Research on price elasticity of employer offer usually measures the price of insurance as
either the premium amount or the tax subsidy to the employer-paid portion of the premium.1 The
latter is more common, simply because the premium available to firms that do not offer
insurance typically is unobservable. Studies that observe differences in the tax subsidy to
estimate elasticity of employer offer generally examine whether those firms with higher tax
subsidies are more likely to offer insurance. They assume that other components of price
variation are correlated (and can be controlled for) with firm characteristics, such as number of
employees and industry group—potentially contributing significantly to estimation error.
Typically, they observe differences in the average “tax price” of insurance for employed workers
(one minus the relevant marginal personal tax rate) to estimate the elasticity of employer offer.
However, they may differ with respect to the amount of variation in the “tax price” that they
observe (only cross-sectional variation or variation over time as well), and the method used to
identify the representative “marginal” employee whose tax price motivates an employer decision
whether to offer coverage.
For example, Royalty (2000) considered the variation in marginal tax rates across states.
Using Current Population Survey (CPS) data2 from 1988 and 1993, she estimated an offer
elasticity of –0.63 across all sizes of firms. Gruber and colleagues investigated the impact of tax
subsidies on firms’ decisions to offer insurance and on their expenditures for insurance
conditional on offer (Gruber 2001; Gruber and Lettau 2004). Having statistically matched CPS
data (from the mid-1980s to the 1990s) to other person-level data, they imputed marginal tax
1 Employer-sponsored health insurance is not considered taxable income: employer contributions to health insurance are excluded from the taxable base for purposes of both income and wage taxation. Therefore, differences or changes in federal and state income tax rates in effect vary the after-tax price of health insurance.
2 March CPS data only collect information on respondents’ insurance coverage. However, occasionally, CPS has collected data on employer insurance offering and employee insurance eligibility for offered policies among