Illness is one of the greatest and least predictable shocks to the poor. Households often rely on costly and inefficient coping strategies, as they are unable to insure against illness.1 In Mexico a typical uninsured household with three dependents spends up to 12 hours per week caring for someone who is ill. Given the traditional role of women in Mexican families, the increased demand for caregiving during spells of illness is borne almost exclusively by women.  These shocks have profound repercussions on the employment prospects of women, for whom family responsibilities account for as much as 44% of all firing or quitting events.

In a recent paper,2 I show that the provision of publicly subsidised health insurance in Mexico has led to an increase in the labour supply. This increase can be as high as one-quarter percent of GDP. This labour supply effect is important for two reasons:

  • The labour market response is concentrated among women for whom insurance reduces the burden of caring for sick dependents, and
  • It allows me to show that the provision of insurance need not entail an efficiency loss in the labour market, as suggested by past papers.

The nuts and bolts: Deriving causal estimates

The key challenge in deriving estimates of the causal impact of health insurance on the labour market is the endogeneity of access to health insurance. I overcome this problem by exploiting the variation created by the municipal-level rollout of Mexico’s Seguro Popular (SP). This program provides free health insurance and improved access to health services to those not covered by employer-based schemes. SP provides a unique opportunity to learn from a large-scale intervention. SP currently insures 52.6 million individuals. This means that, in terms of affiliates, SP covers more people than the Affordable Care Act in the US.

I use a difference-in-differences design that compares changes in the labour market outcomes of individuals that reside in municipalities already reached by SP with individuals in municipalities not yet reached by SP. I isolate plausibly exogenous variation, focusing on two years in the middle of the rollout period for which control municipalities are likely to provide good counterfactuals;3 that is, accurate estimates of what would have happened to labour market outcomes had the program not been implemented.

Health insurance increases labour supply

My main finding is that SP increases labour supply by reducing the exit flow from employment, that is, by helping workers stay employed.4 This labour market response is, however, not contemporaneous. I find that SP reduces the exit flow from employment roughly one to two years after its introduction. This time profile is consistent with the idea that individuals are learning about the value of the program, and that the program is operating through a health channel.5

SP enables women to stay employed

By reducing the frequency and duration of illness, particularly among children, SP enables women to stay employed.6 I find that the labour supply response triggered by SP is specific to women.  In particular, women not fully specialised in caregiving, but who are likely to care for dependents during spells of sickness, are the ones who benefit the most from SP. I also find that SP leads to an increase in the hours worked by this group of women and to an almost symmetrical decrease in the hours spent caregiving.7

SP leads to an overall efficiency-enhancing response in the labour market

Given that programs like SP are modeled as transfers, it is often argued that their introduction will encourage workers to seek jobs without employer-based health insurance. In Mexico, these jobs are informal. Policymakers are understandably concerned about growing informality in view of the loss in tax revenues and the potential loss in overall efficiency associated with informal jobs.8

In keeping with past papers,9 I find that SP increases the relative size of the informal sector. However, this finding does not imply a trade-off in the labour market. The new insight is that the increase in informality is not driven by workers moving to informal jobs, but by informal workers being retained in the labour force.

The intuition behind these findings is that better-off workers who are voluntarily informal place little value on SP, while marginalised women, trapped in informal jobs, benefit from SP because the program delivers a valuable reduction in the exposure of their household to health shocks.

Two invitations for policymakers

  • Concern about SP reallocating labour to the informal sector is important, but it should be weighed against the positive impact SP has on labour force participation.
  • The design of social insurance should leverage the way families operate in order to achieve complementary objectives. The case of SP highlights the potential of insurance to both improve health and empower women.

This article is published in collaboration with Vox EU. Publication does not imply endorsement of views by the World Economic Forum.

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Author: Alejandro del Valle is a doctoral candidate in Economics at the Paris School of Economics

Image: Jasmine Rodriguez, 10, gets an influenza vaccine at Boston Children’s Hospital in Boston, Massachusetts January 10, 2013. REUTERS/Brian Snyder