Sunday, November 18, 2012

Obamacare and the Quantity of Labor

The Patient Protection and Affordable Care Act (ACA) subsidizes health insurance for many, but not all, persons.  It also levies a fine on employers who do not offer health insurance.  The net result of all of this will be to reduce employment, especially among less skilled people.

First Approximation: ACA = $2000/Employee Levy on ALL Employers
To analyze this, I break the ACA subsidies (as of 2014) and taxes into conceptual pieces that have the same sum total as the ACA itself
  1. A levy on ALL employers in the amount of $2000 for each employee
  2. A subsidy to employers offering health insurance in the amount of $2000 per employee
  3. A subsidy to insurance-purchasing employees at employers not offering health insurance
  4. A subsidy to insurance-purchasing people not working
You won't find either item (1) by itself or item (2) by itself discussed in connection with the ACA.  Rather the combination of (1) and (2) are usually described as a bundle: as a $2000/employee levy only on employers not offering health insurance.  But we'll see that it's easier to analyze them separately.

Suppose for the moment that (3) and (4) were each about $2000 per employee or potential employee.  In this case, the combination of (2)-(4) has no effect on employment because non-employment and both types of employment relationships all receive the same subsidy.  That leaves us with (1), which obviously reduces employment, especially low-skill employment.

Take, for example, someone who would be working full-time and full-year at minimum wage: the $2,000 levy would increase his employer cost by 13 percent.  It would increase the employer cost of the median full-time employee by 5.5 percent.

Because labor demand is more wage elastic than labor supply is, workers would bear the majority of a $2,000 levy on employers in the form of lower wages.  Each one percentage point increase in employer cost would reduce employment by 0.36 to 0.83 percentage points: at the median that's an employment per capita decline of 2.0 to 4.5 percent: a recession by any definition.

In fact, the average subsidy per employee or potential employee is greater than $2,000, so the net employment effect of (2)-(4) is not zero.  (2) is smaller in magnitude than (3) and (4), which means that people are pulled from employers offering HI to non-employment or employment without employer-provided HI.  In other words, the combination (2)-(4) depresses employment, and raises wages, in addition to the effects of (1).  Perhaps the overall employment effect of (1)-(4) is in the range -2.5 to -5.9 percent.

The direction of the overall wage effect of (1)-(4) is ambiguous, but I suspect that it is slightly negative. Employer cost will go up, but by less than $2,000 per employee.  This means that the ACA will drive a wedge between labor productivity and wages in the amount of about 5 percent of productivity at the median (perhaps 4 percent on average).

ACA Elements Not Yet Considered Here
I haven't thought much about the dynamics of these effects yet, but I doubt that it will all happen on January 1, 2014.  Presumably some will happen before and some after.  Interestingly, we began to see wages fall about 2-4 percent behind productivity beginning almost exactly when the ACA was debated and passed.

This does not consider the subsidies to small employers providing health insurance, and the levy exemptions for small employers not providing health insurance.  The exact size of the wedge between wages and productivity depends on the degree to which employer subsidies offset the revenue from the employer levy.  Nor does the above consider the expansion of Medicaid coverage (although that expansion is considered in my book).

Between 2014 and 2018, the levy and subsidies grow, which means that the employment impacts should grow too.

**The above does not consider that the subsidies (3) and (4) are on a sliding scale function of household income.  As a result of those provisions alone, some households will see their marginal tax rates increase by 40 percentage points.  I have not yet quantified the effect of the sliding scale on nationwide average marginal tax rates, but it is significant and in the direction of depressing employment.

Previous Studies have Underestimated the ACA's Employment Impact
Some economists say that Massachusetts' healthcare law, which shared many features with ACA, did not reduce employment in the state.  However, the MA levy was only $295 rather than $2000, and people in MA tend to make more than they do in the rest of the U.S.  Thus, I expect the ACA to depress employment per capita at least 6-7 times more than MA's law did.  In other word's, my approach says that the MA law would reduce employment per capita in MA by 0.3 to 0.8 percent, which is small enough that an econometric study might not detect it and significantly less than population growth over the time frame that the MA law matured.

(Hardly anyone was on the MA version of the sliding scale I mentioned above).

I also understand that the CBO says that the ACA would depress employment by only 0.5 percent.  Scaling by 10, I guess that means they think that a $20,000 levy would reduce employment by only 5 percent?!  When it comes to estimating employment impacts, the CBO keeps repeating the same flaw: they say that transfers and related government transactions expand employment through a "multiplier" that (at best) applies to government purchases of items (like military spending) that individuals would not purchase for themselves.  Their approach is radically different from a labor supply and labor demand analysis, which recognizes that transfers and other subsidies reduce the incentive to work and raise employer costs.


Walter said...

If ACA were a perfect substitute for current employer-provided health care (both on the benefit and the cost side), it should have no effect on either employment or wages. Of course, it is not, especially for low wage workers. The wedge between labor supply (which is a function of full wages, including the value of health care) and labor demand (a function of wage and health care costs)should be less than $2000.

Casey B. Mulligan said...

You seem to be ignoring the fact that unemployed people are eligible for ACA subsidies whereas pre-ACA unemployed people had to pay full price for their own health insurance or go on Medicaid (if eligible).

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