How Obamacare Discourages Work -- And Why That Could Be A Good Thing

The CBO released its new budget and economic projections today, and here’s the finding everybody is talking about: By 2024, the Affordable Care Act will reduce full time-equivalent employment by about 2.5 million workers, compared to what it would be if the law hadn’t gone into effect. This is about triple what the CBO estimated when it first scored the law in 2010.

There’s been a sort of annoying conversation about the report today, with conservatives saying “see? Obamacare kills jobs,” and liberals insisting the reduction in labour supply is a good thing, because it reflects people choosing to work less once they’re no longer tied to their jobs for health insurance.

The truth is more complicated: The law will reduce work hours through several mechanisms, some of which are desirable and some of which aren’t. Here are seven things you should know about Obamacare, jobs, and the CBO estimate:

  • The decline in work will be almost entirely because people choose to work less, not because employers choose to hire less. Republicans tend to talk about Obamacare as “forcing people into part-time work.” But CBO expects the law to have “small or negligible” effects on labour demand in most parts of the economy. The main effects will come on the labour supply side. This has important implications for wages: While a decline in labour demand will tend to reduce wages, a withdrawal of labour supply may actually help push them up, as employers compete to hire from a reduced pool of available workers.
  • Obamacare will discourage people from working in two main ways, through “income effects” and “substitution effects.” Broadly, fiscal policies have two kinds of effects on behaviour. There are income effects: When you give a person a subsidized health plan, you raise that person’s real income, making it easier for him to quit his job, work fewer hours, or take a job that doesn’t offer insurance. And there are substitution effects: if you phase out that person’s health insurance subsidy with rising income, you encourage him to work less, and instead substitute non-taxed activities, such as leisure or child-rearing. Importantly, this substitution is a distortion: In absence of the tax, the worker would have preferred to work and earn his pre-tax wage, rather than spend time on something else.
  • The work-discouraging substitution effect from Obamacare is clearly bad. For workers who rely on health insurance subsidies created by the law, Obamacare will reduce the marginal return to labour: That is, they’ll get less after-tax income for working one more hour. This is because a higher income will mean a smaller health plan subsidy. The effective tax rate will vary based on individual circumstances. For workers who work only part of the year (and therefore can get a cheap subsidized plan during the part of the year they’re unemployed) CBO pegs the typical tax rate at 15%. For a single adult with a low or moderate income who works all year without employer-based health coverage, my back-of-the-envelope maths puts the tax rate around 10%.
  • The work-discouraging income effect from Obamacare is mostly good. The pre-Obamacare health policy status quo, which focused heavily on tying insurance to full-time employment, provided a strong incentive for people to be full-time employed. Easy availability of comprehensive, subsidized health plans will make it easier for people to retire before age 65, quit a full-time job to start a business, or shift to part-time work and spend more time raising children or attending school. This is a feature, not a bug. As a Senior White House Official pointed out on a press call this afternoon, Social Security and Medicare reduce employment among seniors; this (making retirement possible) is a key aim of those programs, not a negative side-effect.
  • Any alternative policy to significantly expand health coverage will also have income and substitution effects that reduce labour supply. If you give out subsidies for health insurance that aren’t tied to employment, you’ll create an income effect that makes it easier for people to work less. If you phase out those subsidies, you’ll create a substitution effect that encourages people to work fewer hours. (For example, the Republican Coburn-Burr-Hatch Obamacare alternative has both of these features, and so would also reduce employment relative to the pre-Obamacare status quo.) If you don’t phase out the subsidies, they’ll be really expensive, and you’ll have to raise some tax to pay for them; that tax will also create a substitution effect that discourages work. There is a trade-off here, as with any government program that costs money: Taxes discourage work and reduce economic output, but they pay for things we value, like a near-universal health insurance entitlement.
  • Obamacare could be improved so it doesn’t discourage labour supply as much. These fixes should be focused on alleviating the substitution effects, not the desirable income effects. The most obvious way to do this is by repealing the penalty on employers who don’t provide health coverage, which has already been delayed to 2015. (While people mostly talk about the penalty as a policy that might reduce labour demand, CBO expects most of the penalty to be passed through to workers in the form of lower wages, which will reduce labour supply.) The phaseout range for subsidies could be extended, so workers lose less subsidy value for every extra dollar they earn. Most importantly, more effective policies to contain health care costs would reduce the size of the subsidies necessary to get people covered, which would then reduce the severity of the phaseouts.
  • Obamacare may positively affect the labour market in ways not addressed in the CBO report. De-linking insurance from employment isn’t just good for personal fulfillment; making it easier for people to go back to school, take jobs that don’t come with health insurance, or start their own businesses should lead to better job-matching and higher productivity. It remains to be seen how much of the recent slowdown in health inflation is attributable to the ACA, but if it persists, it will have positive economic and labour market effects beyond the direct fiscal effects of the law. Slower health inflation will lower the cost of health insurance to private employers, leading to some combination of higher labour demand and higher wages.

Broadly, one key goal of health policy should be to let people make work decisions without worrying about how those decisions affect their health insurance. The CBO report shows that Obamacare partly furthers that goal (by making insurance available to more people, regardless of income or employment status) and partly inhibits it (by withdrawing benefits from people who work more). Efforts to optimise the policy should focus on de-linking work decisions from insurance, not simply on maximizing the amount of labour supply.

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