Incentives Matter: Why Estimated Job Losses Under Obamacare Have Tripled

by Rea Hederman Jr.

Today the Congressional Budget Office upped the number of work hours lost due to Obamacare by a lot — in fact, they tripled their previous estimate.

Work hours can be lost by employers reducing the number of jobs, but also individuals voluntarily dropping out of the labor force or not working as much. 

Our awareness of the second group owes much to the excellent microeconomic analysis done by University of Chicago economist Casey Mulligan. Mulligan has done a great deal of work looking at the growth of transfer programs such as food stamps and Medicaid and how these programs will discourage work, particularly for lower-wage earners. Today’s report shows that the CBO has moved substantially in Mulligan’s direction: Simply put, the large subsidies under the Affordable Care Act will drive many people out of the labor market. 

The ACA has the pernicious effect of strengthening the poverty trap, where people make the rational decision not to work because work simply doesn’t pay as well as government benefits. Mulligan’s research is directly cited by CBO as part of its analysis finding a sharper downturn in hours worked.

The decline in jobs and hours worked isn’t just individuals leaving the labor market, though. Higher costs to business discourage work and hiring, and the CBO correctly states that eventually all workers will pay the cost of the employer mandate by having lower salaries. 

In the short term, however, businesses will simply hire fewer workers. And why? Because the ACA has increased labor costs. This fact isn’t just a theoretical exercise, it’s a current reality. Repeatedly, the Federal Reserve’s report on current economic conditions has a variation of this sentence: “Employers continued to express concern about potential cost increases related to the Affordable Care Act.”

The CBO also states that the higher payroll tax on income over $200,000 in Obamacare will cause people to not work as hard. Just to repeat this non-shocking finding: Higher taxes reduce effort and work.

The ACA will not create jobs. There will instead be a lot less employment and even more people reliant on government benefits. With each new CBO report, the predictions of Obamacare critics seem more and more accurate. Kudos to Mulligan and others who have painstakingly proven that incentives matter — and Obamacare’s incentives hurt work three times as much as previously estimated.  

— Rea Hederman Jr. is director of the Center for Data Analysis and Lazof Family Fellow at the Heritage Foundation.