Friday, August 14, 2009

Entrepreneurship and Health Care in the OECD, part deux

. Friday, August 14, 2009

Last week I linked to a CEPR report showing that the U.S. has one of the smallest small business sectors in the OECD. The authors of that report speculated that this may be due to the lack of universal health insurance in the U.S., and Krugman agreed with them. I acknowledged that it was possible that a lack of public health insurance had something to do with the lower small business sector, but also argued that there plenty of other possible causes as well, and it's irresponsible to assume causal links that just happen to support our priors. Well, Scott Shane of Case Western studies this stuff for a living and he came to a similar conclusion:

If you compare health care’s portion of G.D.P., as measured by the World Bank, with the self-employment rate across the 21 O.E.C.D. countries in the C.E.P.R. study, you will find that the correlation is only -0.19, which statistically speaking, cannot be considered different from zero.

I know that everyone is focused right now on the health care debate, which is great. But we can’t just say that the absence of universal health care influences the size of our small-business sector. It’s certainly possible that national differences in health care affect national differences in self-employment and small-business generation in some way.

But we have to show some evidence of those effects.

Exactly right. Further, Shane did find a different statistically significant result (p < .01): richer countries have less self-employment than poorer countries. The causal direction could run either way -- the self-employed are generally poorer than employees, or the poor have less human capital and therefore fewer opportunities to get high-paying jobs -- but either way it doesn't to appear to have anything to do with health care. Or if it does, we need more than just baseless speculations motivated by partisanship to establish the claim.

Krugman and others were (rightly) vehement in their denunciations of the "dumb cowards" at the Investor's Business Daily for playing fast-and-loose with factual claims about British health care. Perhaps Krugman should hold himself to his own standard and refrain from making causal claims without evidence.


John said...

Thanks for taking the time to read our recent report on international small-business employment rates and to write two interesting posts reviewing our findings.

The main finding of our report --one that is generally very surprising to most Americans-- is that the U.S. has a much smaller small-business sector than other rich countries. This finding holds both for self-employment and for employees in small businesses in every industry for which the OECD publishes internationally comparable data.

One paragraph of our report speculates that "one plausible explanation" for the finding is that the U.S. health-insurance system impedes the creation of small businesses, in a way that does not happen to entrepreneurs in countries with universal health care.

Scott Shane (who's blog post you quote) believes, instead, that what is causing low small-business employment in the U.S. is our high per-capita income. To support his view, he notes that there is a strong negative correlation between national per-capita income and the self-employment rate.

Shane's view is also plausible, but odd. Why would we expect higher incomes to cause lower small-business employment? If people are on average richer, wouldn't they have more money to start their own small business? Wouldn't they have more money to buy the products and services of small businesses? (And, how is it that more small business, which is supposed to be making our country more prosperous is, on average, strongly correlated with being poorer?) A correlation is not an explanation, and neither Shane's post nor your's helps readers to understand why the U.S. lags.

Our report speculates that the lack of universal health care in the U.S may play a role. We don't make strong claims, but we do cite two academic studies that find an important link between health insurance and entrepreneurship in the U.S. Wellington (Contemporary Economic Policy, 2001), for example, found that men and women whose spouses had employer-provided health insurance (and could thus provide family coverage), were significantly more likely to be self-employed than married men and women whose spouses did not have coverage.

Fairlie, Kapur, and Gates (RAND Working Paper, November 2008) extended and updated Wellington's work. They also found that 65 year-old men (who were thus eligible for Medicare) were significantly more likely to own a business than men just a little younger (and thus not eligible for Medicare). (Fairlie, Kapur, and Gates's work was funded by the Kauffman-RAND Institute for Entrepreneurship Public Policy, hardly a source to participate in "baseless speculation motivated by partisanship.")

Shane himself recently posted a nice analysis of the impact of the U.S. health-insurance system (”How the Health Care Mess Affects Entrepreneurship”). His conclusion: “The health care mess is clearly weighing down entrepreneurship in this country.”

Shane's finding that there is a low correlation between national health-care expenditures and self-employment is not a test of our argument. We are not arguing that the more a country spends on health care, the higher (or lower) the national self-employment rate. We are arguing that a person who wants to start a small business in the U.S. must secure health insurance in a market where age, gender (women of reproductive age, for example), family size, and pre-existing medical conditions can make health insurance unavailable or prohibitively expensive. In the rest of the countries in our sample, regardless of the share of GDP spent on health care, entrepreneurs do not face this problem.

The comments section of the NYT Economix blog is full of often poignant comments recounting the difficulties that many entrepreneurs have faced as a result of the U.S. health-insurance system.

John Schmitt, CEPR

Entrepreneurship and Health Care in the OECD, part deux
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