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Selection of the fittest:Employer coinsurance and worker selection

Jonas LagerströmÅbo Akademi & IFAU

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Introduction

• Reform in January 2005 in Sweden: Employers copayment, 15 % of full-time sick-pay.

• Intended to create incentives to rehabilitate and reduce health hazard, but may also cause selection of workers with good health.

• Do employers act on incentives to select the fittest in hiring and firing, when faced with a coinsurance payment?

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Outcome of interest

1. Hiring effect: Probability of becoming employed (if unemployed)

2. Firing effect: Probability of becoming unemployed (if employed)

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Hiring effect: Sampling

• For each month (Jan 2000 – Jan 2006), I sample all registered unemployed first working day in a month and add rich register data.

• Outcome measure: count days of employment per month six months after starting point.

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Hiring effect: Definition of health groups

• Number of days on sickness insurance (SI) 24 months before sampling point

• The healthy comparison group: zero SI days.• The bad health group divided into quartiles (Q1-Q4)

– within the local labor market, and – within the UI fund.

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Identification

• Steps in the identification:1. Difference

Compare workers with bad health with healthy workers2. Difference-in-Differences

Compare the differences between various bad-health groups

3. Difference-in-Differences discontinuityUse pattern in period before the reform as a comparison

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Hiring effect: Difference 1

Employed

time

healthy

Q1 (factual) Q1 (hypothetical)

6 months

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Hiring effect: Difference 2

Employed

time

healthy

Q1 (factual) Q1 (hypothetical)

6 months

Q2 (hypothetical) Q2 (factual)

Q2 worse health than Q1

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Hiring effect: Discontinuity

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. . . . . . . . . . . . . . . . . . . . . . .

. . . . . . .

. . . . . . . . . . . . . . . . . . . . . . .

Q1

Q2

0

-1

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Hiring effect: Graphical effects

-1

-.8

-.6

-.4

-.2

0

DD

-est

imat

es

Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06

Q1 Q2 Q3 Q4

Line shows first sample affected by reform

Into employment, 6 months

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Hiring effectsStock Stock

Dummy SplineTE -0,034 -0,030

Q1 (0,004) (0,007)Constant 0,064 0,067Rel.effect -0,032 -0,028TE -0,052 -0,049

Q2 (0,000) (0,000)Constant -0,071 -0,070Rel.effect -0,055 -0,052TE -0,087 -0,083

Q3 (0,000) (0,000)Constant -0,298 -0,294Rel.effect -0,124 -0,118TE -0,046 -0,048

Q4 (0,035) (0,024)Constant -0,636 -0,629Rel.effect -0,125 -0,130

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Hiring effect: Sectors with high and low wage flexibilityHigh Low

Spline SplineTE -0.028 -0.047

Q1 (0.001) (0.000)Constant -0.021 -0.025Rel.effect -0.028 -0.049TE -0.032 -0.029

Q2 (0.000) (0.002)Constant -0.155 -0.167Rel.effect -0.038 -0.035TE -0.013 -0.032

Q3 (0.375) (0.031)Constant -0.408 -0.401Rel.effect -0.022 -0.054TE 0.008 0.024

Q4 (0.688) (0.295)Constant -0.744 -0.713Rel.effect 0.031 0.084

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Firing effects: Sampling

• Data source: Statistics Sweden and Social Insurance Office register

• We sample all employed 25-60 years each month– income statement, kontrolluppgift– not registered with Employment Service as unemployed

• The bad health group divided into quartiles (Q1-Q4) – within the workplace

• Outcome measure firing: – unemployed at least one day the sixth month after the sampling

point.

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Firing effect: Graphical results

0

.2

.4

.6

.8

DD

-est

imat

es

Jan 00 Jul 00 Jan 01 Jul 01 Jan 02 Jul 02 Jan 03 Jul 03 Jan 04 Jul 04 Jan 05 Jul 05 Jan 06

Q1 Q2 Q3 Q4

Line shows first sample affected by reform

Into unemployment, 6 months

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Firing effect: ResultsDummy Spline

TE -0.019 -0.015Q1 (0.226) (0.352)

Const 0.181 0.188Rel.effect -0.016 -0.012TE -0.019 -0.013

Q2 (0.172) (0.302)Constant 0.265 0.266Rel.effect -0.015 -0.011TE 0.083 0.083

Q3 (0.000) (0.000)Constant 0.513 0.507Rel.effect 0.055 0.055TE 0.180 0.161

Q4 (0.000) (0.000)Constant 0.358 0.344Rel.effect 0.132 0.120

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Summary• Employers select based on expected health, both in hiring

and firing (and in early retirement).• The effect is larger for people with a really poor health (no

effect on firing for employees with relatively poor health) and largest in sector with rigid wages.

• To be continued… different kind of firms, the effect on wages, on-the-job search.

• Falsification test: Check for effects for groups that are suppose to be unaffected by the reform (“wild card” for certain type of individuals, e.g. people with disabilites or diseases)