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Short Takes

Q: How would a minimum wage increase affect health insurance coverage?

The Federal minimum wage is currently $5.15 an hour, a level it's been at for the past decade. But that is about to change. More than 20 states have increased the minimum wage in the absence of action at the federal level. And, after years of debate, the new Congress is set to raise the minimum wage to $7.25. Such action may affect health insurance coverage for workers earning the lowest wages, with the effect depending in part on whether or not they currently have health insurance from their jobs.

Labor costs are made up of wages, insurance, and other fringe benefits. If wages are forced to go up, employers may have to reduce labor costs in other ways. Those with work-based health insurance could very well see their employers dropping or trimming health insurance benefits to absorb part of the cost of the minimum wage hike. A minimum-wage worker in a large firm, for example, might find his hours reduced so that he would no longer be eligible for the firm's health insurance benefits. Or, his job could be "outsourced" to a contractor so the employer could avoid health insurance costs altogether.

Most minimum-wage workers do not have health insurance from their job. Low-wage workers without coverage face a greater risk of losing their job if employers can't offset the added labor costs in other ways. The impact of the job loss on coverage will depend on whether the worker gets another job, whether the new job comes with coverage, and whether a loss of income makes the worker eligible for public coverage. For those who keep their job, a minimum wage increase might result in some workers using the extra income to obtain coverage. If wages for a full-time worker increase by $2 per hour, their gross income will rise by $4,000, perhaps enough to buy an individual health insurance policy. While some such workers may not use the added income to buy health insurance, as they may have other more pressing priorities for that money, some may opt to purchase coverage.

Bottom Line: The effect of minimum wage increases on coverage depends partly on whether low-wage workers already have coverage and on how workers and their employers respond to the change.

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Funded by The Robert Wood Johnson Foundation, ERIU is a five-year program shedding new light on the causes and consequences of lack of coverage, and the crucial role that health insurance plays in shaping the U.S. labor market.