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!
Derek Barnhart
February 5, 2014
The ACA has continually proven itself to be detrimental to the American laborer. I have had personal friends and parents of friends who are making cuts of their employees to hit less than the quota that would put them in a position to force workers and the business to have the ACA’s health plan be applicable to them. Even looking to the subsidies being funded by taxes just discourages the American laborer from wanting to work harder or excel in what he/she does for in doing so they are going to be paying more taxes and this only discourages the individual from wanting to pursue successes. when you begin to understand that the more money you make, the more you end up giving up to the government and its plans of re-disbursement to lower income people you have less and less of a drive to pursue such success.
Jeff Haymond
February 6, 2014
Wow–Incentives matter–that sounds like it ought to be called an economic law. Who would’ve thought that if you effectively tax labor more (thru subsidy removal), the quantity of labor supplied would decrease? Does the CBO really mean to say that supply curves slope up and demand curve slopes down? That cannot be!
anthonyberemand
February 6, 2014
The loss of 2.5 million workers does seem to be detrimental, however how many of those 2.5 million would be elderly and opting to retire early due to the free healthcare coming their way? Just a question. That would make the loss less of an issue in my mind.
Bert Wheeler
February 6, 2014
Hi Anthony, Good question. While I have not seen the econometric work we can be pretty much 100% certain that the 2.5 million are additional (not elderly retiring) to those who would have choosen to leave the labor force before the ACA. The CBO does technically good work and to “overlook” those who would retire anyway would not happen.
Michael Miller
February 6, 2014
Would this affect small businesses? Let’s say the ceiling for subsidies is $50,000. Let’s also say it’s a sole proprietorship and the owner makes $100,000, but they buy a company car for $51,000. The company would thus make $49,000 and be below the ceiling to gain the subsidies, right?
Bert Wheeler
February 7, 2014
Michael, I’m not certain how the hypothetical case you describe would play out. I do not know the ceiling numbers. Number of hours an employee works (30/week) is important. You might be able to find more information on your question here: http://www.sba.gov/healthcare.
jamesdyksterhouse
February 6, 2014
This is an interesting topic. It makes you think twice about the political process when a bill like this is approved. According to the Washington Post, there was “supposedly” 59% support for the bill early on in the process. I believe this staggering statistic shows how uninformed Americans are when it comes to politics. The same poll was taken again in September of 2013 that confirmed that only 39% actually support it. Is this Obama trying to make his impression on our country before he leaves office or does he really believe in the Affordable Care Act? Hmm.
Oh, I just can’t wait for the long term effects…
Jesse Froese
February 6, 2014
This loss of labor is not only detrimental to the workers who are losing hours, but it appears that it will also be detrimental to the economy and the government. Less hours worked in a week means less income-tax generated for the government. In a time in which the government needs all of the money that they can generate in order to deal with the current deficit and other potential problems like the rising Social Security costs due to Baby Boomers retiring, this “side-effect” of the AFA does not seem at all desirable.
Sarah Howland
February 7, 2014
Not surprised at all, moving from one income bracket to another income bracket can actually cause a significant cut in income. It is not wonder people will not want to continue working when they can make more money NOT working. The system as it stands provides disincentives and must be altered in order to change the motivation to work.
Anonymous
February 8, 2014
So maybe I’m missing something but this report sounds to me like it won’t be bad for the workers, since they are choosing to not work they no longer value work as much as free time. And it shouldn’t hurt the economy because with a lower labor supply one of two things should happen. Either unemployment should go down because there is that gap between labor supply and labor demand right now, orb wages will go up to raise the labor supply and bring us back to an equilibrium.
Bert Wheeler
February 10, 2014
Excellent comment – there is a similar discussion at the Washington Post largely b/c the “fact checker” at the Post identified that the CBO’s prediction did not involve a decline in employment (as we define employment). I would argue that from both an aggregate and individual perspective that if the prediction come to fruition that it is very harmful to the US economy and culture than a similar loss of jobs from the demand side of our economy. On an aggregate level, these 2.5 million jobs mean that 2.5 million people will not be producing and creating output and wealth. This is wealth creation that is simply lost. People were created to work – to be creative. So that aggregate output is simply lost. This hurts individual people because, they do not fully grow and develop to be what God meant them to be to be. Through our work comes human flourishing; we don’t work – we don’t flourish. Work is such a very important part of who were created to become. This is a further statement of the United States economy becoming a welfare state. These people not working will need to be supported by someone. Someone will need to create goods and services for the 2.5 million people now choose not to work. I do think in some ways this CBO prediction is worse than if we were losing 2.5 million jobs on the demand side of our economy.
Anonymous
February 10, 2014
Dr. Wheeler those are all very good points in response to my question and I could see how this will hurt individuals. But I still don’t think I see that this hurts the aggregate because the 2.5 million FTEs should be replaced by individuals currently unemployed. The new group would probably need some assistance, but maybe not if they are only working less hours instead of completely quitting but that should be made up for in the people who are able to work more hours or work at all
C Ericson
February 8, 2014
Since people make more not working than working (at the margin) because of subsidies, we are in effect trapping them in a lower bracket. I wonder if our income inequality problem could be solved if we removed those subsidies because people would get paid for how much they worked and not get paid for how much they didn’t work. Therefore they would have more incentive to work and make more. What would be the consequences of removing those subsidies?
Nicole Doornink
February 14, 2014
Looking into the effects of our legislation is always astounding to me, so much more is impacted than what is expected to be impacted, every time. I believe that reducing the number of work hours is truly ä major issue, as Gif created us to be workers. We are already seeing so many absences of good leadership and of hard working people throughout our nation today, that for people to be working less would only extend these effects. As I stated, I see this as a negative thing; however, I have one contrary question. Could this possibly do some leveling to the playing field as far as incomes across the country? As people are willing to work fewer hours, wouldn’t businesses have to offer up higher salaries for their employees, and possibly hire additional employees? Therefore, providing jobs for the unemployed and reducing the net profit in corporations? Although, I do also understand that not every business could afford this.
Bert Wheeler
February 14, 2014
Hi Nicole,
Most analysis of the labor market is very similar to the analysis that you have made. I’m certain that there will be some adjustment when labor supply is cut back b/c of the ACA, we would expect wages to be higher. The labor market is diverse and complex so I don’t know if people available for employment will match up with positions that will be vacated. I’m also not certain about net corporate profit necessarily falling. However, I do think you have made excellent points and your analysis is very good.
jdxbyknxqi@gmail.com
February 15, 2014
Another Alienware design, the M15x is not as robust as the M17x, but will give you a run for your money. The Nehalem architecture has proven to be very miserly on power, and the Core i3 is no different.
Kyle Funtik
March 26, 2014
Personally, I can see a positive spin on people voluntarily leaving the workplace. That gives more opportunity for those, like myself, who desire to work and continually improve their company and the national economy. I understand the idea that Dr. Wheeler brought up about 2.5 million people not producing anymore, but if they did not want to work in the first place, then how much were they actually creating? I think they will have created just enough for the company to make a profit and keep money flowing in. New employees who enjoy their job, are good at it, and want to make a profit will effectively create more than those who do not, right?