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

Just How Much Damage Does Obamacare Do to the Labor Market? A Lot



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The Congressional Budget Office’s latest set of ten-year projections has made a great deal of news mostly because of one major finding: The Affordable Care Act will reduce the amount of hours worked in the U.S. economy by the equivalent of 2 million full-time employees each year — the equivalent of 2 million jobs disappearing, in other words, and a 1.5–2 percent reduction in the labor supplied overall.

But it’s important to understand why that’s happening: The ACA isn’t so much “killing jobs” as it is killing the reasons people have to get jobs — and that’s a serious problem for the American economy, and an even bigger problem if you generally think it’s a good thing for people to work.

If Obamacare were killing jobs as in causing employers not to hire people, that would mean it’s reducing the demand for labor. It does that, too (more on that later), but for the most part, the reduction the CBO sees in the U.S. economy’s workers occurs on the “supply side” — and as the term redolent of Reaganomics might suggest, that’s really important.

There are two big things going on:

One, Obamacare expands Medicaid and extends huge subsidies for purchasing health insurance that shrink as one earns more income, which raises effective marginal tax rates on a lot of people. Who? For one, people earning anywhere from just under 133 percent of the poverty line (the end of Medicaid eligibility, which is approximately $15,000 for individuals and $31,000 for a family of four) to 400 percent of the poverty line ($45,000 for individuals and $94,000 for a family of four). Those income levels include at least 39 percent of Americans. Marginal tax rates are going up on some other Americans, too, via just plain old taxes: The CBO says that the 0.9 percent surcharge on incomes over $200,000 ($250,000 for families) will have “a small net reduction in labor supply.”

Second, Obamacare makes it easier and cheaper to get health insurance without having a job that provides it.

The former of these, all else being equal, is an unequivocally bad thing: Higher marginal tax rates, a feature of Obamacare’s subsidies, make people less likely to work an extra hour of work or take a higher-paying job because they make it less appealing relative to other things someone might do with his time (leisure, basically). And the tax hike involved in Obamacare is big: The CBO estimates that it’s about 15 added percentage points on top of someone’s marginal federal tax rate (which for people in this income cohort is probably somewhere between 0 and 20 percent to start, though their implicit marginal tax rate is probably much higher– now poor people are paying a higher tax rate than Warren Buffett!).

The latter, a reduction in something called “labor lock,” is both a good and bad thing. On the one hand, it’s good for the economy at large because it helps free up the labor market: People can leave jobs they rely on for health insurance to start their own businesses, work for themselves, or work a part-time job that doesn’t provide health insurance while caring for their kids or going to school. But on the other, it allows people to leave the labor force when they might have had to hold a job exclusively for the sake of health insurance otherwise — this is obviously a good thing for them personally, but it’s not a good thing for the economy at large. This happens due to Obamacare at both ends of the labor market: Low-income people can choose not to work altogether, though we don’t know just how big that effect may be (there’s conflicting empirical evidence, but the CBO assumes it’s pretty substantial). And now older people can afford to retire before they reach Medicare age, because the ACA is most beneficial to older, sicker people. This, like the above instances, may sound nice for beneficiaries, but it’s hard to imagine that most Americans think retiring before the age of 65 is something the federal government ought to be subsidizing.

Josh Barro, in a very good post on this report, argues that the overall effect I just described is “mostly good.” In terms of first-order utility effects for the people involved, that may be true, but for the economy and the labor market as a whole, the fact that the CBO thinks it’s a net negative for labor-force participation seems likely to outweigh the other economic benefits. 

So overall, both of these two changes are going to encourage fewer people to work, and to encourage the ones who do work to work less. For decades, Americans have tended to work harder and for longer than people do in other countries, which has made the U.S. richer and more competitive – and as our workforce ages and our entitlements get more expensive, encouraging economic growth and labor-force participation is going to become more important, not less. (This is not just an economic problem, too: Most Americans — especially conservatives, but most people in general – think that work is a good thing for individuals and for society, mentally, spiritually, etc. A bigger welfare state cuts against this priority.)

None of this will necessarily be news to people who looked at the structure of the law: University of Chicago economist Casey Mulligan, for instance, calculated that the average increase in marginal tax rates on labor will be about five percentage points (the CBO’s estimate above, of ten to fifteen points, is the increase for the people affected — Mulligan averaged it across the whole labor market). An NBER study from last year projected that 700,000 Americans would leave the full-time work force because of reduction in “labor lock.”

The CBO’s predictions are just a very detailed way of adding up all of these effects — and the reason it’s news is because they didn’t do nearly as much work on the question when they released their last analysis of the labor-market effects of the law, in 2010 (see Box 2-1). Back then, they estimated that the shrinking of the labor market would be just a third of what they calculate in today’s report. While there are some new studies the CBO took into account, the model they constructed now could have basically been used to assess the law back in 2010, if someone like Mulligan had the resources to calculate what their findings would mean for the economy as a whole. But since a lot of economists could have guessed that the above effects would work out something like this, of course, it’s always been false for the president to claim, as he has, the ACA isn’t going to hold back economic growth.

The CBO’s ultimate numbers are, of course, fallible. Have they constructed the right model to measure what effect the ACA will have? Theirs is probably better than anyone else’s, but it is just a model. A much better one than what they used when they initially assessed the law, though.

There are a number of other, more obscure labor-market effects the CBO notes were part of its model this time around: While generally older, sicker people can now leave the workforce before reaching Medicare because they can get subsidized insurance, some people who could be eligible for Social Security Disability Insurance and Medicaid for the disabled, the CBO thinks, won’t go on those programs because they can get subsidized private insurance when they’re on the labor market. Moreover, people who live in states that don’t expand Medicaid who aren’t eligible for it under current law will now have an incentive to earn enough to get subsidies on the exchanges — which requires earning more than 100 percent of the federal poverty level. (This is actually a strong negative income tax, which encourages work.)



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