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…