The Corner

How Obamacare Will Do Even More Damage to the Labor Market than the CBO Said

This morning, the Wall Street Journal has a piece on “Obama Deniers” — those Democrats running for reelection who are trying their best to distance themselves from the president. More specifically, very few Democrats are running for reelection on the greatness of the ACA or Obamacare.

Why? Because there’s not much to say. And that’s even though, as insurance expert Robert Laszewski explained this week in USA Today, the administration has become a master at spinning the facts about Obamacare. The administration, for instance, “put a gag rule on insurance companies from talking about just how well the second version of is working,” which is probably a sign that it isn’t going as well as they hoped it would. It’s also “delayed the start of the 2015 open enrollment from last year’s October 1st start date to November 15th this year,” which is conveniently after the elections.

But that just means we need to docment the side effects of the law. A new Mercatus Center study, “The Affordable Care Act and the New Economics of Part-Time Work,” by University of Chicago’s Casey Mulligan looks at the law’s damage on labor markets. There are three major ways it discourages work: (1) an explicit tax on full-time work, (2) an implicit tax on full-time work for those who are ineligible for the ACA’s health-insurance subsidies, and (3) an implicit tax that links the amount of available subsidies to workers’ incomes. What’s the sum of these problems?

The health subsidies’ structure will put millions in a position in which working part-time (29 hours or less, as defined by the ACA) will yield more disposable income than working their normal full-time schedule. This creates a strong incentive to work less. He estimates these ACA disincentives will reduce work by about 3 percent, or about 4 million full-time-equivalent workers. This is the aggregate result of the law’s employment disincentives, and it’s nearly double the impact most recently estimated by the Congressional Budget Office.

Nearly half of American workers will be affected by at least one of the ACA’s employment taxes — and this does not account for the indirect effect on others as the labor market adjusts.

Notably, the ACA will push more women than men into part-time work. Because a greater percent­age of women work just above 30 hours per week, it is women who will be more likely to drop to part-time work as defined by the ACA.

Mulligan’s findings are consistent with the work of other economists, such as Nobel laureate Ed Prescott. I explained the connection in the past:

“In his famous 2004 paper, ‘Why do Americans work so much more than Europeans?’ [Prescott] shows that workers spend considerably more hours working when marginal tax rates on their incomes are lower. So basically, over time, people will reduce the number of hours of work, economic growth slows down, and less revenue is collected.”

In other words, we can expect tax increases to have an impact on the available labor supply.

But Prescott’s other big insight is that a generous redistributive system makes it easier to reduce one’s labor supply. As George Mason University economist Garett Jones explains, “Prescott argues that if you raise taxes for pure redistribution from the ‘average person’ back to the ‘average person,’ then the tax hike doesn’t make the ‘average person’ poorer: The government is taking money out of everyone’s right pocket and slipping it into their left. But if the income effect is gone, what’s left? The disincentive to work: The pure substitution effect.”

In other words, higher taxes coupled with more generous benefits equal a strong incentive to work less.

The bottom line: Lawmakers can try to distance themselves from Obamacare, but Americans will feel its deep consequences on the labor market for a long time. Unless, of course, Congress finds the courage to reform the whole thing. 



Veronique de Rugy — Veronique de Rugy is a senior research fellow at the Mercatus Center at George Mason University.

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