The Agenda

Obamacare and the Gender Gap

Could it be that the Affordable Care Act will actually widen the gender gap? President Obama has described the raw wage gap between women and men as a serious problem that public policy ought to solve. As we have discussed, however, the raw wage gap isn’t necessarily the most useful summary statistic for understanding how women and men far in the U.S. labor market, as it isn’t an apples-to-apples comparison. For an apples-to-apples comparison, we would want to compare the wages of women and men who are full-time, full-year employees who work similar hours and have similar experience. Such a comparison will yield a much smaller wage gap, in large part because women are more likely than men to reduce their work hours in order to meet family responsibilities. Given that women in younger cohorts are surpassing men in educational outcomes, this is a social dynamic that may well dampen U.S. growth potential over time, and I think it makes sense that business enterprises, civil society groups, and policymakers are thinking about how we might make it easier for women, and men, to better combine work and family life.

Yet because the president has described the raw wage gap as an “embarrassment,” it is worth reflecting on the fact that his signature domestic policy legislation seems likely to exacerbate it. A new analysis from the Congressional Budget Office projects that Obamacare will reduce full-time equivalent employment by 2.5 million, or three times what the CBO had estimated when the law was passed in 2010. It is important to keep in mind that this decline in work effort will largely reflect workers choosing to work fewer hours, as Josh Barro of Business Insider explains:

The decline in work will be almost entirely because people choose to work less, not because employers choose to hire less. Republicans tend to talk about Obamacare as “forcing people into part-time work.” But CBO expects the law to have “small or negligible” effects on labor demand in most parts of the economy. The main effects will come on the labor supply side. This has important implications for wages: While a decline in labor demand will tend to reduce wages, a withdrawal of labor supply may actually help push them up, as employers compete to hire from a reduced pool of available workers.

Obamacare will discourage people from working in two main ways: through “income effects” and “substitution effects.” Broadly, fiscal policies have two kinds of effects on behavior. There are income effects: When you give a person a subsidized health plan, you raise that person’s real income, making it easier for him to quit his job, work fewer hours, or take a job that doesn’t offer insurance. And there are substitution effects: If you phase out that person’s health insurance subsidy with rising income, you encourage him to work less, and instead substitute non-taxed activities, such as leisure or child-rearing. Importantly, this substitution is a distortion: In absence of the tax, the worker would have preferred to work and earn his pre-tax wage, rather than spend time on something else.
When the CBO found that Obamacare would reduce work effort in 2010, many of the law’s defenders argued, reasonably enough, that the fact that it would reduce was not necessarily a bad thing, particularly if it meant that people who were only working to retain their health insurance were now free to make other choices, i.e., if income effects dominated substitution effects. Unfortunately, it is a safe bet that both income effects and substitution effects will be an important part of the story, and these effects won’t impact labor force participation by women and men equally. Matt Yglesias offers two stylized examples of workers who might reduce their work effort in response to the new health insurance subsidies available under the Affordable Care Act:

John is 59, has had a good career as a mechanical engineer, has saved pretty diligently his whole life, and also has a chronic heart condition. He’s got the cash to retire early, but he’s not yet eligible for Medicare. So he needs to keep working more than he wants to for a few more years. Or at least he would have if not for the Affordable Care Act, which makes it feasible for him to buy insurance on the private market and get a jump start on his fishing plans.

Mary is 27 and pregnant. She’d like to start working part time once the baby is born. But even though her husband’s company is doing OK it’s too small to provide health insurance to its employees. So the family really needs Mary to put in enough hours to qualify for benefits at her office. That is, they would need her to work full time if not for the Affordable Care Act, whose small-business tax credits are going to let her husband’s boss start offering insurance.

Those are good stories, right?

Though one assumes that there will be many Johns and many Marys, the social norms that influence labor force participation in our country make it likely that while the number of female and male near-retirees that exit the workforce, or rather that reduce their work hours, might be broadly similar, the number of women who reduce their work hours once they have a child is considerably larger than the number of men who will do the same. (See Alberto Alesina, Andrea Ichino, Loukas Karabarbounis on “gender-based taxation and the division of family chores.”) The Pew Research Center reports that mothers are the sole or primary breadwinners in 40 percent of U.S. households with children. One-fourth of these households are headed by single-mothers; 15 percent of these households are households in which a mother earns more than a father. This leaves 60 percent of households with children in which a father earns more than a mother, and as a general rule, second earners already face high effective marginal tax rates. The Affordable Care Act will tend to increase marginal tax rates on second earners, as the value of health insurance subsidies is tied to household income.

There is a decent case for not being too concerned about this outcome. Most of the mothers who choose to reduce their work hours in response to the new health insurance subsidies may well be delighted by the prospect, and perhaps we shouldn’t fret too much about the mothers who find that the returns to work will be so low in the wake of the new health insurance subsidies that they feel compelled to quit jobs that they find meaningful and worthwhile. But if that is the case, we also shouldn’t fret too much about the raw wage gap. What I find frustrating is the prospect that if Obamacare does indeed lead to an increase in the raw wage gap, future left-of-center politicians will use this as an opportunity to press for some other supposed solution, like legislation making it easier for trial lawyers to target employers.

And on a tangential note, Yglesias draws attention to Obamacare’s small-business tax credits, and how they might benefit workers. Recently, Seth J. Chandler of the University of Houston Law School described how the ACA might result in an adverse-selection death spiral in the small-group insurance market:

We have seen already the storm created by requiring most health insurance sold to individuals to be more generous in its benefits than was frequently the case before, and by requiring individuals to be rated, not on the actual health risks they face or even an approximation thereof, but on the basis of a metric based on the Obama administration’s ideas about equality. Individuals have seen their policies canceled only to find that replacement policies on the exchanges are far more expensive and, sometimes, offer no better benefits. Even when the individual situations end up being resolved in a satisfactory way, enormous stress has been generated. Moreover, when the dust settles, it may well end up, notwithstanding the promises and huge expense, that the net number of people with individual insurance failed to increase much if at all in 2014 once the ACA took full effect.

The same storm is brewing in the small-group market. Indeed, the only reason the storm has been delayed is that clever insurance advisers had small employers preemptively renew their policies in late 2013 so that the new requirements would not kick in until late in 2014. Although no one knows for sure, there appears to be a consensus that many of the policies now sold in that market fail to provide all the “essential health benefits” required by the ACA, particularly as interpreted by the Obama administration, or have overly burdensome cost-sharing requirements. In some instances — such as a failure to provide pediatric vision benefits — the departures will be inexpensive and easy to fix; in others, however — such as “excessive” cost sharing, a failure to provide adequate behavioral health benefits, or (for employers who have fewer than 15 employees and thus are exempted from the federal Pregnancy Discrimination Act) a failure to cover at least some maternity expenses — the departures may be quite expensive to remedy.

Small business is thus likely to find itself in the same predicament as individuals, in which cancelation notices abound and immediate answers are unclear or unsatisfactory. For example, if a low-health-cost business purchased a policy that did not cover several of the items required by the ACA, it might find itself forced to choose between a more expensive “better policy” or none at all; and if it does purchase a new policy, it may find itself treated as an average-cost business rather than (correctly) as a low-cost one. While federal tax credits the ACA provides may undo the damage for some small businesses, or even improve their situation, that will not help the hundreds of thousands of small businesses that have too many employees or that pay their employees too much to be eligible for the tax credit. Result: Hundreds of thousands or even millions of small businesses and surely millions of their employees and dependents will have their health-insurance coverage seriously jeopardized.

To take the story a bit further, it is certainly possible that Mary’s husband might gain access to insurance coverage through his employer. It could be that the firm in question couldn’t afford to self-insure in the past, as its employees had higher-than-average medical expenses. The Obamacare SHOP exchanges will allow such firms to purchase insurance at rates that do not reflect these higher-than-average expenses. Yet firms with lower-than-average medical expenses that have self-insured in the past will find the rates charged on the SHOP exchanges unattractive, and so they will avoid them like the plague. Some of these firms will continue to self-insure; others will find that their old plans are no longer acceptable under the new ACA regulations, and so they will drop coverage. So though there will be some Marys with husbands who gain coverage, there will also be Marthas and Martin with spouses who lose coverage, and who will have to find new coverage options that don’t match their needs.


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