger portion of health insurance costs or switching to less generous plans.

4 244 / MINDY S. MARKS minimum wage effects. In the end they conclude that minimum wages have had no discernible effect on fringe benefit provision. Under their empirical framework, the significant negative relationship they find between health insurance and the minimum wage in some specifications is due to unmeasured state-year factors that are correlated with the minimum wage. This analysis differs from these papers in a key way. Both Royalty and Simon and Kaestner employ a difference-in-differences methodology. Under this approach the difference in fringe benefit receipt for a group of low-wage workers likely to be affected by an increase in the minimum wage (the treatment group) is compared to the change in fringe benefit provisions for mid-wage workers unlikely to be impacted by the minimum wage (the control group). These authors argue that the minimum wage has an impact on the provision of non-wage benefits if and only if the coefficient on the treatment group is more negative (less positive) than the control group. These papers state that the methodology depends on two key assumptions: Obviously, this specification relies heavily on the adequacy of the control group and the assumption that time effects are the same for high- and low-wage workers (Simon and Kaestner 2004:56) This difference-in-differences framework is employed regardless of whether the outcome variable is a benefit that the firm may individually tailor, like sick leave, or a benefit that is governed by the non-discrimination clause. As mentioned earlier, however, the non-discrimination rule makes near minimum wage workers an invalid control group when analyzing a benefit that cannot be individually tailored, such as employer-provided health insurance. Using data from before and after the enactment of the non-discrimination rules, Vanness and Wolfe (2002) argue that minimum wage constraints are a more important factor in determining employer-sponsored health insurance outcomes after the non-discrimination rule than before. Accordingly, unlike prior scholarship, this article explicitly takes into account the role that the non-discrimination law plays in the relationship between the minimum wage and the receipt of employer-provided health insurance. Empirical Specifications This article examines the effect of the minimum wage on the availability of employer-provided health insurance using an approach that has become standard in the new minimum wage research. 6 This approach exploits cross-state 6 Empirical studies prior to the new minimum wage research used time-series data and compared changes in the real value of the federal minimum wage to changes in some output measure at the national level.

5 Minimum Wages, Health Insurance, and the Non-discrimination Law / 245 variation in minimum wages to avoid attributing to the minimum wage influences from unmeasured variables common to all observations in a particular state or year. States may set minimum wages higher than the federal minimum wage. If firms respond to higher minimum wages by reducing non-wage benefits, in any given year a state with an increased minimum wage should have a larger percentage of employees without employer-provided health insurance than a state whose minimum wage is equal to the federal minimum wage. Furthermore, if two states increase their minimum wage, then the state with the larger increase should see a larger impact. This hypothesis is tested using the following Probit model: PðHI ijt ¼ 1Þ ¼Ffa þ b 1 MW jt þ b 2 X ijt þ b 3 S j þ b 4 T t þ e ijt g: In equation (1), HI ijt is a dichotomous variable that equals one if individual i in state j in year t receives employer-provided health insurance and zero otherwise. MW jt is the real value of the minimum wage in state j. X ijt is a vector of demographic and industry controls which the literature on employer-provided health insurance (Dranove, Spier, and Baker 2000; Gruber and Lettau 2000; Gruber and Poterba 1994; Vanness and Wolfe 2002; Woodbury 1983) have established to be important. Included as demographic controls are: age, age squared, race (black, white), part-time status, and education (no high school (omitted), high school graduate, some college, college graduate, and advanced degree). Also included is a complete set of interaction terms between marital status (married, unmarried), gender (male, female), and presence of own children (children present, children not present). These variables capture the possible access to insurance through a spouse, and control for the fact that the value of health insurance is increasing with the presence of children (Buchmueller 1996). The number of workers (0 24, 25 99, , , over 1000) in the firm and a set of 46 industry controls capture benefit provision differences on the firm side. State unemployment rates are also included in X ijt.s j and T t are state and year fixed effects, respectively. Equation (1) uses state-level variation in the minimum wage and receipt of employer-provided health insurance from year to year to identify the effect of the minimum wage. Federal variation in the minimum wage, which is of larger magnitude than state variation, is subsumed by the year fixed effects. 7 The state fixed effects control for any state specific time invariant variables, ð1þ 7 According to Burkhauser, Couch, and Wittenburg (2000), federal variation in the minimum wage is responsible for 90 percent of the total variation in the minimum wage between the years 1979 and Omitting the time-specific effects enables the use of both state-year and federal variation in the minimum wages. In estimates (not shown) that include the federal variation in the minimum wage the results are similar but suggest that workers in large firms of all skill categories experience a small reduction in the likelihood of receiving employer-provided health insurance.

6 246 / MINDY S. MARKS such as insurance mandates, that impact employer-provided health insurance. Included in all specifications are education-specific time trends that allow unmeasured factors such as rising health care costs to differentially impact low-educated workers. 8 Equation (1) can also be estimated with the minimum wage variable interacted with a complete set of skill category (high school dropouts, high school graduates, education beyond high school) dummy variables. This alternative regression equation can be written as follows: PðHI ijt ¼ 1Þ ¼Ffb 1 MW NoHS ijt þ b 2 MW HS ijt þ b 3 MW BHS ijt þ b 4 X ijt þ b 5 S j þ b 6 T t þ e ijt g: ð2þ In equation (2) NoHS ijt, HS ijt, BHS ijt are mutually exclusive dummy variables for high school dropout, high school graduate, and post-secondary education, respectively. The X ijt vector is the same as in equation (1) and includes a full set of education dummy variables and education-specific time trends. Equation (2) will investigate if minimum wage increases disproportionately impact the receipt of employer-provided health insurance for low-skilled workers. For firms covered by the non-discrimination law any reduction of health insurance should be similar across skill categories since these firms must offer all workers the same health insurance. For firms not restricted by the law, low-skilled workers should be disproportionately impacted. As previously mentioned, the non-discrimination law only affects firms that self-insure (Collins 1999), thus firms that do not self-insure are legally allowed to provide employees at different compensation levels different health insurance plans or different premiums. 9 The data do not identify if firms are self-insured; however, firm size has been shown to be the best predictor for self-insurance status. Larger firms are much more likely to self-insure than their smaller counterparts because their large size better shields them from risk (Acs et al. 1996). Recent data from the Medical Expenditure Panel Survey Insurance Component finds in 2000, 10.7 percent of firms with fewer than 100 workers offered a self-insured plan, 29.6 percent of firms with between 100 and 500 workers offered a self-insured plan, while 76.3 percent of firms with more than 500 workers offered such a plan (Agency for Healthcare Research and Quality 2000). In 2006 only 25 percent of firms with workers 8 The exclusion of the education-specific time trends does little to alter the results. 9 There is an active consulting market where law firms advise employers how they can legally provide different health insurance packages. See pdf and librarydetail.htm&show=1.

7 Minimum Wages, Health Insurance, and the Non-discrimination Law / 247 offered self-insured plan whereas 80.5 percent of firms with more than 500 workers offered self-insured plans (Agency for Healthcare Research and Quality 2006). Thus, firm size will be used as a proxy for coverage under the non-discrimination law and equation (2) will be estimated separately for large firms (at least 500 workers) and small firms (fewer than 500 workers). For those small firms less likely to be covered by the non-discrimination law we can test the following claim. Assume that the minimum wage only affects the receipt of health insurance for low-skilled workers in firms that are not subject to the non-discrimination law, and that it has no effect on highskilled workers in these firms. The effect of the minimum wage will therefore be captured by the difference between coefficients b 1 and b 3 in equation (2). Identifying the effect of the minimum wage in this manner guards against picking up trends in employer-provided health insurance that affect all workers (in small firms) and are therefore unlikely to be caused by the minimum wage but are correlated with minimum wage changes. For large firms, governed by the non-discrimination law, minimum wage changes can directly impact the benefit provision for high-skilled workers and this interpretation is invalid. For these firms any reduction in health insurance should be similar across skill levels and therefore the difference between the coefficients b 1 and b 3 should be statistically insignificant. The Data The data for this article are drawn from the Annual Demographic Survey of the CPS, a national survey conducted by the Census Bureau that gathers information on health insurance, labor force participation, and other socioeconomic variables (King et al. 2009). Appended to the CPS records is information on the state minimum wage as well as information on the state unemployment rate drawn from the Bureau of Labor Statistics Current Local Area Unemployment Statistics. Since the CPS health insurance questions concern the previous year s employment, each year s minimum wage as of January 1st is merged with the CPS survey in year t + 1. For instance, the 2000 state minimum wages are applied to the 2001 CPS responses (which ask respondents about insurance in 2000). 10 To be included in the sample, the respondent must be of working age (18 64), currently working with reported earnings above zero and 10 There is some debate over the reference year for the health insurance questions in the CPS (Currie and Yelowitz 1999). This article treats them as if they refer to the prior year s health insurance status. These models are equivalent to assuming that respondents provide information about current year health insurance but that firms are only able to respond to increases in the minimum wage with a lag. Results are robust (but lower in magnitude) to treating respondents as if their answers refer to the current calendar year.

8 248 / MINDY S. MARKS not be self-employed, a student, or in the public sector. 11 Respondents from Hawaii and Nevada are excluded because Hawaii mandates employer-provided health insurance and Nevada allows a lower minimum wage if the firm offers health insurance. Analysis is conducted to focus on two separate time periods and where there were numerous state-level minimum wage changes and complete information about health insurance coverage. 12 Lee (1999), Orrenius and Zavodny (2008), Royalty (2000), and Simon and Kaestner (2004) each provide evidence that the minimum wage was binding for a subset of workers during these time periods. In addition, there was considerable variation in the state minimum wages during these years. Table 1 shows the nominal minimum wage in each state that had a state minimum wage above the federal minimum wage at some point in the sample period. In all instances the higher minimum wage (state or federal) is used. The number of states with a minimum wage above the federal minimum wage ranges from 3 to 14 for the analysis years. The set of states that alter their minimum wage is not identical across sample periods. For instance, Delaware, Illinois, and New York had minimum wages equal to the federal minimum wage in the early period, but had state minimum wages above the federal minimum wage in the later period. On the other hand, Iowa, Minnesota, New Hampshire, New Jersey, Pennsylvania, and Wisconsin had minimum wage changes in the early period but adhered to the federal minimum wage in the later period. Thus, these states will appear as control states in the later time period but as treatment states in the early time period. The key health insurance questions in the CPS are as follows: Was [the employee] covered by a private health insurance plan in [the employee s] own name? If and only if the respondent answered affirmatively to this question, 11 The non-discrimination law only applies to full-time workers. One potential adjustment mechanism to an increase in the minimum wage is to shift low-skilled workers to part-time status where benefits can be more easily altered. Carrington, McCue, and Pierce (2002) and Wolaver, McBride, and Wolfe (1997) find evidence consistent with firms using part-time work to skirt non-discrimination provisions. While the desire to reduce expenditures on benefits may cause an increase in the use of part-time labor following an increase in the minimum wage, the direction of the change is theoretically ambiguous. If part-time and full-time workers are substitutes in production (but wages for part-time workers are lower than wages for full-time workers) then a minimum wage increase will raise the relative price of part-time work, and part-time work should decline (McKee and West 1984). Results, not shown, suggest that state-level changes in the minimum wage are associated with around a 2 percentage point decrease in the likelihood of part-time work for lowskilled workers in both large and small firms. Since part-time work is potentially endogenous the author has included all workers in the sample and a control for part-time status. 12 In 1994 only Washington increased its minimum wage. There were no state minimum wage changes in In 1996 only Massachusetts and Vermont increased their minimum wage by 50 and 25 cents, respectively. In addition to this, in 1994, the CPS did not collect information about what share of the health insurance was paid for by the employer.

9 Minimum Wages, Health Insurance, and the Non-discrimination Law / 249 TABLE 1 STATE MINIMUM WAGES Average minimum wage median wage Early Late Federal minimum wage Alaska California Connecticut Delaware Illinois Iowa Maine Massachusetts Minnesota New Hampshire New Jersey New York Oregon Pennsylvania Rhode Island Vermont Washington Wisconsin All Number above federal minimum wage NOTE: All entries reflect the minimum wage as of January 1st of that year. All entries are equal to the federal minimum wage unless otherwise noted. SOURCES: State Labor Laws, Monthly Labor Review (Nelson various years), March CPS.

10 250 / MINDY S. MARKS TABLE 2 MEANS (AND STANDARD DEVIATIONS) BY MINIMUM WAGE Entire sample State-years above federal minimum wage State-years at federal minimum wage Real minimum wage 2.97 (0.279) 3.41 (0.267) 2.88 (0.165) Minimum wage average hourly wage (0.069) (0.075) (0.057) Percent with health insurance 61.6% (0.486) 60.9% (0.488) 61.7% (0.486) Percent with health insurance (high school dropouts) 41.5% (0.492) 38.5% (0.487) 42.3% (0.494) Percent with health insurance fully paid by employer 16.5% (0.371) 17.6% (0.381) 16.2% (0.369) Percent with pension plan 46.3% (0.499) 44.8% (0.497) 46.7% (0.499) State unemployment rate 5.48% (1.407) 5.55% (1.196) 5.47% (1.450) Age (11.321) (11.27) (11.33) Wage 21,990 (21,373) 23,212 (23,155) 21,716 (20,942) Percent with public insurance 5.1% (0.220) 5.8% (0.233) 5.0% (0.217) Percent married 59.8% (0.490) 57.2% (0.495) 60.3% (0.489) Percent with children 48.4% (0.500) 47.1% (0.499) 48.7% (0.500) Percent African American 10.8% (0.310) 5.5% (0.228) 11.9% (0.324) Percent female 45.8% (0.498) 45.1% (0.498) 46.0% (0.498) Percent high school dropout 12.8% (0.334) 14.2% (0.349) 12.4% (0.330) Percent some college or higher 51.1% (0.500) 54.9% (0.498) 50.2% (0.500) employees 15.4% (0.361) 16.3% (0.369) 15.2% (0.359) employees 15.9% (0.365) 16.0% (0.367) 15.9% (0.365) employees 6.1% (0.239) 5.9% (0.235) 6.1% (0.240) Over 1000 employees 37.8% (0.485) 35.4% (0.478) 38.4% (0.486) Percent working part time 11.8% (0.323) 12.7% (0.333) 11.6% (0.320) Observations 690, , ,640 NOTES: All monetary values are expressed in real ( = 100) terms. The samples are weighted using population weights. Public insurance means the workers received Medicaid, Medicare, or Champus. they were asked the follow-up question: Was this health insurance plan offered through [the employee s] current or former employer or union? Thus a positive response to both questions implies the worker has health insurance from her employer in her own name (as opposed to being covered by a spousal plan). The nesting of the questions means it is impossible to distinguish if a negative response to the first question implies the firm did not make health insurance available to that employee or the firm offers health insurance but the employee declined the firm s coverage. 13 Table 2 contains summary statistics for the entire sample (column 2), workers in state-years that have a minimum wage above the federal minimum wage (column 3), and workers in state-years where the minimum wage equals the federal minimum wage (column 4). State-years with minimum wages greater 13 There are datasets that allow one to distinguish between these two cases. For instance, the Employment Benefit Survey conducted periodically by the CPS contains this information. Unfortunately, this dataset is unavailable for the years under study.

11 Minimum Wages, Health Insurance, and the Non-discrimination Law / 251 than the federal minimum wage account for 20.1 percent of the sample. The coverage of employer-provided health insurance is similar across the two subsamples (60.9 percent vs percent). This would appear to be inconsistent with the argument that a higher minimum wage decreases the likelihood of receiving employer-provided health insurance. However, high school dropouts are significantly less likely to have employer-provided health insurance in high minimum wage state-years (38.5 percent vs percent). Thus, there is preliminary support for the hypothesis that firms respond to higher minimum wages by reducing the availability or generosity of health insurance. It is clear that workers in states with high minimum wages are not identical to their federal minimum wage counterparts. States with higher minimum wages also tend to have higher average wages, fewer married individuals, fewer minorities, more educated workers, smaller firms, and more part-time workers. All of these factors, except firm size and part-time status, are correlated with higher rates of employer-provided health insurance. Empirical Results Employer-Provided Health Insurance Table 3 shows the results from estimating equation (1) for the two time periods. Since the magnitude of raw Probit coefficients are not interpretable, all tables present marginal effects for the continuous variables and discrete changes in predicted probability for the dummy variables holding all other variables at their means. There is little evidence that state-level increases in the minimum wage are associated with a reduced likelihood that the average worker will receive employer-provided health insurance. In both time periods (Panels A and B) and for both small and large firms the estimated impact of minimum wage changes are small and statistically insignificant. However, this specification assumes a homogenous response to an increased minimum wage across skill levels. As shown in column 1, the receipt of employer-provided health insurance is much more common for workers who work in large firms. In both time periods a worker working for a firm with over 1000 employers has almost a 30 percent point increase in the predicted probability of receiving employer-provided health insurance relative to his counterpart who works for a firm with fewer than 25 employees. The year fixed effects (not shown) indicate that the likelihood of receiving employer-provided health insurance declined over both sample periods. The relationship between education and the likelihood of receiving employer-provided health insurance varies noticeably by firm size. As shown in Panel A: column 3, in small firms, which have more freedom to tailor health insurance plans to their employees, education is a strong predictor of receipt of health insurance. In the early time period, moving from high school

12 252 / MINDY S. MARKS TABLE 3 ESTIMATES OF THE EFFECTS OF MINIMUM WAGES ON EMPLOYER-PROVIDED HEALTH INSURANCE All firms Large firms Small firms Panel A: Minimum wage )0.006 (0.015) )0.018 (0.013) (0.016) High school (0.018)** (0.012)** (0.022)** Some college (0.018)** (0.011)** (0.025)** College (0.014)** (0.009)** (0.023)** Beyond college (0.015)** (0.009)** (0.020)** employees (0.004)** (0.004)** employees (0.003)** (0.004)** employees (0.004)** >1000 employees (0.004)** (0.005)** Observations 261, , ,365 Panel B: Minimum wage )0.001 (0.005) (0.011) )0.006 (0.010) High school (0.024)** (0.026)** (0.029)** Some college (0.025)** (0.024)** (0.031)** College (0.022)** (0.020)** (0.029)** Beyond college (0.019)** (0.016)** (0.024)** employees (0.004)** (0.005)** employees (0.005)** (0.007)** employees (0.005)** >1000 employees (0.006)** (0.004)** Observations 428, , ,890 *Statistically significant at the 0.05 level; **at the 0.01 level. Estimates were obtained using Probit model and standard errors have been corrected for clustering at the state level. Regression models include the following additional variables: age; age squared; indicators for race, part-time status, seven controls for family structure, forty-five industry controls, state unemployment rates, state and year fixed effects, and year times education time trends. Results are weighted to reflect population averages. Large firm means more than 500 employees. dropout (the omitted category) to having an advanced degree increases the likelihood of receiving employer-provided health insurance by 24 percentage points. For large firms (column 2) moving from the lowest education category to the highest education category increases the likelihood of receiving employer-provided health insurance by only 11 percentage points. The fact that in both periods, additional educational attainment implies a larger increase in the receipt of health insurance in small firms than in large firms is consistent with non-discrimination laws placing additional restrictions on the ability of large firms to offer workers with different skill levels different health insurance offerings The non-discrimination law does not imply complete equality in benefit provision. Even if firms charge a common premium for health insurance, low-skilled workers may be less willing to pay the premium. In addition, firms may impose waiting periods for coverage that would again have a greater impact on low-skilled workers due to higher turnover.

13 Minimum Wages, Health Insurance, and the Non-discrimination Law / 253 Table 4 reports the results from estimating models on receipt of employerprovided health insurance where the impact of the minimum wage on health insurance is allowed to vary by skill level. Panel A presents results from estimating equation (2) for the years For the full sample of firms (column 1), the minimum wage variable is negative and statistically significant for workers in the lowest skill level only. The coefficient estimates suggest that a $1.00 increase in the minimum wage would reduce the probability of receiving employer-provided health insurance by 5.1 percentage points for the average high school dropout. Minimum wage changes appear to have no impact on the receipt of health insurance for workers in the other skill categories. As discussed earlier, we should expect the impact of minimum wage changes to differ by coverage under the non-discrimination law. Specifically, for large firms (covered by the non-discrimination law), whatever changes the firm makes to its health insurance plans must by law affect all employees. In contrast, small firms (where the non-discrimination law does not apply) have the freedom to focus the reduction in benefits on the group whose compensation costs are most affected by a minimum wage increase. We can investigate TABLE 4 ESTIMATES OF THE EFFECTS OF MINIMUM WAGES ON EMPLOYER-PROVIDED HEALTH INSURANCE BY SKILL LEVEL All firms Large firms Small firms Panel A: Minimum wage* no high school )0.051 (0.017)** )0.033 (0.025) )0.044 (0.022)* Minimum wage* high school )0.001 (0.013) )0.004 (0.016) (0.017) Minimum wage* beyond high school (0.012) )0.025 (0.015) (0.017) High school (0.058) (0.081) (0.075) Some college (0.057) (0.065) )0.027 (0.075) College (0.053) (0.054)** (0.075) Beyond college (0.052) (0.047)** (0.075) Observations 261, , ,365 Panel B: Minimum wage* no high school )0.030 (0.011)** )0.019 (0.017) )0.034 (0.014)* Minimum wage* high school )0.007 (0.009) (0.012) )0.016 (0.012) Minimum wage* beyond high school (0.008) (0.010) (0.011) High school (0.034)* (0.051) (0.043)* Some college (0.031)** (0.046) (0.041)* College (0.029)** (0.041)** (0.040)** Beyond college (0.027)** (0.035)** (0.038)** Observations 428, , ,890 *Statistically significant at the 0.05 level; **at the 0.01 level. Estimates were obtained using Probit model and standard errors have been corrected for clustering at the state level. All regressions include the control variables listed in Table 3. Results are weighted to reflect population averages. Large firm means more than 500 employees.

14 254 / MINDY S. MARKS these hypotheses by estimating equation (2) separately for large and small firms. 15 Column 2 contains the results for the subsample of large firms. Coefficient estimates suggest a $1.00 increase in the minimum wage causes a 3.3 percentage point reduction for high school dropouts and a 2.5 percentage point reduction for workers with some post-secondary education. These estimates are not statistically different from each other or from zero. These results suggest that a reduction in health insurance for all employees is too costly a margin of adjustment to minimum wage changes for large firms covered under non-discrimination laws. In column 3 the sample is restricted to workers in firms with fewer than 500 employees. For these firms, minimum wage changes disproportionately impact low-skilled workers. A $1.00 increase in the minimum wage reduces the receipt of employer-provided health insurance by 4.4 percentage points for high school dropouts and is associated with a 3.1 percentage point increase in coverage for workers with some post-secondary education. The estimated impact for the lowest skilled workers is significantly different than that for the highest skilled worker at the 5 percent level. For those firms who can discriminate in their health insurance provisions, low-wage workers experience a reduction in health insurance following minimum wage changes. Panel B repeats the analysis for a later time period. Again, the results for all firms suggest that low-skilled workers are less likely to receive health insurance following an increase in the minimum wage. In large firms the likelihood of receiving health insurance is unchanged by increases in the state minimum wage. The significant negative relationship between higher state minimum wages and lower receipt of employer-provided health insurance appears only for low-skilled workers in small firms who are not subject to the nondiscrimination laws. Since the non-discrimination law requires health insurance to be altered at the firm level, firms whose workforce is predominantly low-wage workers should find it more attractive to adjust their health insurance plans than firms that employ a limited number of low-wage workers. Even for firms not covered by the non-discrimination law, transaction costs may make altering health insurance a more attractive option for firms with a large share of low-skilled workers. To investigate this hypothesis the sample was restricted to workers in industries where at least 15 percent of the industry workforce consists of high 15 It would not be appropriate to re-estimate equation (2) and include as additional variables the minimum wage variables interacted with firm size dummy variables. This specification would imply that the impact of additional education attainment is the same in large and small firms. The results in Table 3 demonstrate that the impact of education attainment (and other control variables) on the receipt of health insurance clearly differs by firm size.

15 Minimum Wages, Health Insurance, and the Non-discrimination Law / 255 TABLE 5 ESTIMATES OF THE EFFECTS OF MINIMUM WAGE CHANGES ON EMPLOYER-PROVIDED HEALTH INSURANCE IN LOW-SKILLED INDUSTRIES All firms Large firms Small firms Panel A: Minimum wage* no high school )0.083 (0.024)** )0.052 (0.038) )0.076 (0.028)** Minimum wage* high school )0.003 (0.020) (0.029) )0.012 (0.024) Minimum wage* beyond high school (0.022)* (0.031) (0.028)* High school )0.062 (0.080) )0.009 (0.126) )0.037 (0.094) Some college )0.219 (0.084)** )0.036 (0.137) )0.245 (0.087)** College )0.152 (0.086) (0.126) )0.190 (0.087)* Beyond college )0.171 (0.086)* (0.130) )0.204 (0.082)* Observations 115,117 43,916 71,201 Panel B: Minimum wage* no high school )0.049 (0.021)* (0.039) )0.062 (0.023)** Minimum Wage* high school )0.009 (0.019) (0.034) )0.020 (0.021) Minimum wage* beyond high school (0.020) (0.033) (0.022) High school (0.063) (0.112) (0.069) Some college (0.064) (0.091) (0.071) College (0.063) (0.070)** (0.072) Beyond college (0.064) (0.060)** (0.075) Observations 89,509 23,592 65,917 *Statistically significant at the 0.05 level; **at the 0.01 level. Estimates were obtained using Probit model and standard errors have been corrected for clustering at the state level. See notes in Table 3 for a list of control variables. Results are weighted to reflect population averages. Large firm implies more than 500 employees. Low-skilled industries are those where at least 15 percent of the workforce is not a high school graduate. school dropouts. 16 This produces a sample where 21 percent of the workforce is a high school dropout. Table 5 presents the relationship between the minimum wage and the receipt of employer-provided health insurance for workers in predominantly low-skilled industries. These results parallel the results in Table 4. In large firms, covered by the non-discrimination law, the relationship between the minimum wage and health insurance is statistically insignificant in both time periods for all workers. In firms exempt from the non-discrimination law, low-skilled workers are the only group whose receipt of employerprovided health insurance is negatively affected by an increase in the minimum wage. However, the reduction in the likelihood of receiving employer-provided health insurance is consistently larger when the sample is restricted to lowskilled industries. For instance, Panel B: column 3 shows that the average low-skilled worker in a low-skilled industry is 6.2 percentage points less likely to receive employer-provided health insurance following a $1.00 increase in the minimum wage. The corresponding estimate for the average low-skilled 16 Results are robust to an alternative cut-off of 20 percent.

16 256 / MINDY S. MARKS worker in all industries (Table 3: Panel B: column 3) is a 3.4 percentage point reduction. In results (not shown) that focus on the subsample of high-skilled industries (where only 8 percent of the sample is a high school dropout), the minimum wage variable is insignificant at the 0.05 level in all specifications. Altering the health insurance of employees is too costly a margin of adjustment in industries without a significant low-wage population. The fact that the minimum wage variables are insignificant in these specifications suggests that there are no unmeasured factors that are correlated with minimum wage changes and receipt of employer-provided health insurance. The CPS also contains information on the share of the health insurance plan paid by the employees (all, part, or none). One mechanism for reducing expenditures on employees following minimum wage increases is to require workers to directly bear part (or all) of the cost of health insurance. In Table 6 the dependent variable is an indicator variable that equals one if the worker receives a health insurance plan with no employee contribution from her firm TABLE 6 ESTIMATES OF THE EFFECTS OF MINIMUM WAGES ON CONTRIBUTION FREE EMPLOYER-PROVIDED HEALTH INSURANCE All firms Large firms Small firms Panel A: Minimum wage* no high school )0.049 (0.014)** (0.026) )0.062 (0.016)** Minimum wage* high school (0.009) )0.003 (0.016) (0.012) Minimum wage* beyond high school (0.009) (0.014) (0.011) High school )0.084 (0.039)* (0.077) )0.115 (0.045)* Some college )0.075 (0.034)* (0.077) )0.083 (0.039)* College )0.065 (0.034) (0.079) )0.063 (0.039) Beyond college )0.054 (0.033) (0.082) )0.047 (0.040) Observations 261, , ,365 Panel B: Minimum wage* no high school )0.025 (0.008)** )0.020 (0.013) )0.020 (0.009)* Minimum wage* high school )0.010 (0.006) (0.008) )0.016 (0.007)* Minimum wage* beyond high school (0.005) (0.007) )0.003 (0.006) High school (0.033) )0.012 (0.053) (0.043) Some college (0.030) )0.014 (0.050) (0.042) College (0.032) )0.018 (0.048) (0.047)* Beyond college (0.035) )0.001 (0.051) (0.054)** Observations 428, , ,890 *Statistically significant at the 0.05 level; **at the 0.01 level. Estimates were obtained using Probit model and standard errors have been corrected for clustering at the state level. All regressions include the control variables listed in Table 3. Results are weighted to reflect population averages. Large firm implies more than 500 employees.

17 Minimum Wages, Health Insurance, and the Non-discrimination Law / 257 and zero otherwise. 17 The results from this analysis are similar to those obtained when the dependent variable is simply the receipt of health insurance. In firms covered by the non-discrimination laws, changes in the state minimum wage have no impact on likelihood of receiving generous health insurance coverage in either period. In small firms that have the flexibility to require increased contributions from low-skilled workers, the likelihood of having a health insurance plan without an employee contribution is reduced for only low-skilled workers. For instance, the final column in Panel A implies that a $1.00 increase in the minimum wage has no impact on the generosity of health insurance for high-skilled workers but reduces the likelihood of receiving no cost health insurance by 6.2 percentage points for high school dropouts in small firms. The results in Panel B are weaker and suggest that in the later time period firms were only slightly less likely to reduce the generosity of the insurance offered to their low-skilled employees. Robustness Checks The analysis thus far has been predicated on the assumption that changes in the minimum wage are uncorrelated with unmeasured factors that vary by state-year and influence the receipt of fringe benefits. 18 There could be unmeasured state-year factors, like economic conditions, Medicaid AFDC eligibility, or state policies, which may be correlated with state minimum wage increase that drive down the generosity of the benefit package being offered by small firms but not their large counterparts. To correct for this potential correlation, a second minimum wage measure was created. This new measure is the ratio of the minimum wage in each state in a given year to the median wage for workers with a high school degree or less in that state in that year (relative minimum wage). 19 This variable captures 17 Information about generosity of workplace health insurance is only provided for individuals that accept health insurance from their employers. Thus, the appropriate sample is all workers (as opposed to the restricted sample of workers with employer-provided health insurance). It is possible that in response to an increased minimum wage, employers reduce the generosity of health insurance and as result some workers now reject their firm s offer of insurance. This channel would be omitted if the sample were restricted to only those with health insurance from their employers. 18 There is a small literature on the political economy of state minimum wage laws. This literature concludes that ideological factors are the dominant force behind state minimum wage laws (Waltman and Pittman 2002). 19 Median wage was calculated from a weighted average of the median hourly wage for full-time and part-time workers in each state assuming full-time workers work 2000 hours a year (40 hours worked per week times 50 weeks worked per year) and part-time workers work 1000 hours a year (20 hours per week for 50 weeks).

18 258 / MINDY S. MARKS state-year variation in the bindingness of the minimum wage and can be seen in Table 1. The closer the measure is to one the closer the minimum wage is to the state s median wage and it is more likely that employers with low-skilled workers will change their behavior in response to changes in the minimum wage. The set of states with the highest minimum wage differs from the set of states with the most binding minimum wage. The six states with the most binding minimum wages are California, Oregon, Mississippi, New Mexico, Texas, and Arkansas. Of these only California and Oregon have a minimum wage greater than the federal minimum wage at some point in the sample period. Replacing the original minimum wage variable with this relative minimum wage variable is equivalent to estimating the main specification with a different set of control states (those states with relatively non-binding minimum wages). It is unlikely that whatever omitted factors are correlated with living in a high minimum wage state are also correlated with living in a state whose minimum wage has become more binding. As a robustness check the main model (equation (2)) was re-estimated with this new minimum wage variable for the sub-sample of low-wage industries. 20 The coefficients on the key variables from this model can be found in Table 7. The same patterns of findings emerge under this specification of the state minimum wage. For small firms, exempt from the non-discrimination law, as the minimum wage becomes more binding, low-skill workers experience a decrease in their likelihood of receiving employer-provided health insurance relative to their higher-skilled counterparts. This is true in both time periods under study. In contrast, when the relative minimum wage variable is used, the health insurance of workers in large firms governed by the non-discrimination law is unaffected when the minimum wage becomes more binding. 21 That the results are robust to an alternative specification of the minimum wage suggests that there are no unmeasured factors that are correlated with state-level minimum wage changes and lowered receipt of fringe benefits in small firms. A final robustness check investigates the receipt of employer-provided pension benefits. A weaker version of the non-discrimination law covers pension plans but this law applies equally to small and large firms (Carrington, McCue, and Pierce 2002). Thus, unlike health insurance, small firms are constrained to alter the rules governing inclusion in their pension plans in a way that should 20 There is limited state-year variation in the bindingness of the minimum wage thus results are presented for the subsample of low-wage industries where the minimum wage is most likely to have an impact. Results for the full sample are similar in pattern but smaller in effect. In both periods there is a statistically significant difference in the availability of health insurance between low- and high-skilled employees in small firms. 21 Results (not shown) suggest that workers in small firms also receive less generous health insurance, as the minimum wage becomes more binding.

19 Minimum Wages, Health Insurance, and the Non-discrimination Law / 259 TABLE 7 ESTIMATES OF THE EFFECTS OF MINIMUM WAGES ON EMPLOYER-PROVIDED HEALTH INSURANCE IN LOW-SKILLED INDUSTRIES CONTROLLING FOR MEDIAN HOURLY WAGE All firms Large firms Small firms Panel A: Relative minimum wage* no high school )0.327 (0.126)** )0.119 (0.169) )0.349 (0.123)** Relative minimum wage* high school )0.005 (0.109) (0.120) )0.060 (0.128) Relative minimum wage* beyond high school (0.126)* (0.129) (0.155)* Observations 115,117 43,916 71,201 Panel B: Relative minimum wage* no high school )0.419 (0.103)** (0.184) )0.526 (0.103)** Relative minimum wage* high school )0.176 (0.103) (0.159) )0.258 (0.103)* Relative minimum wage* beyond high school (0.091) (0.184) )0.009 (0.103) Observations 89,509 23,592 65,917 *Statistically significant at the 0.05 level; **at the 0.01 level. Estimates were obtained using Probit model and standard errors have been corrected for clustering at the state level. All regressions include the control variables listed in Table 3. Results are weighted to reflect population averages. not discriminate against low-skilled workers. The results from estimating equation (2) with a dichotomous variable that reflects inclusion in the employerprovided pension plan as the outcome variable can be found in Table 8. Overall these results support a binding non-discrimination law in the provision of pension benefits. In small firms, both high-skilled and low-skilled workers experience a 3 percentage point decrease in likelihood of being included in their firms pension plan in response to a $1.00 increase in the minimum wage in the early period (Panel A: column 3). The corresponding reduction in likelihood of being included in the firm s pension plan is larger for large firms (Panel A: column 2) but, again, there is not a statistically significant difference across the highest and lowest skill category. In Panel B there appears to be no systematic relationship between higher state-level minimum wages and inclusion in the firm s pension plan during the later sample periods. Unlike health insurance, pensions which are governed by a non-discrimination law for small firms show a similar change in benefit provision for both low- and high-skilled workers following an increase in the minimum wage. Conclusion This article argues that rising state minimum wages create incentives for firms to substitute between wage and non-wage benefits. Indeed, the fact that employers may respond to increases in the minimum wage by decreasing the availability of non-wage benefits may explain why empirical researchers find it

20 260 / MINDY S. MARKS TABLE 8 ESTIMATES OF THE EFFECTS OF MINIMUM WAGES ON EMPLOYER-PROVIDED PENSION PLAN BY SKILL LEVEL All firms Large firms Small firms Panel A: Minimum wage* no high school )0.064 (0.029)* )0.091 (0.026)** )0.030 (0.030) Minimum wage* high school (0.014) (0.014) )0.002 (0.019) Minimum wage* beyond high school )0.036 (0.012)** )0.037 (0.017)* )0.030 (0.014)* High school )0.066 (0.094) )0.168 (0.069)* (0.101) Some college (0.093) )0.034 (0.075) (0.098) College (0.098) (0.073) (0.106) Beyond college (0.100) )0.006 (0.074) (0.117) Observations 261, , ,365 Panel B: Minimum wage* no high school )0.026 (0.030) )0.054 (0.036) )0.000 (0.023) Minimum wage* high school (0.011) )0.018 (0.012) (0.011)* Minimum wage* beyond high school (0.010) )0.005 (0.010) (0.009) High school (0.094) (0.129) (0.068) Some college (0.101) )0.005 (0.133) (0.073) College (0.099) (0.127) (0.075)* Beyond college (0.097) (0.123) (0.077)** Observations 428, , ,890 *Statistically significant at the 0.05 level; **at the 0.01 level. Estimates were obtained using Probit model and standard errors have been corrected for clustering at the state level. All regressions include the control variables listed in Table 3. Results are weighted to reflect population averages. Large firm implies more than 500 employees. difficult to detect an economically significant relationship between the minimum wage and employment. Using data from the and waves of the March CPS, this article demonstrates that state minimum wages influence the number of individuals who receive employer-provided health insurance but the impact depends on coverage under the non-discrimination law. For firms subject to the non-discrimination law, it appears that the non-discrimination law is binding. Large firms do not reduce the availability of health insurance following a minimum wage change. For uncovered small firms only low-skilled workers experience a significant reduction in employer-provided health insurance. This finding is in contrast to research that does not focus on the non-discrimination law and concludes that minimum wages have no effect on the provision of health insurance. In addition, it appears that industry composition matters. Workers in predominantly low-skilled industries experience the largest declines in the likelihood of receiving employer-provided health insurance following a minimum wage increase, while the minimum wage has no impact on health insurance for workers in high-skilled industries.