Since the 1950s, employers have played an instrumental role in private health insurance provision for employees and their dependents in the United States (Blumenthal, 2006). Today an estimated 178 million people are covered through an employer source (Keisler-Starkey and Bunch, 2022). Several factors have led to the proliferation and stability of employer-sponsored insurance (ESI) over time, including administrative economies of scale, favorable tax treatment of premiums, and a risk pooling mechanism that is predominantly for a purpose other than the purchase of insurance. Moreover, access to ESI is highly valued by individuals when they make employment choices, in part because it is a fringe benefit that confers near-term financial benefits for most employees relative to other forms of non-wage compensation (Employee Benefit Research Institute and Greenwald Research, 2022).1

Several factors contribute to how employers determine wage and non-wage components of compensation, including local labor market conditions, workers’ preferences, and the legal environment in which firms operate. An important labor policy affecting the compensation decisions of employers includes federal2 and state minimum wage laws. Such laws provide important financial protection for lower-wage workers and their dependents. However, minimum wage laws also have the potential to create labor market distortions. In 2022, 30 states and the District of Columbia had minimum wage levels in excess of the federal level of $7.25 per hour; 15 states had minimum wage levels equivalent to the federal level, and five states had no established minimum wage law and are therefore subject to the federal law (U.S. Department of Labor, 2022a).

The effects of minimum wage laws on labor market outcomes have been studied extensively and continue to generate considerable debate among economists. Economic theory, under the assumption of perfectly competitive labor markets, predicts that a binding minimum wage should lead to reductions in employment. However, the empirical literature has yielded mixed evidence, including both negative as well as null effects of minimum wage increases on employment outcomes (for example: (Allegretto et al., 2011; Card and Krueger, 2000; Clemens et al., 2018; Dube et al., 2010; Manning, 2021; Neumark and Shirley, 2022; Wolfson and Belman, 2019)). Two prevailing theories may explain why some studies find null employment effects. The first is that many labor markets are not competitive and predictions made under an assumed perfectly competitive labor market may not apply (Ashenfelter et al., 2022). A second potential explanation is that employers may respond to minimum wage increases on non-employment margins, including non-wage compensation, changes to the work environment, and increased effort requirements (Clemens, 2021). As a major form of non-wage compensation, ESI may be an important margin that employers adjust in response to minimum wage increases (U.S. Department of Labor, 2022b). Relatively few studies have investigated the impact of minimum wage increases on ESI provision, however. Recent work on this topic finds small reductions in ESI coverage at the individual level (Clemens et al., 2018; Dworsky et al., 2022), but does not investigate the employer-level decision to offer ESI or the characteristics of benefits beyond the decision to offer coverage (e.g., premium contributions, deductibles).

In this study, we use the Medical Expenditure Panel Survey – Insurance/Employer Component (MEPS-IC) to investigate how changes in state and federal minimum wage laws between 2002 and 2020 have influenced employer health benefits provision (Agency for Healthcare Research and Quality, 2022). Using these data, we implement a difference-in-differences analysis that examines the relationship between within-state changes in ESI provision and within-state changes in state minimum wage laws over time. We examine the effect of minimum wages on both the extensive margin of whether employers offer any health insurance, as well as characteristics of ESI that employers may adjust on the intensive margin, including employee eligibility, premium contributions, or plan characteristics. We hypothesize that an increase in minimum wages may result in a decrease in ESI offers, but also potentially adjustments that reduce benefit generosity (e.g., higher employee premium contribution shares, higher deductibles) as employers look to offset increased labor costs.

We find that a $1 increase in state minimum wage levels is associated with a 0.92 percentage point (p.p.) decrease in the percentage of employers offering health insurance, robust to all regression specifications. Further, we show that this relationship is largely driven by small employers, with fewer than 50 employees and employers with more low-wage employees. Conditional on offering insurance, we also find that minimum wage laws are associated with a small increase in average deductibles. We do not find consistent evidence, however, that employers who offer health insurance adjust eligibility criteria or the employee contribution share of the total premium. Consistent with observed decreases in employer offers of health insurance, we find evidence from supplemental analyses of workers from the American Community Survey (ACS) of a decrease in ESI enrollment following minimum wage increases. However, we document no changes in the overall rate of uninsurance, with suggestive evidence that this discrepancy is explained by an increase in Medicaid enrollment.

Our study contributes to the empirical literature in three important ways. First, we examine the relationship between minimum wage laws and ESI provision from the perspective of the employer, which is ultimately responsible for ESI provision. In doing so, we consider how employers’ responses to minimum wage law changes may differ by employer size or its distribution of employees’ wages. This approach is distinct from prior studies which have used individual workers as the unit of observation to examine how ESI outcomes are affected by minimum wage laws (Clemens et al., 2018; Dworsky et al., 2022; Marks, 2011; Royalty, 2000; Simon and Kaestner, 2004). Second, once employers decide to offer health insurance as a form of non-wage compensation, they must make several additional decisions related to workers’ eligibility and benefit design (e.g., plan type, cost-sharing provisions, share of total premium paid by employee). Leveraging the rich MEPS-IC data, we examine whether employers that offer ESI adjust on these additional dimensions in response to changes in minimum wage policies over time. Our findings help paint a substantially more complete picture of employer responses to minimum wage increases. Third, our long panel covers nearly two decades and includes years before and after implementation of the Affordable Care Act's major coverage provisions. Major policy effects on the ESI market resulting from the Affordable Care Act include the employer shared responsibility requirement for larger employers (fully enacted in 2016) and a comprehensive set of insurance market reforms for small employers implemented in 2014 (e.g., modified community rating, essential health benefits, and plan standardization). Prior work on this topic uses data as recent as 2016 – our approach allows for the inclusion of four additional years in the post-ACA period and we explore how the effect of minimum wage increases on ESI has changed in this post-ACA period.