CBO finds Affordable Care Act cuts employment by equivalent of 2 million workers

Appendix C of the Congressional Budget Office’s ten-year economic outlook, regarding the labor market effects of the Affordable Care Act, explains in devastating detail just how much the Act will hurt the already weak labor market.

It’s pretty straightforward price theory, gauging the effects of the various taxes imposed and subsidies offered by the ACA. Below is a short summary of the CBO’s findings, followed by supporting excerpts from the report.

• The ACA’s subsidies will cause workers on the margin to restrict their labor in order to qualify for benefits, and the Act’s other special taxes on income will also result in less labor supplied.
• The labor market effects will be substantial, reducing employment by between 1.5 – 2% over the next decade.
• The disemployment effect will be largely concentrated among lower and lower-middle income workers, because they will be on or near the margins of the ACA’s insurance subsidies (<400% of the federal poverty line) and expanded Medicaid benefits (<138% of FPL).
• This 1.5 – 2% decrease in labor hours worked equates to roughly 2 – 2.5 million full-time equivalent jobs lost.

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  For the most part, this effect will not show up in unemployment figures. As it results from a decline in labor hours supplied, it will reduce total hours worked and labor force participation.

• For those unemployed and eligible for benefits, returning to a job that provides health insurance will result in a loss of Medicaid benefits or subsidies equivalent to an implicit 15% tax on income, reducing the incentive to work and resulting in longer stretches of unemployment.
• The phaseout of insurance subsidies as income increases has effects like those of progressive income taxes, except that in this case, the income and substitution effects work on the same direction, resulting in larger employment effects than would come from direct taxation.
• The penalty on employers who fail to offer ACA-compliant health insurance will be passed on to employees in terms of lower compensation, similar to payroll taxes, because it increases the cost of employing a worker.
• In addition, the ACA’s payroll and excise taxes on high income earners and expensive health care plans will also reduce the labor supply by decreasing worker compensation. This effect will be small compared to the effect of the insurance subsidies on lower income earners.
• The bottom line: incentives matter.

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The ACA’s subsidies will cause workers on the margin to restrict their labor in order to qualify for benefits, and the Act’s other special taxes on income will also result in less labor supplied.

The ACA includes a range of provisions that will take full effect over the next several years and that will influence the supply of and demand for labor through various channels. For example, some provisions will raise effective tax rates on earnings from labor and thus will reduce the amount of labor that some workers choose to supply. In particular, the health insurance subsidies that the act provides to some people will be phased out as their income rises—creating an implicit tax on additional earnings—whereas for other people, the act imposes higher taxes on labor income directly.

The labor market effects will be substantial, reducing employment by between 1.5 – 2% during the next decade.

CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive.

The disemployment effect will be largely concentrated among lower and lower-middle income workers, because they will be on or near the margins of the ACA’s insurance subsidies (<400% of the federal poverty line) and expanded Medicaid benefits (<138% of FPL).

Because the largest declines in labor supply will probably occur among lower-wage workers, the reduction in aggregate compensation (wages, salaries, and fringe benefits) and the impact on the overall economy will be proportionally smaller than the reduction in hours worked. Specifically, CBO estimates that the ACA will cause a reduction of roughly 1 percent in aggregate labor compensation over the 2017–2024 period, compared with what it would have been otherwise.

This 1.5 – 2% decrease in labor hours worked equates to roughly 2 – 2.5 million full-time equivalent jobs lost.

The reduction in CBO’s projections of hours worked represents a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024.

For the most part, this effect will not show up in unemployment figures. As it results from a decline in labor hours supplied, it will reduce total hours worked and labor force participation.

The decline in full time- equivalent employment stemming from the ACA will consist of some people not being employed at all and other people working fewer hours; however, CBO has not tried to quantify those two components of the overall effect. The estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor, so it will appear almost entirely as a reduction in labor force participation and in hours worked relative to what would have occurred otherwise, rather than as an increase in unemployment (that is, more workers seeking but not finding jobs) or underemployment (such as part-time workers who would prefer to work more hours per week).

For those unemployed and eligible for benefits, returning to a job that provides health insurance will result in a loss of Medicaid benefits or subsidies equivalent to an implicit 15% tax on income, reducing the incentive to work and resulting in longer stretches of unemployment.

Specifically, those people whose income would make them eligible for subsidies through exchanges (or for Medicaid), and who work less than a full year (roughly 10 to 15 percent of workers in that income range in a typical year), would tend to work somewhat less because of the ACA’s subsidies. For those workers, the loss of subsidies upon returning to a job with health insurance is an implicit tax on working (and is equivalent to an average tax rate of roughly 15 percent, CBO estimates). That implicit tax will cause some of those workers to lengthen the time they are out of work—similar to the effect of unemployment benefits.

The phaseout of insurance subsidies as income increases has effects like those of progressive income taxes, except that the income and substitution effects work on the same direction, resulting in larger employment effects than would come from direct taxation.

The implicit taxes that arise from the phaseout of the subsidies have effects on net income that are similar to the effects of direct taxes. With tax changes, however, the income and substitution effects typically work in opposite directions, whereas with the insurance subsidies the income and substitution effects work in the same direction to decrease labor supply. [To see how the substitution and income effects can create counteracting pressures on people’s willingness to work when tax rates change, consider the case of an increase in tax rates. The resulting reduction in take-home pay for an additional hour of work makes work less valuable relative to other uses of time and encourages people to work less. Reduced after-tax income from a given amount of work, however, encourages people to work more to limit the decline in their standard of living.]

The penalty on employers who fail to offer ACA-compliant health insurance will be passed on to employees in terms of lower compensation, similar to payroll taxes, because it increases the cost of employing a worker.

Under the ACA, employers with 50 or more full-time equivalent employees will face a penalty if they do not offer insurance (or if the insurance they offer does not meet certain criteria) and if at least one of their fulltime workers receives a subsidy through an exchange. … In CBO’s judgment, the costs of the penalty eventually will be borne primarily by workers in the form of reductions in wages or other compensation—just as the costs of a payroll tax levied on employers will generally be passed along to employees. Because the supply of labor is responsive to changes in compensation, the employer penalty will ultimately induce some workers to supply less labor.

In addition, the ACA’s payroll and excise taxes on high income earners and expensive health care plans will also reduce the labor supply by decreasing worker compensation. This effect will be small compared to the effect of the insurance subsidies on lower income earners.

[T]he payroll tax for Medicare’s Hospital Insurance program has increased by 0.9 percentage points for workers whose earnings are above $200,000 ($250,000 for those filing a joint return). … On net, CBO anticipates…the tax will yield a small net reduction in labor supply.

In addition, beginning in 2018, the ACA imposes an excise tax on certain high-cost health insurance plans. CBO expects that the burden of that tax will, over time, be borne primarily by workers in the form of smaller after-tax compensation. …After-tax compensation will thus fall whether firms pay the excise tax or take steps to avoid it, and the resulting increases in average and marginal tax rates will cause a slight decline in the supply of labor, CBO estimates.

The bottom line: incentives matter.