The Affordable Care Act and Labor Supply

Posted on February 5, 2014 by


On Tuesday the non-partisan Congressional Budget Office released it’s report – “Budget and Economic Outlook: 2014 to 2024” . The report is causing quite a stir because of the CBO’s estimates of the affect of the Affordable Care Act on the United States economy. President Obama has previously used CBO estimates to provide support for the ACA, so this latest report is particularly harmful to the president’s rhetoric on the affect of the ACA on the economy.

Rather than provide commentary, I’d like to show you some quotes from the CBO’s report. From page 40:

In addition, changes in people’s economic incentives caused by federal tax and spending policies set in current law are expected to reduce the number of hours worked such that aggregate compensation of labor will be almost 1½ percent lower in 2024 than what would occur in the absence of those changes. That estimate largely reflects changes in labor hours worked owing to the ACA. (emphasis added) Given the greater subsidies for health insurance to people with lower earnings and the higher taxes on some people under the ACA, some people will choose to work fewer hours, yielding a net reduction in aggregate labor compensation of roughly 1 percent over the period from 2017 to 2024, CBO estimates. Separately, rising incomes will push some taxpayers into higher tax brackets over time, which will reduce their incentive to work and trim aggregate compensation by almost one-half percent by 2024, according to CBO’s analysis.

Most of the analysis is in Appendix C – Labor Market Effects of the Affordable Care Act: Updated Estimates. Page 117-118:

The ACA’s largest impact on labor markets will probably occur after 2016, once its major provisions have taken full effect and overall economic output nears its maximum sustainable level. 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. … 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. … 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. (emphasis added) … 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 (emphasis added) (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).

CBO’s estimate that the ACA will reduce employment reflects some of the inherent trade-offs involved in designing such legislation. Subsidies that help lower income people purchase an expensive product like health insurance must be relatively large to encourage a significant proportion of eligible people to enroll. If those subsidies are phased out with rising income in order to limit their total costs, the phaseout effectively raises people’s marginal tax rates (the tax rates applying to their last dollar of income), thus discouraging work. In addition, if the subsidies are financed at least in part by higher taxes, those taxes will further discourage work or create other economic distortions,  depending on how the taxes are designed.

The employment destroying effects of the ACA that we knew would happen and are seeing occur have been quantified by CBO. Surprise, Surprise!