Generous Health Insurance Makes Employees Stay

The idea of “job lock” is well established in the academic literature- employees leave firms that don’t offer health insurance more often than they leave firms that do. But this literature has always measured employer-provided health insurance as a simple binary: either they offer it or they don’t. In fact employers vary widely in the generosity of their plans, both in the quality of the insurance and in how much of the cost is paid by the employer. Some employers pay all of the premiums, some pay none, and most pay part:

Data are from the Current Population Survey, which uses top-coding to protect privacy (values greater than 9997 are reported as 9997)

In an article published last week in Applied Economics Letters, my colleague Michael Mathes and I combine two supplements of the Current Population Survey to test whether employers who contribute more towards health insurance see their employees stay longer. Perhaps not surprisingly, we find that they do. We run lots of regressions to establish this, but this simple fit plot tells the story best:

What we found more surprising was the magnitude of this effect: a thousand dollar increase in employer contributions to health insurance is associated with at least 83 additional days of job tenure, compared to less than 10 additional days for a thousand dollar increase in wages. We conclude that:

For employers trying to increase retention, increasing contributions to health insurance appears to lengthen employee tenure far more than increasing wages by a similar amount.

Why the difference? Probably employees rationally valuing $1000 in untaxed contributions to health insurance above $1000 in taxable wages. Why don’t employers shift more compensation away from wages and toward health insurance, given that employees seem to prefer it? Here I’m less sure, and they could simply be making a mistake, but one possibility is that they worry about increasing their costs as couples whose employers both offer insurance choose the more generous one for a family plan. Another is that while generous health insurance plans are better for retention, higher wages could be better for attracting new employees, who tend to be younger and for whom the salary number could be more salient.