Wednesday, October 5, 2011

Mandatory health insurance and informality

Insurance suffers chronically from the problem that only bad risks want to get insured, which makes the cost of insurance prohibitive and the insurance market often collapses while its presence would be a clear welfare improvement. A workaround is to force everyone to participate, thereby avoiding that good risks could weasle out. This is the principle behind health insurance mandates in most of the Western world, and it is part of the so-called Obamacare. But such mandates are difficult when there is a large informal economy, as it makes difficult tracking people, especially if access to government services, paying taxes, etc. are the way the mandate is enforced. Could in fact a mandate increase informality?

Reyes Aterido, Mary Hallward-Driemeier and Carmen Pagés look at Mexico and ask a somewhat different question, but it is still informative: Does the provision of health insurance to those without social security (mostly informals) increase informality? They find the formal sector decreased by 0.4 to 0.7% points because fewer people join it. It is not surprising that fewer people see the need to be cover by social security and thus declared their jobs, yet I find it interesting that the effect on formality is so low in a country where it is so easy to disappears from the books. Transpose that to, say, the US, where having a job is currently pretty much a requirement for health insurance coverage. Would then a health insurance mandate lower the incentive to have job? Most likely yes, but seeing how small the impact was in Mexico and considering that the lower elasticity of the formal/informal margin in the States, that effect is very likely to be very small.


John said...

How is insurance welfare increasing? It is a transfer (either ex-post or ex-ante) from the healthy to the sick.
Forcing the healthy to participate makes this transfer payment involuntary.
Since transfer payments are usually not considered welfare increasing (unless one invokes diminishing returns) it seems that the issue of welfare is irrelevant.
Of course, there are other reasons to support insurance but welfare is not one of them

Economic Logician said...

Insurance is ex-ante welfare improving for any risk averse person if it is actuarially fair. With sufficient risk aversion, you can deviate quite strongly from actuarial fairness.

But beyond this, a young and healthy person is not always going to be young and healthy. And health shocks are not small shocks that are easy to self-insure against. Witness the staggering number of personal banruptcies in the US solely due to health shocks.