Health Insurance and the Labor Market

Health Insurance and the Labor Market





Adverse selection refers to a strategic behavior by a partner who is more informed in a contract against the interest of a partner who is less informed. These restrictions on insurance sales are due to the fact that there are numerous insurance regulations in different states. There are some implications of adverse selection in insurance markets that contain information asymmetry and community ratings. Information asymmetry implies that there is an imbalance of power in the insurance transaction where one party is more informed compared to the other. Community ratings means that insurer are not supposed to deny an individual from being covered and neither are they supposed to charge high premiums if one has a preexisting condition. An implication of adverse selection in this kind of market is that individuals that are of a higher risk than expected end up buying insurance covers (Browne, 2010). The costs and of higher risks are high that may lead to lower risk individuals forgoing insurance covers. The scenario will lead to a further increase in per insured costs. Another implication is that healthy people might end up going for managed care and the less healthy going for generous plans. It is mainly caused by information asymmetry whereby the people seeking insurance are less informed (Browne, 2010).

A model of the demand for labor can be used to explain the wage and employment figures for healthcare workers. Analysts can use this model to determine the demand of labor at a particular time. A high demand for labor means that healthcare workers are needed and hence the employment figures will go up since more will be employed (Gruber, 1998). The wages will also go up when there is a high demand because employers want to attract healthcare workers. Low demand in the labor market means that employment figures will go down since healthcare workers are not being employed. The wages will also go down because there are many healthcare workers hence it becomes difficult to sustain them. An employee’s health status influences their decision to seek full-time or part time employment. Healthy individuals would seek full-time employment and hence they will have a higher compensation compared to those who go for part-time employment. Compensation also takes the form of healthcare insurance. The health status of an individual affects the compensation they receive in form of insurance.


Browne, M. (2010). Evidence of Adverse Selection in the Individual Health Insurance Market. The Journal of Risk and Insurance, 13-13.

Gruber, J. (1998). Health insurance and the labor market. Cambridge, MA: National Bureau of Economic Research.