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The Agenda

NRO’s domestic-policy blog, by Reihan Salam.

The ACA and Labor Force Participation



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Many critics of the Affordable Care Act warn that that the expansion of subsidized coverage has the potential to reduce labor force participation. The bill’s champions, in contrast, often characterize this as a feature and not a bug. Ezra Klein’s 2011 remarks on the subject are representative:

If you make health-care insurance cheaper and make it harder for insurance companies to deny people coverage, then a certain number of people who would like to leave the labor force but can’t afford or access health-care insurance without their job will stop working.

To understand why, imagine a 62-year-old woman who works for IBM and beat breast cancer 10 years ago. She wants to retire. She has the money to retire. But no one will sell her health care under the status quo. Under the health-reform law, she can buy health care in an exchange because insurers can’t turn her away due to her history of breast cancer. So she’ll retire. Or imagine a 50-year-old single mother who wants to home-school her developmentally disabled child but can’t quit her job because they’ll lose health care. The subsidies and the protections in the Affordable Care Act will give her the option to stop working for awhile, while under the old system she’d need to stick with her job to keep her family’s health-care coverage. That’s how health-care reform can reduce the labor supply. If either case counts as a destroyed job, then so does my winning the lottery and moving to Scotland in search of the perfect glass of whiskey.

Moreover, this would happen for any health-care reform that reduced costs and improved access. So when Republicans say that they want a better health-care reform bill that does even more to reduce costs, they’re calling for legislation that, according to them, would “destroy” even more jobs than the Affordable Care Act. If they’re against all legislation that might destroy jobs in this way, then they’re against making health care cheaper. In fact, by that logic, we could just jack the price of health-care insurance up and make it easier for insurers to turn individuals away. Then even more people would have to stick with their employers. Job creation!

One distinction that Ezra neglects is that right-of-center health reformers tend to emphasize reducing costs while the ACA places a great deal of emphasis on reducing the net prices paid by low- and middle-income households, and in particular the net prices paid by older individuals earning modest incomes, by increasing subsidies. The wedge between costs and net prices matters insofar as subsidies are financed by taxes, and there is a broad consensus that taxes have at least some impact on the labor market. That said, Ezra’s larger point is well-taken. Some observers have (controversially) suggested that one reason why male labor force participation has declined is that the cost and the net price of various important goods, like food and entertainment, are quite low by historical standards, and at least some native-born less-skilled men who’ve seen their labor market position deteriorate have thus chosen not to pursue the limited private employment options available to them. Mike Konczal of the Roosevelt Institute has derisively referred to this as the “Great Vacation” theory of employment decline. 

Whether or not we think declining labor force participation in response to the expansion of subsidized coverage represents a moral advance, the extent of the decline obviously matters, as a larger decline will tend to reduce tax revenues by a larger amount than a smaller decline. Andrew Biggs of the American Enterprise Institute has called for eliminating or reducing the Social Security payroll tax for workers over the age of 62 on the grounds that doing so will encourage an increase in labor force participation among older workers, and that the resulting revenue gains will come close to making up for the reduction in Social Security payroll tax revenues. Ezra references a 62-year-old woman who suffered from breast cancer a decade ago, but of course the expansion of subsidized coverage might prompt other workers with less compelling personal stories to retire or reduce their work hours earlier than they might choose to otherwise, and this will tend to reduce revenues that might be devoted to, for example, anti-poverty programs.

A number of scholars have sought to estimate the labor market impact of the expansion of subsidized coverage under the ACA. Last year, three scholars at Emory University’s Rollins School of Public Health offered the following assessment, drawing on evidence from state-level public health insurance expansions:

The Affordable Care Act aims to substantially increase public health insurance eligibility among low-income childless adults. The literature suggests that public health insurance may have important implications for labor market participation. With data from the March supplement to the Current Population Survey, difference-in-difference multivariable regression modeling is used to examine the association between state-level public health insurance expansions and the likelihood of full-time employment, part-time employment, and not working among eligible childless adults. Results indicate that public health insurance eligibility is associated with a 2.2 percentage point decrease in full-time employment, a 0.8 percentage point increase in the likelihood of part-time employment, and a 1.4 percentage point increase in the likelihood of not working. These associations were greatest among those with worse health and those aged from 50 to 64 years. This analysis provides important insights into the potential labor market repercussions of health insurance expansions under the Affordable Care Act. 

And more recently, the economists Craig Garthwaite, Tal Gross, and Matthew Notowidigo released a working paper based on the experience of Tennessee, a state that saw a sharp decrease in the extent of subsidized insurance coverage in 2005:

We study the effect of public health insurance eligibility on labor supply by exploiting the largest public health insurance disenrollment in the history of the United States. In 2005, approximately 170,000 Tennessee residents abruptly lost public health insurance coverage. Using both across- and within-state variation in exposure to the disenrollment, we estimate large increases in labor supply, primarily along the extensive margin. The increased employment is concentrated among individuals working at least 20 hours per week and receiving private, employer-provided health insurance. We explore the dynamic effects of the disenrollment and find an immediate increase in job search behavior and a steady rise in both employment and health insurance coverage following the disenrollment. Our results suggest a significant degree of “employment lock” – workers employed primarily in order to secure private health insurance coverage. The results also suggest that the Affordable Care Act – which similarly affects adults not traditionally eligible for public health insurance – may cause large reductions in the labor supply of low-income adults.

But the employment decline they anticipate is relatively modest, but potentially greater than the employment decline anticipated by the CBO:

In 2011, approximately 8.9 million Americans with incomes below 139 percent of the poverty line were covered by employer-provided health insurance. If all states implement the Medicaid expansion, our estimates suggest that approximately 4.2 million of these privately insured individuals will move into public coverage. To place this number in perspective, the Congressional Budget Office estimated that if all states implemented the ACA Medicaid expansion, there would be 16 million additional Medicaid enrollees (CBO, 2010a). In an earlier analysis, the CBO estimated that only 10 percent of the new Medicaid enrollees will previously have had private coverage (CBO, 2009). Our results suggest much larger crowdout among childless adults, which may result in a 16 percent increase in public health insurance enrollees under the ACA.

Our results also speak to the potential for the ACA to decrease aggregate labor supply. In a 2010 Budgetary Outlook, the CBO estimated that all of the combined features of the ACA will result in an approximately 0.5 percentage-point decline in the aggregate employment rate (CBO, 2010b). This amounts to approximately 800,000 individuals leaving employment. The CBO based this estimate on a number of different factors, but the empirical evidence available to the CBO could not fully account for how lower-income Americans without children would respond to the availability of free or heavily subsidized health insurance.

Our estimates suggest that the labor supply consequences for this population could be substantial. In particular, our estimates demonstrate substantial “employment lock” – that is, individuals working primarily to secure private health insurance through an employer. Using CPS data, we estimate that between 840,000 and 1.5 million childless adults in the US currently earn less than 200 percent of the poverty line, have employer-provided insurance, and are not eligible for public health insurance. Applying our labor supply estimates directly to this population, we predict a decline in employment of between 530,000 and 940,000 in response to this group of individuals being made newly eligible for free or heavily subsidized health insurance. This would represent a decline in the aggregate employment rate of between 0.3 and 0.6 percentage points from this single component of the ACA. One must exercise considerable caution when directly applying our results to the ACA, but our results appear to indicate that the soon-to-be-enacted health care reform may cause substantial declines in aggregate employment. [Emphasis added]

There are many ways to interpret the “employment lock” phenomenon. We could see it as an important way to keep people attached to the labor force. Yet we might also see it as a barrier to productivity-enhancing labor market churn, as some workers might be more inclined to take a leap on a promising job opportunity if they are less concerned about having access to affordable health insurance. In a similar vein, low-wage employers might be obligated to offer more attractive employment options that they might under conditions of employment lock, assuming labor demand is robust (a big assumption). 



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