Health insurance and job creation by the self-employed
Accepted: 17 November 2008 / Published online: 11 December 2008
Ó Springer Science+Business Media, LLC. 2008
Abstract Health insurance is regulated at the state
level by the use of state-mandated health beneﬁts.
These are regulations issued by the state that mandate
minimum levels of certain beneﬁts as part of policies
offered, e.g., drug abuse and alcohol treatment ser-
vices, treatment for mental illnesses, etc. In this paper,
we evaluate the impact of state health insurance
mandates on job creation by small ﬁrms using data
from the Survey of Income and Program Participation
(SIPP) dataset for the period 1993–1995. Results from
an ordered probit regression indicate that, the larger the
number of mandates in a state, the lower the proba-
bility that a self-employed person will be a signiﬁcant
employment generator. These results hold when we
consider both the sum of mandates as well as a cost-
weighted measure of the most expensive mandates.
Keywords Health mandates Á Job creation Á
Entrepreneurship Á Empirical analysis
JEL Classiﬁcations L26
Surprisingly, despite all the attention devoted to the
job creation attributes of small businesses, there has
been an insigniﬁcant amount of research on the hiring
decisions of entrepreneurs.
What determines an
entrepreneur’s decision to employ more workers and
expand the size of the business? Why do the bulk of
small businesses employ fewer than 9 people, and
why are more than 50% of small businesses sole-
proprietorships with no employees?
This paper is an
attempt to address this issue empirically. Speciﬁcally,
it highlights the role of health care regulation—health
insurance mandates—on a small ﬁrm’s decision to
increase employment and expand the ﬁrm.
While there is general agreement that health
insurance mandates affect small ﬁrms disproportion-
ately more, there are conﬂicting views about whether
they distort ﬁrm behavior in terms of ﬁrm’s decision to
offer insurance coverage to workers, reduce coverage,
and their impact on small ﬁrm premium costs.
A. Mathur (&)
American Enterprise Institute, Washington, DC, USA
For instance, Davis et al. (1996) ﬁnd that the rate of gross job
creation in US manufacturing is nearly double for ﬁrms with
fewer than 100 employees as compared with ﬁrms with more
than 25,000 employees.
According to Census, ‘‘Nonemployers account for roughly
3% of business activity [in terms of sales or receipts]. At the
same time nonemployers account for nearly three-quarters of
all businesses. Most nonemployer businesses are very small,
and many are not the primary source of income for their
owners.’’ See the US Census Bureau, Nonemployer Statistics
for more detailed information.
Overall, in 2002, there were approximately 2.7 million ﬁrms
with 0–4 employees and 1 million ﬁrms with 5–9 employees,
out of a total of approximately 5.7 million ﬁrms. http://www.
Small Bus Econ (2010) 35:299–317