m Firm-specic human capital: knowledge and experience that is highly relevant at a specic rm but irrelevant at other rms. Workers with rm-specic human capital can be much more productive at that particular rm than anywhere else. The accumulation of rm-specic human capital can mean that an employee who is invaluable to one rm would be just mediocre at another rm even if she were performing similar duties. If so, wages the worker earns in his current employment would far exceed what he could earn at another company (Becker 1993). Firm-specic human capital provides a strong incentive for a healthy employee to stay in a job even if he has to pool with his unhealthy counterparts. Though the triathlete in BHT Enterprises may not want to subsidize care for his sicker colleague, BHT Enterprises is still the best place for him to work because of his many years of experience at the rm. In this way, tying insurance coverage to employment can solve the adverse selection problem. Firm-specic human capital acts as the glue keeping insurance pools together. The need for rm-specic human capital in maintaining insurance pools may explain why rms in industries with high turnover rates do not typically provide health insurance. At those rms, pooling is harder to sustain, because there is nothing to counteract the effects of adverse selection due to more robust employees exiting the pool 0n the other hand, the rms that rely on workers with rm-specic human capital are more likely to provide health insurance (Bhattacharya and Vogt 2006; Amelung et al. 2003). Iob lock As we have discussed, the success of employer-sponsored insurance in mitigating the adverse selection problem depends on its ability to keep healthy and unhealthy workers together on the same insurance plan. And this in turn depends on the strength of job- specic human capital to reduce the appeal of leaving the company. In one way, tying employer-sponsored health insurance to employment is good, because it combats adverse selection. But tying the two together can also be bad, because it distorts labor markets by hindering job mobility. Consider a worker at a job which provides employer-sponsored health insurance. Despite working at his current company for years, he would be a better t for a new job opportunity elsewhere. He is unhappy and could be more productive and better paid at another company. However, in the previous year, the worker became conned to a wheelchair due to a progressive case of multiple sclerosis (MS). He anticipates high health care costs, but, fortunately, his current company's insurance plan covers MS-related care. Despite his higher health care costs, his wages have not been cut by wage pass-through. This may THE AMERICAN MODEL 379 be because wages are sticky downward that is, resistant to reductions once set (Hall 2005). Moreover, reducing a worker's wages immediately after a disease diagnosis may be a legal liability in a discrimination lawsuit (DeLeire 2000). As a result, the worker's wages may not change, even though the burden he places on the company' s health insurance bill has increased. Suppose the worker still wants to switch jobs. The insurance from his new job might still offer to cover his MS care. But his new employers, when negotiating his new salary, observe his wheelchair and lower his offered wage to compensate for the anticipated rise in health care premiums. Unlike a wage reduction at his current job, the sickness-related wage discrimination is difcult to observe, because the employers can argue that the lower wage is due to being new at the rm and not his MS. Thus, the potential employers offer the worker a lower salary than his current one, even though his productivity is higher there. This lower offer deters the worker from switching jobs, and he stays unhappily and inefciently at his current one. This conuence of employer-sponsored health insurance, wage pass-through, and sticky wages is known as job lock. Even in the absence of sticky wages, job lock may per- sist if insurers can, for a time, refuse coverage for expensive pre-existing conditions ones diagnosed before insurance coverage began. Our example worker was diagnosed with MS while he was with his current rm, so the employer- sponsored insurance plan was obligated to cover his MS- related care. On the other hand, a new insurer at a new employer would view the MS as a pre-existing condition, since it was diagnosed before enrollment It may deny coverage for his M5, at least for the rst year or two. Under this scenario, switching jobs could be pro- hibitively costly the worker would have to pay out-of- The agony quob tack. pocket for medication and expensive physical therapy. Staying with his current rm, Credit: Allen Cox. though, allows the worker to keep his current insurance, which is obligated to cover his MS. Thus, employer-sponsored health insurance and the insurer's denial of coverage on pre-existing conditions would also lock the worker in his current job. Through job lock, employer-sponsored health insurance distorts labor markets and thus can reduce social welfare. Our example worker would be more productive at a differ- ent job than he is at his current one, so it would be socially efcient for him to switch. But job lock discourages him from doing so. Society, as a result, misses out on the productivity gain from him switching to a more productive job. From data on American employees in 1987, Madrian (1994) estimates that job lock reduces voluntary employee turnover rate by 25%. In a back-of-the-envelope calculation, Gruber and Madrian (2004) estinlate that the total cost of job lock in the US is modest, less than 0.1% of GDP. One of the reasons why the social loss from job lock is modest may be the result of policies aimed at mitigating the harm of job lock. The Consolidated Omnibus Budget Reconciliation (COBRA) Act of 1985 mandates that rms offer former employees the opportunity to continue in their employer-sponsored health insurance plan temporar- ily after their termination. Workers have to pay the insurance premium themselves but can typically maintain the plan for up to 18 months. By temporarily decoupling insurance coverage from employment, COBRA eases job mobility