Welcome to the latest installment of our “No, Obamacare actually doesn’t do the thing people are freaking about” series. Yesterday the Congressional Budget Office released a report with its updated projections for the economy and federal budget over the next decade. They took a closer look at Obamacare’s effect on employment, and found that the new law will reduce the total number of hours worked by 1.5 to 2%, representing a decline of about 2 to 2.5 million full-time-equivalent workers by 2024.
And then people went nuts. A bunch of reputable news sites ran headlines blaring that the “CBO report says Obamacare will result in 2 million fewer jobs,” which is, well, totally wrong. Here’s what the CBO report actually says:
“The estimated reduction stems almost entirely from a net decline in the amount of labor workers choose to supply, rather than from a net drop in business’ demand for labor.”
In other words, Obamacare isn’t causing employers to eliminate jobs– some people will just choose to work less.
Labor supply vs. demand
There are two sides to the job market– the supply of labor and the demand for labor. When politicians talk about creating jobs or businesses cutting jobs, they’re talking about the demand side of that equation.
The CBO report does say that Obamacare will affect demand side slightly in a couple ways. The new law’s employer penalty– employers with 50 or more full-time employees have to provide insurance or pay a tax– could cause some employers to cut jobs, hire fewer people, or shift more people from full-time to part-time work. They also predict that Obamacare will increase the demand for goods and services (some of that is increased demand for healthcare services, but since many people will be spending less for coverage, they’ll have more to spend on other stuff too), causing companies to hire more workers. In fact, the CBO’s director recently told Congress that Obamacare “spurs employment and would reduce unemployment over the next few years.”
However, in the long-term the CBO expects that neither the employer penalty nor the increase in demand will have much effect on employment. Instead, the reduction in hours worked will come “almost entirely” from a drop in the supply of labor: workers choosing to work less.
Why will workers choose to work less?
Four reasons, says the CBO, in declining order of importance:
- The subsidy for health insurance purchased through the exchanges;
- The Medicaid expansion;
- The penalties on employers that decline to offer insurance; and
- New taxes imposed on labor income.
The subsidies and the Medicaid expansion have by far the biggest impact, causing workers to work less for a couple reasons. The first is that financial assistance depends on income– the more you make the less help you get paying for insurance. So, as Mother Jones’ Kevin Drum explains:
If, for example, earning $100 in additional income means a $25 reduction in Obamacare subsidies, you’re only getting $75 for your extra work. At the margins, some people will decide that’s not worth it, so they’ll forego working extra hours.
The other reason people who qualify for subsidies or Medicaid (and even some who don’t) will choose to work less, says the CBO, is that many of them are currently working full-time only to get health insurance. According to Business Insider’s John Barro:
Easy availability of comprehensive, subsidized health plans will make it easier for people to retire before age 65, quit a full-time job to start a business, or shift to part-time work and spend more time raising children or attending school. This is a feature, not a bug.
The employer penalty: This one’s a smaller effect. According to the CBO, some employers will respond to the penalty by lowering wages, rather than cutting jobs altogether. So, say an employer cuts its hourly pay from $15 to $14 as a result of the penalty. Some people will work more to make up the lost income, but others will decide that extra work isn’t worth it at the lower rate. The CBO figures more people will decide it’s not worth it, and so the total number of hours worked will decrease.
New taxes on labor income: Right off the bat, we should point out that this tax only affects people making over $200,000 per year ($250,000 if they’re filing a joint return), and it’s a tiny 0.9% increase, so it won’t have that big of an impact. Again, same deal as before– some people will work more to make up the lost income, while some will decide the extra work isn’t worth it, and the CBO figures more people will decide it’s not worth it.
Is it a problem that people will choose not to work?
Most people would say it’s a good thing that people can now choose to work less– after all, we want people to have the opportunity to start their own business, go back to school (two things that by the way could increase their productivity, improving our economy), spend more time with their kids, or retire early rather than clinging to crappy jobs just to get health benefits. Jonathan Gruber, an MIT economist and an architect of Obamacare, tells The New Republic’s Jonathan Cohn:
“This is what we want in a fair society. We don’t want to enslave the old and sick to their jobs out of some sense of meanness. If they are dying to quit/retire, then let’s them. That’s a good thing, not a bad thing.”
Of course, some conservatives would argue that while we should do something to make sure everyone can get health coverage, we shouldn’t do it in a way that encourages able-bodied people to work less. The problem with this argument is that any income based program will cause some people not to work as much– whether it’s food stamps, Temporary Assistance to Needy Families, the recent health proposal from three Republican senators (which like Obamacare has income-based subsidies), or Obamacare.
The only alternatives then are to do nothing (like we were doing under the old system– clearly that wasn’t working very well) or have the government provide the same benefits to everyone, regardless of income. A national universal health program where everyone is covered regardless of income would mean you don’t lose out on benefits the more you work, so there’d be no incentive to work less. Problem solved! Somehow we don’t think conservatives will go for it though.