Background
Since the Congressional Budget Office released its report earlier this week on the United States’ ten year economic outlook, a furious debate has been raging about over the report’s findings about the Affordable Care Act (aka “Obamacare”). In the report, CBO revised its estimate of the impact the health care reform will have on the labor market, taking into account new research on the effect of the law’s taxes, mandates, and subsidies.
· Read our summary of the key section, along with excerpts from the report, here.
The Controversy
Much of the debate has focused around the finding that the combined effect of the ACA will be to reduce total employment by the equivalent of 2 million full-time workers below what it would be without the law, by 2017. Every word here is important, and many headlines have subtly misstated this point.
Some on the right have claimed that this means the law will “destroy” two million individual jobs, or that it will make two million Americans “unemployed.” Those on the left have said this distorts what the CBO actually said, and the fact-checkers at Politifact rated House Speaker John Boehner’s claim that Obamacare is “expect to destroy 2.3 million jobs” as “mostly false.”
But even Politifact’s analysis is potentially misleading. Their summary of the report stated, “The CBO estimated that by 2017, there would be about 2 million fewer workers than there would be in the absence of the law. CBO said that number would grow to about 2.5 million by 2024.”
The Facts
CBO did not say either that the ACA will cause “2 million fewer workers” to be employed, or that it will “destroy” 2 million individual jobs, or that it increases the ranks of the unemployed by 2 million people.
What the report actually said was that the ACA will cause a reduction in total employment by 1.5 – 2 percent over the next decade. This means that total hours worked over the next decade will be about 2 percent less than it would have been without the law.
CBO concluded, “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.” This is a huge reduction, and the finding has not been much disputed, though widely misunderstood.
Why will this happen?
How this disemployment effect is expected to happen is critical to understanding the controversy. The labor market, like all markets, has two basic components: supply and demand. CBO found that the reduction will result “almost entirely because workers will choose to supply less labor.”
The ACA’s trillions of dollars in taxes and subsidies are tied to income, and they are progressive. Medicaid benefits and insurance subsidies are cut as your income increases, while higher income workers and those with expensive health care plans are subject to additional taxes. The effect is the same: the law reduces the benefit of working, thus reducing the supply of labor below what it would otherwise be.
Who does it affect?
For workers are on the margin–that is, close to the threshold for having their benefits cut or their taxes increased–it makes sense to reduce the amount you work in order to keep subsidies or avoid taxes. Workers can do this by working fewer weeks per year, fewer hours per week, dropping out of the labor force, or declining to return to full-time employment at a job that has health insurance–which the law mandates all businesses with over 50 employees offer (such businesses employ more than half of all workers in the US).
This means that the effect will mostly show up as workers working fewer hours or dropping out of the labor force entirely. This reduction in supply will be the equivalent of two million fewer full-time jobs in the economy, but it doesn’t mean that two million fewer actual individuals will drop out of the labor force, as Politifact claimed.
CBO explicitly stated, “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.” Emphasis added.
It also doesn’t mean that two million “jobs” will “disappear.” The latter claim implies a reduction in demand from employers for labor, whereas the effect found by the CBO was almost entirely from a reduction in supply from workers.
Does this mean that the unemployment rate will go up?
No. In fact, the report stated this effect likely won’t show up in official unemployment or underemployment figures, as it results from workers choosing to work less, while unemployment is defined as workers who are seeking employment but are unable to find it (underemployment means employed workers seeking more work than they can find).
Unemployment results when quantity supplied is greater than quantity demanded at a given wage level, creating a surplus of labor. This is different from the effect CBO is talking about, which is a reduction in quantity supplied because of a reduction in the effective compensation rate for labor.
Why is this a bad thing?
In some truly appalling displays of motivated reasoning, which I won’t link here, some on the left have claimed this actually great news, because workers are “voluntarily” choosing not to work, and because it won’t destroy “jobs,” those precious things by which politicians live and die, we needn’t worry about it
It’s good thing, they say, because work just sucks, and if you pay people to work less (or punish them for working more), it’s actually good for them, because then they will be free to do more important things than creating value for others. Jay Carney called this induced reduction in employment giving Americans “the opportunity to pursue their dreams.” By punishing them for working.
But even if we think fewer Americans working is a good thing (many policies, from unemployment insurance to the minimum wage, seem to be based on this notion), it’s still bad news for the economy.
Production, not jobs, is what we ought to be concerned with when we talk about the health of the economy. We could pay people to dig ditches with spoons if all we cared about was making people do hard stuff, but we don’t do that because the point of labor is to create value. But less employment also means less output: CBO estimates that this 2 percent reduction in labor hours will result in about 1 percent less total labor compensation over the next decade (it’s proportionately smaller because most of the reduction in labor comes from lower income workers).
It means fewer goods and services are being produced and less value created. It means less production and more consumption. It means less wages with which buy, save, or invest. It means less demand and less investment. It means lower profits and higher interest rates. It means less capital and lower productivity. It means the country as a whole will be poorer. This also means a smaller tax base with which fund Jay Carney’s American Dream of people sitting around not working.
Conclusion
It’s certainly true that the short-run welfare effects for particular individuals because of the insurance subsidies are not all bad–after all, getting money is helpful for any family, wherever it comes from–it is also true that in the long-run we’ll all be worse off by having fewer people working, investing, innovating, and collaborating. The collective intelligence of our free market economy, the sum of all the expertise, skills, and knowledge available to workers and employers, will decline with fewer people involved. This is a bad thing, as it reduces the number of things we can do and create. The horizon of the possible shrinks. This will hurt us and our children in the long-run.
I don’t have space here to talk more broadly about all the pros and cons of government providing health care, but proponents of the law are kidding themselves if they think the goal of public policy should be get more people out of the already shrinking labor force. Incentives matter. Laws have tradeoffs and unintended consequences. Make the case, if you can, that these tradeoffs are worth it, but don’t pretend they don’t exist.
Denying these tradeoffs is dishonest, and most people realize that. That’s hurts whatever credibility the Democratic Party has left on health care, and it’s not helping our public discourse either. Moreover, when Republicans misrepresent crucial facts to score quick political points, it hurts credibility of anyone who raises concerns about the health care reform. The bottom line is, as always, be skeptical.