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Eliminating Health Care 'Job Lock' Will Generate Few Jobs

For the past several months I've talked to a lot of reporters about the impact of different aspects of health reform on the small business sector. One of the issues that has come up repeatedly is "job lock"—the inability of people to start businesses because it would mean that they would have to give up their employer-sponsored health insurance.

Many economists, myself included believe that job lock is real and that providing universal health coverage will increase the number of people who start businesses.

Because startups create jobs, this means that the health reform bills would create some jobs by reducing job lock. But, how many jobs will be created?

An article in MarketWatch quoted Jonathan Gruber, a professor of economics at MIT and adviser to the Health & Human Services Dept., as saying, "I don't think anyone can give you a credible estimate of that."

Perhaps he's right, but I'm going to try.

The starting point for this analysis is the gap in the tendency to start businesses among people who have and do not have employer-sponsored health insurance. Professor Robert Fairlie of the University of California Santa Cruz has a paper which shows that 3.2% of people who don't have employer-sponsored health insurance become self-employed every year, while only 2.2% of people with employer-provided health insurance do so. This suggests that, on average, 1% of the labor force with employer-sponsored health insurance would start businesses every year if we got rid of job lock.

entrepreneurs unleashed

The latest Small Business Economy an annual publication of The Office of Advocacy of the Small Business Administration explains that 60.7 million people have employer-sponsored health insurance from their employment (people covered by their spouses don't matter here because they don't face job lock). Therefore, 607,000 additional people per year would begin the entrepreneurial process if we eliminated health insurance job lock.

But not everyone who begins the process of starting a business manages to get one up and running. In fact, analysis of the Panel Study of Entrepreneurial Dynamics data by Paul Reynolds shows that a new business results from about one-third of startup efforts. So we will get about 200,000 new businesses if we can eliminate the job lock that comes from employer-sponsored health insurance.

This same research shows that only about 19% of new businesses employ someone other than the founder. Because people who leave jobs to start nonemployer businesses don't generate any net new jobs, it's the 38,000 additional new employer businesses that would be created if we eliminated the health insurance job lock that would be the source of any additional jobs.

job losses from health-care reform?

Data from the Small Business Administration's Web site reveals that the average number of employees in a new employer firm is 5.6. Therefore, we will create an estimated 213,000 annually if universal health care eliminates the problem of job lock.

While this may sound like a lot of jobs, it is not. In general, estimates of the number of jobs that will be lost because of health reform are larger. For instance, the Lewin Group, a health-care consulting firm owned by UnitedHealth Group (UNH), calculated that the original House bill would have destroyed 260,000 to 600,000 jobs and that "the estimate would increase a bit under the House bill as passed, because employer costs are a little higher." Researchers at RAND Corporation make similar estimates to those of the Lewin Group.

A study by the conservative Heritage Foundation estimates that "up to 382,000 workers could lose their jobs" from the proposed health reform, while a study commissioned for the liberal Economic Policy Institute and the Institute for America's Future predicts a range of 166,095 jobs lost to 55,365 jobs gained from health reform.

A report from the Congressional Budget Office cites two studies, one estimating a loss of 224,000 jobs and the other estimating a loss of 750,000 jobs from the health reform bills (although it points out that the latter study includes assumptions not in the current bills.)

In short, the current system of employer-sponsored health insurance creates job lock that keeps some entrepreneurs from starting businesses and creating jobs. But the size of that effect is smaller than most estimates of the number of jobs that health-care reform will destroy.

Scott Shane is the A. Malachi Mixon III Professor of Entrepreneurial Studies at Case Western Reserve University.

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