I've heard a lot of arguments that health care reform will increase the rate of entrepreneurship. Most of them go along the lines of this piece from Jonathan Gruber: lack of an alternative source of health insurance creates "job lock", where employees are afraid to switch jobs. The better your recourse to alternate insurance, the more likely you are to be self-employed.
It's certainly a plausible story. And certainly, the number of people who wish to start businesses, but are held back by the health insurance problem, cannot be zero. The question is, is that number actually large? The age group that worries most about health insurance is also the age group that has other commitments, like mortgages. How many people are financially stable enough to strike out on their own, but have no recourse to COBRA, and cannot afford to buy private insurance?
It is not enough to point to self employment statistics. Self employment is not the same thing as entrepreneurship--a lone consultant, professional, or contractor is a fine thing, but it's not quite what we are talking about when we worry about rates of entrepreneurship. For some people, self-employment is essentially tax arbitrage, so it's not surprising that you see more of it when people are able to take advantage of, say, a spouse's generously tax-subsidized health care. But moving those people between self-employment and wage slavery would not much change the dynamism of the American economy. Similarly, a physician who starts his own practice is probably not affecting GDP much one way or another.
Which is not to say that it isn't a large problem. Here are the questions you need to ask about the net effect of this bill:
1) How many "job locked" people would really create new businesses? About 2/3 of Americans say they'd like to start a company, but far fewer than that actually do. How many marginal entrepreneurs are being held back by health care, rather than the other risk aversions of middle age?
2) Has the marginal impact changed over time? It is now easier to port insurance than it used to be, so how much extra boost can we get from health care reform, over things like COBRA and HIPAA?
3) Is this the kind of entrepreneurship where you start a new firm, or where you take a professional practice solo, or go to contract work? The best data we have is on Medicare, which seems to show a noticeable discontinuity around age 65--but the size of the effect is small, and as I understand it, entrepreneurship among the elderly is usually a matter of retiring into a part-time consulting practice, not founding a new company with the potential for major economic impact. Arguably, Medicare is actually slowing the economy, by letting people retire before they otherwise would.
4) How many would-be entrepreneurs have no recourse to spousal insurance, and also are so resource-constrained that they can't afford to buy insurance?
5) New taxes on capital income are a major source of funding for this health care plan. Does this ultimately make a difference in rates of entrepreneurship? I can see two ways that it would: by reducing the return on the entrepreneur's savings, so that they need to dip into the principal; and by reducing the prospective return of investing in said entrepreneur. On the other hand, how significant is a 4% tax?
6) Does the health care reform slow cost growth? That would be beneficial for small businesses, especially--either because they're in a bigger pool, or because we've slowed the rate of inflation. But that does not seem to have been the experience
7) Does the health care bill create a threshold effect that impedes firm growth? Firms smaller than 50 employees don't have to offer insurance; firms with 50 or more workers do. Other regulations of this sort tend to encourage firms to keep their companies artificially small, because hiring that fiftieth worker is so costly: his salary, plus health benefits or a $2.000 fine for him and the other 49 workers. But is this really a large problem? I'm not sure we know.
8) If social safety nets are so great for entrepreneurship, why are European rates of entrepreneurship so much lower than ours? I can imagine a countervailing force: people left without a good, insured job who become so desperate to make it that they build an exciting new business. But that is merely a just-so story; there are a lot of differences between us and Europe, and perhaps universal health coverage simply isn't adequate to overcome the other barriers.
9) What about the regulatory compliance costs? Will these increase for firms under the new regulation, and what does that imply for their growth rates?
These suggest some empirical tests. For starters, around 2020, do we see higher rates of entrepreneurship? Entrepreneurship seems to have been fairly stable in this country, so an uptick would be meaningful (though not right around 2014--you might see bunching, as people wait a few months to start their companies, without any real increase in the overall rate of entrepreneurship). And, do we see firms bunching right under that 50 employee mark? That's complicated by the fact that 50 is one of those nice, intuitive cut-offs, and so probably there's already some bunching due to state-level regulations. But if this is a meaningful problem, it should get worse in the latter part of this decade.
On net, I'd suspect that this will be positive for entrepreneurship--but I don't know that this will translate into a lot more growth. Enabling people to become self-employed is a fine thing, but it is not the same as enabling them to start transformative new businesses.
The latest Small Business Economy an annual publication of The Office of Advocacy of the Small Business Administration explains that 60.7 million people have employer-sponsored health insurance from their employment (people covered by their spouses don't matter here because they don't face job lock). Therefore, 607,000 additional people per year would begin the entrepreneurial process if we eliminated health insurance job lock.
But not everyone who begins the process of starting a business manages to get one up and running. In fact, analysis of the Panel Study of Entrepreneurial Dynamics data by Paul Reynolds shows that a new business results from about one-third of startup efforts. So we will get about 200,000 new businesses if we can eliminate the job lock that comes from employer-sponsored health insurance.
This same research shows that only about 19% of new businesses employ someone other than the founder. Because people who leave jobs to start nonemployer businesses don't generate any net new jobs, it's the 38,000 additional new employer businesses that would be created if we eliminated the health insurance job lock that would be the source of any additional jobs.
JOB LOSSES FROM HEALTH-CARE REFORM?
Data from the Small Business Administration's Web site reveals that the average number of employees in a new employer firm is 5.6. Therefore, we will create an estimated 213,000 annually if universal health care eliminates the problem of job lock.
While this may sound like a lot of jobs, it is not. In general, estimates of the number of jobs that will be lost because of health reform are larger. For instance, the Lewin Group, a health-care consulting firm owned by UnitedHealth Group (UNH), calculated that the original House bill would have destroyed 260,000 to 600,000 jobs and that "the estimate would increase a bit under the House bill as passed, because employer costs are a little higher." Researchers at RAND Corporation make similar estimates to those of the Lewin Group.
Note--that's the previous House bill, not the current version, for which I don't have any estimates on job loss or creation.
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