Health insurance benefits as a labor market friction: Evidence from a quasi‐experiment

Research Summary This study examines the propensity of small firms to provide health insurance in response to high state‐level unemployment insurance (UI) benefits, given that generous UI benefits reduce labor market frictions that constrain employee mobility. We exploit a unique data set of over 15,000 small private firms in the United States and find that when state UI benefits are high, firms will offer their employees health insurance benefits—especially when those firms rely on human capital that is difficult to replace. We find positive effects of health insurance policy on worker retention, worker productivity, and firm performance. We discuss the implications of our findings to the theory development on the relationship between exogenous labor market frictions and firms' responses to those frictions. Managerial Summary This study examines whether small firms that offer health insurance to their employees have better performance outcomes. Even though health insurance is a costly investment for small firms, there has been scant strategy‐ and evidence‐based guidance for managers regarding the conditions that can render investments in employee health ultimately worthwhile. The study analyzes data from 15,000 small firms in the United States and finds that offering health insurance when retaining and replacing workers by firms is more difficult. Firms that offer health insurance also have better worker retention, productivity, and profitability compared to firms that do not offer health insurance. The results suggest that investments in employee health and well‐being may provide a competitive edge to firms, especially when labor market competition for workers is high.