More Obamacare Means More Unemployment

According to the Congressional Budget Office, the Affordable Care Act (aka Obamacare) will reduce the labor force by 2 million workers by 2017.  And it’s not because employers aren’t hiring.  The CBO explicitly states that the Affordable Care Act will “reduce the total number of hours worked, 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.”  Interestingly, the same analysis performed by the CBO in 2011 showed a mere 800,000 person reduction in the labor force by 2017.  Why is this estimate so different now?

The reason is the newly implemented structure of Obamacare.  Under the Affordable Care Act, Americans are provided with a certain amount of free health care given the amount they work.  In the reverse fashion of our progressive tax system, as you work more (generating more income and contributing more hours), the amount of free coverage you receive declines.  According to CBO Director Douglas Elmendor, in this way Obamacare imposes an “implicit tax on additional work.”  In response to this implicit tax, the CBO estimates that significantly more workers will choose to work part time instead of full time, as doing so maximizes their level of free coverage.

Specifically, the law works as follows. First imagine an American supporting a 4 person family.  This American can choose between a part-time job paying $36,000 a year or a full-time job paying $42,000 a year.  If he chooses the part-time job, he will qualify for about $10,000 more of free coverage each year relative to the full-time job.  Assuming consumers treat health care coverage as a type of income/compensation (I feel safe making this assumption because health care coverage is now legally required.  If you’d like to challenge this assumption, please do so), the part-time job is clearly the better choice.

Now consider another American support a family of four.  He is choosing between a job paying $54,000 a year and a job paying $72,000 a year.  Given the reverse-progressive (regressive?) coverage rates of Obamacare, this individual would only lose out on $7,000 of free coverage by choosing the higher paying job.  As such, this American, who is in in a higher income range, will not distort his behavior based on Obamacare’s coverage rules.

What this example shows is that Obamacare does distort employment decisions, and that it does so on the low-end of the income spectrum.  The benefits for low-wage employees are so high, that Obamacare encourages them to remain low-wage employees.  For high-wage employees, while losing out on free coverage is certainly disappointing, the free coverage is not significant enough to alter indivdiual behavior.

At a time when income inequality and a lack of income mobility are such key issues in this country, it seems that Obamacare is fighting against our end goal: making the American Dream easier.  At least for the poorest Americans, Obamacare seems to encourage individuals to give up on the American Dream, because if the government will pay your expenses for you, why go out and get a higher paying job.  Personally, I think that in this way, the Affordable Care Act is hurting America.  And while I think health care is extrememly important, maybe Obamacare should focus more on helping businesses pay their full-time employees healthcare (which would likely encourage employment as it is a requirement for coverage) instead of bypassing businesses and going straight to consumers…

2 thoughts on “More Obamacare Means More Unemployment

  1. mdbold

    The title of this post misrepresents what’s actually being talked about. People choosing to work less is not the same thing as more unemployment. Don’t get me wrong — people choosing to work less could still be harmful to the economy, but it is not unemployment, in the traditional sense, we’re talking about here.

  2. mhupp

    Interesting points, but I don’t agree with you on this. First of all, we’re talking about a voluntary reduction in hours worked. When people choose to work less, they’re doing that because they believe they’ll be better off with less hours on the job and more leisure. You may disagree with them and believe that they’d actually be better off not reducing their hours. But why exactly you’d know what’s good for them better than they know themselves, I don’t really get. So let’s give them the benefit of the doubt. If their baseline income is low enough to make them value the additional coverage more than the foregone income, they’re doing the right thing and there’s no reason to think that’s bad.
    After all, these people aren’t actually going to be unemployed. I doubt that anybody will choose unemployment over working if they have a job. These are by definition employed people. When employed people decide to work less, they’re not unemployed. Generally, anybody who voluntarily chooses not to work doesn’t count as unemployed. Even if these people voluntarily gave up their job because they think they’ll be better off without it, and they then don’t try to get a new one, they won’t be unemployed. The unemployed don’t have a job and would like to work. Those guys wouldn’t have a job and would like not to work. Different thing.
    On a more technical note, I think people regard insurance subsidies not as a form of income, but rather as a substitute for income. And probably a rather weak one, given that money is the most fungible asset you could possibly have, and these insurance subsidies can only be used to, well, pay for health insurance. Sure, in your first example, that person qualifies for more free coverage than he/she would gain in income from the higher-paying job. But just because you qualify for $10,000 in free health insurance doesn’t mean that with the higher-paying job, you have to pay an additional $10,000 to your insurance company. That depends on your plan. You’ll have to pay some more, but not necessarily all of ten thousand dollars.
    I think the real issue here is that the people we’re talking about have dreadful income options. Like you say, when you earn more money, you’ll be more willing to forego free coverage for additional income. So the true problem is: why aren’t these people able to get a higher wage? That’s classic American Dream denial/inequality/lack of social mobility stuff right there, but it’s not due to the ACA.

Comments are closed.