The Effect of the Medicaid Program on Welfare Participation and Labor Supply

Although there is a large literature on the effect of AFDC and Food Stamps on labor supply and welfare participation, there has been little work on the effects of Medicaid, despite its importance in the O.S. transfer system. In this paper we use 1986 data from the Survey of Income and Program Participation to examine the effect of Medicaid on the labor supply and welfare participation decisions of female heads of family. A key contribution is the development of a family-specific proxy for the valuation of Medicaid benefits which depends upon the health and other characteristics of the family. We find that Medicaid has strong and significant effects on labor supply and welfare participation that are negative and positive in sign, respectively, but which are concentrated in the tail of the distribution with the highest expected medical expenditures. We also find that the availability and level of private health insurance have very large effects opposite in sign to those of Medicaid.