Earlier today, the Congressional Budget Office released a report saying the Affordable Care Act will reduce employment by 2.5 million full time-equivalent workers as of 2024, almost entirely through effects on the labour supply side: That is, the law won’t much change firms’ interest in hiring, but it will make people want to work less.
Here’s a key implication of that finding that most people are glossing over: Obamacare will drive wages up.
The price of labour, like any good or service, is determined by supply and demand. If producers of labour (workers) become less inclined to sell it, but consumers of labour (firms) are unchanged in their interest in buying, then the price of labour has to rise in order to bring the quantity supplied and the quantity demanded into line.
If labour supply falls and labour demand remains the same, how will the labour market clear? Higher wages. (3/4)
— Donald Marron (@dmarron) February 4, 2014
This helps explain why so many business owners have been apoplectic about the law.
The usual warning about Obamacare from the right has been that it will “kill jobs” by making firms less inclined to hire. While this warning tends to come from (or on behalf of) business owners, the phenomenon it describes would mostly have negative effects on workers, by increasing unemployment and reducing their ability to command wage increases.
If (as CBO predicts) the decline in work is driven almost entirely by a decline in labour supply, the upshot will be very different. Employers will be left holding the bag economically. Workers will choose to work fewer hours; since firms won’t be any less interested in hiring, they’ll have to pay more per hour to get those workers in the door.
The positive wage effect should be concentrated among low-skill workers, who will face the greatest discouragement to work from Obamacare, and therefore will be able to command the greatest wage increases in order to keep working.
More broadly, Obamacare alters the employer-employee relationship in a way that empowers employees. When an employee is dependent on his job not just for a wage but for health insurance, he is less able to threaten to leave if he doesn’t get a raise. Severing the work-insurance link strengthens the employee’s hand in bargaining — which is bad for employers and good for workers.
Over the last few decades, owners of capital have captured a rising share of national income, as wage growth has lagged. By strengthening workers’ hands in negotiation, Obamacare should increase the labour share of GDP and reduce income inequality. The CBO finding that the law will reduce labour supply is just one example of that.
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