But rather than reassess the theory, economists have focused on why the empirical research fails to produce the expected result. Many empirical studies suggest that workers covered by employment-based health insurance plans earn more, not less, than do workers without health benefits ( Buchmueller and Lettau 1997 Levy and Feldman 2001 Monheit et al. Despite decades of effort to demonstrate its validity, the empirical basis for the theory of compensating differentials remains surprisingly weak. This theory has a number of problems, though, not the least of which is that the data provide very little support for it. The theory states that rather than receiving additional cash compensation and finding and purchasing health insurance on their own, workers prefer to obtain coverage through their employers and so accept a wage offset to cover the cost of that coverage.
According to that theory, employers are willing to arrange health insurance plans for workers because workers are willing to “buy” that health insurance through wages reduced by the amount of the cost of the insurance. The standard economic theory of the availability of employer-provided health insurance focuses on worker demand ( Cutler 1997 Pauly 1997 Summers 1989). Why do employers offer health insurance to workers? Is it because workers want it? Because their unions demand it? Or do employers offer health benefits to workers because their productivity and profitability depend on it? Despite employers’ role in the health insurance market, however, very little attention has been paid to employers’ motivations for providing health insurance to workers. These employment-based plans cover two-thirds of nonelderly Americans and pay most of working families’ expenses for health care and about one-quarter of national health spending. Almost all large firms offer a health insurance plan, and even though they face greater barriers to providing coverage, so do the majority of very small firms. Most nonelderly Americans receive their health insurance coverage through their workplace.
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