The New Economics of Part-time Employment, Continued

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A revised definition of part-time employment may have some popular appeal, but it will not repair the Affordable Care Act’s disincentives for full-time employment or its extra costs for taxpayers.

Part-time employment rarely includes health benefits. The lack of health benefits and the lower pay for part-time work have traditionally discouraged people from taking part-time jobs rather than full-time jobs, but both of those attributes of part-time jobs are about to change.

I explained in an earlier post how, in many cases, the Affordable Care Act would almost entirely eliminate these two shortcomings of part-time employment by offering access to generously subsidized health insurance to part-time employees while denying it to most people who work full time. As a result, more people will work part time (under the law, less than 30 hours a week) rather than full time, and this will occur at significant taxpayer expense.

Two senators, Joe Donnelly, Democrat of Indiana, and Susan Collins, Republican of Maine, are proposing to tweak the Affordable Care Act by changing the definition of part-time work to include any work schedule of 39 hours a week or less. They say the change conforms with traditional definitions of full-time work and will prevent workers from having their work schedules cut.

Their proposal is likely to have the opposite effect. Although it may be true that their proposal would prevent cuts in hours for those now working, say, 35 hours a week, it would be likely to cause cuts for employees working 40 to 45 hours a week, because staying short of the 40-hour threshold would be closer to their current work schedule than staying short of the law’s 30-hour threshold.

More important from an economic point of view, the 40-hour threshold would further magnify the already strong disincentives for working full time. The table below illustrates what may happen.

The left column of the table shows the economics of a full-time position (40 hours a week). Between employer health insurance premiums and the employee paycheck, this position costs the employer $56,000 a year, or about $28 an hour. The full-time employee’s pay after his portion of health insurance premiums are withheld is $42,000.

Although covered by health insurance, the employee and his family incur $3,000 in additional health costs from health insurance deductibles, co-payments and so on ($3,000 is typical for a family of four with a comprehensive health plan). The employee also has work expenses for commuting, child care and so on, which I assume to be $100 a week when working full time.

The part-time columns of the table show two situations for a part-time position with the same employer cost an hour of $28. The middle column is the situation I discussed earlier, in which the full-time threshold is the 30 hours contained in the law. The right column is the situation that would apply if Senator Donnelly and Senator Collins have their way and workers become part-time by cutting their weekly hours to 39.

Because the part-time position is 39 hours a week, the annual employer cost is $54,600. All of the $54,600 consists of cash compensation for the employee, because the part-time position does not include health insurance.

The part-time employee has to pay for his own health insurance, but the new law limits his premiums to $3,947 (the law pays the other $8,463 from the Treasury) and limits his out-of-pocket health costs to $4,590 (the law pays the other $510; by design the law increases deductibles and co-payments but uses subsidies to offset those increases for low- and middle-income families).

Net of work expenses ($100 a week for both 40- and 39-hour positions) and health expenses, the 39-hour position pays $41,063, significantly more than the full-time position’s $34,000.

By taking a 39-hour position, the employee can have comprehensive health insurance coverage and actually make more money than he would in a full-time position. In effect, the new subsidies totaling almost $8,973 more than fully offset, from the point of view of employers and their employees, the loss of production that occurs from working 39 hours a week rather than 40.

It’s one thing for public policies to present workers with a small reward for working full time. But the proposal from the two senators would put millions of people in the position of having to pay – in the form of less disposable income – for the privilege of working full time. When millions of workers choose part-time rather than full-time work under the Donnelly-Collins proposal, it will be taxpayers who pick up the tab.

The Affordable Care Act is full of disincentives. But tweaking the law without carefully considering incentives is likely to increase the law’s damage to the labor market and its depletion of taxpayer funds.

Policy Impact and Red Herrings

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Red herrings are frequently inserted into policy discussions but can be readily identified as long as we remember a simple truth about public policy impact.

The impact of public policy on an economic outcome like employment is, by definition, the difference between employment with the policy in place and what employment would have been under an alternative “baseline” policy. Policy impact quantifies how things are different as a consequence of the policy.

Consider these statements:

“The Affordable Care Act will not reduce full-time employment because workers understand that full-time employment is the path to career advancement” (see my previous post).

“Unemployment insurance does not reduce employment because Americans fundamentally want to work and provide for themselves” (see, for example, this commentary on gawker.com)

These are all examples of red herrings, irrelevant statements that are attached to hypotheses.

Take the full-time employment example. It may be true that full-time employment is the path to career advancement, but that is hardly relevant to the Affordable Care Act as long as we assume that full-time employment would be that path regardless of whether we have that law.

That is, lots of people will choose full-time employment because of the career opportunities it provides, but they are counted as full-time employed under the policy and as full-time employed under the baseline policy (say, continuing as if the act had never become law). A policy impact estimate, by definition, counts only those for whom career advancement does not trump their decision to be in a full-time position.

As I explained in that an earlier post, the Affordable Care Act introduces funds and insurance opportunities for part-time employees that will be unavailable to most full-time employees. As long as there are more than zero people whose full-time vs. part-time work decision depends on funds or insurance, there is the potential for policy impact.

In my second example, it may be true that most people want to work and provide for themselves. But I assume motivation to work is the same regardless of whether unemployment benefits are paid for, say, 99 nine weeks or 26. What’s different between the 99-week policy and the 26-week baseline are the circumstances in which people find themselves.

As long as motivation is not the sole factor determining employment, there is the potential for unemployment insurance to have a policy impact, even in a country in which the people are fundamentally hard-working.

Nobody expects a government program to make everything different. So policy analysis is particularly useful in subtracting out the outcomes that would occur regardless of policy measures.

Taxing Employers and Employees

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The delay of the Affordable Care Act’s employer mandate is a favorable development for the labor market, but the employer mandate is only the tip of the iceberg in terms of the labor-market distortions that the law has scheduled to come on line next year.

The Affordable Care Act’s employer mandate will eventually levy a penalty on large employers that do not offer affordable health insurance to their full-time employees. The penalty is based on the number of full-time employees and adds about $3,000 to the annual cost of employing each person.

Employers have been complaining about the penalty, saying it will reduce the number of people they hire and cause them to reduce employee hours. Even economists and commentators supporting the law acknowledge that per-employee penalties reduce hiring by raising the cost of employment.

Economists have traditionally recognized that it hardly matters whether a tax is levied on employers or on employees, especially in the long run. In the employee-tax case, the employee pays the tax directly. In the employer-tax case, the employee pays the tax indirectly through reduced pay, because employer penalties reduce the willingness of employers to compete for people (Jonathan Gruber of the Massachusetts Institute of Technology has provided some good evidence in support of this widely accepted economic proposition).

Among other things, employment, employer costs and employee take-home pay would be essentially the same if the government levied a $3,000 fine on workers for having a full-time job with a large employer that does not offer health benefits, rather than levying the fine on employers on the basis of their full-time personnel, as the Affordable Care Act does.

But the political optics of the two policies are dramatically different. Large businesses can supposedly afford $3,000 per employee, while many employees could not afford another $3,000 bite out of their paychecks. Like it or not, economics’ equivalence results tells us employees will have to afford what amounts to a tax on them beginning in 2015, pursuant to the Treasury Department’s decision to begin collecting the employer penalty in that year.

For the purposes of understanding the state of the labor market, it doesn’t really matter whether individuals would be paying a tax for having a full-time job or receiving a subsidy for not having a full-time job. Either policy would reduce the gap between the income of full-time employees and everybody else. The ultimate result will be less full-time employment, in an amount commensurate with the size of the tax or subsidy.

The Affordable Care Act offers subsidies for people without work or in part-time positions that far exceed $3,000 per employee per year, which makes the employer mandate only a small piece of the law’s employment effects.

The law’s other new work-disincentive provisions, still on schedule for next year, include (i) a sliding income scale that sets premiums for people who buy health insurance on the new marketplaces, (ii) a plan for premium assistance that essentially resurrects the Recovery Act’s subsidy for what are known as Cobra benefits, allowing employees who have left a job to continue to participate, for a limited time, in their former employer’s health plan, in a more comprehensive form and (iii) hardship relief from the individual mandate.

As an example of these provisions, I explained last week how, even without the employer penalties, the premium assistance plan sharply penalizes full-time employment in favor of part-time employment. In combination, the provisions going into effect next year are two or three times larger than the employer mandate by itself, depending on the type of worker and the industry of employment.

Proponents of the Affordable Care Act, including a number of economists, have yet to acknowledge that so many provisions of the act have, from a labor economics perspective, so much in common with the employer mandate. But labor-market distortions are a common feature of several significant parts of the act and are an important part of what has happened in our labor market.

Whatever labor market benefits accrue from delaying the employer mandate could be had many times over by delaying the entire Affordable Care Act.

Part-time Employment Arithmetic

Yesterday I wrote about some of the arithmetic of part-time employment, and have hysterical reactions that fit into three categories:

1. Arithmetic misunderstanding. Here's more detail on how it works:
   Employer cost = Gross employee compensation + employer health premiums. In my full-time example, $56,000 = $46,667 + $9,333.
   
   
   Employee compensation = employee income subject to tax + employee health premiums. $46,667 = $42,000 + 4,667.
   
   
   Employee income subject to tax, net of health and work expenses = employee income subject to tax - out-of-pocket health expenses - work expenses. $34,000 = $42,000 - $3,000 - $5,000.

2. What about income taxes, welfare payments, etc.?. Those are a function of "Employee income subject to tax," which is $42,000 regardless of whether working full or part time. That's what makes my example so simple: these payments can be ignored for the purposes of the comparison because they would be the same entry in both columns. But even more complicated examples retain the essential message of my calculations: the ACA puts an extraordinarily large implicit tax on full-time employment relative to part-time employment. If you don't like simple examples that make a general point, and would rather see all of the statistical detail, read my my research papers rather than my blog posts.
   
3. Anyone who points out the perverse incentives in progressive legislation is despicable and fraudulent. The good news is that the overwhelming majority of economists, including those who avidly support the Affordable Care Act, are ignoring incentives like these and thereby retaining their option to be respectable and honest.
   

The New Economics of Part-time Employment

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Even without employer penalties, part-time work will become more common next year and more expensive for taxpayers.

Much attention has been paid to people without health insurance, but for the purposes of understanding the entire labor market we must acknowledge that the uninsured are a minority of the population. Most of the work force has health insurance through full-time employment or through a spouse’s employment.

Part-time employment rarely includes health benefits. The lack of health benefits and the lower pay for part-time work have traditionally discouraged people from taking part-time jobs rather than full-time jobs, but both of those attributes of part-time jobs are about to change.

Beginning next year, the Affordable Care Act will subsidize the health expenses for non-elderly families with income of 100 to 400 percent of the federal poverty line (about half of the non-elderly population has incomes in that range), but only if they are not offered health insurance through an employer. In other words, the new subsidies will not be available to most of those who do full-time work.

Because part-time workers will be eligible for the subsidies except in the rare instances in which their employer covers them, full-time work will no longer carry the advantage of access to health insurance. That by itself will encourage more people to seek part-time work.

Moreover, the subsidies will many times be generous enough that workers can make as much money in a part-time position as in a full-time one. The table below illustrates what may happen.

The left column of the table shows the economics of a full-time position (40 hours a week). Between employer health insurance premiums and the employee paycheck, this position costs the employer $56,000 a year, or about $28 an hour. The full-time employee’s pay after his portion of health insurance premiums are withheld is $42,000.

Although covered by health insurance, the employee and his family incur $3,000 in additional health costs because of health insurance deductibles, co-payments and so on ($3,000 is typical for a family of four with a comprehensive health plan). The employee also has work expenses for commuting and child care, which I assume to be $100 a week when working full time.

The part-time column of the table shows a part-time position with the same employer cost per hour: $28. Because the position is part-time (only 30 hours a week), the annual employer cost is $42,000. All of the $42,000 consists of cash compensation for the employee, because the part-time position does not include health insurance.

The part-time employee has to pay for his own health insurance, but the new law limits his premiums to $2,149 (the new law pays the other $12,658 from the United States Treasury) and limits his out-of-pocket health costs to $2,193 (the new law pays the other $2,907; by design the new law increases deductibles and co-payments but uses subsidies to offset those increases for low- and middle-income families).

After work expenses ($75 a week for part-time employment) and health expenses, the part-time position pays $33,908: almost exactly the same as the full-time position’s $34,000.

By taking a part-time position, the employee can have comprehensive health insurance coverage and make almost the same money as he would in a full-time position. Thus the two traditional deterrents to part-time employment are disappearing. In effect, the new subsidies totaling almost $16,000 offset, from the point of view of employers and their employees, the loss of production that occurs from working 30 hours a week rather than 40.

None of the above relates to the employer penalties associated with the new law, because the employers covered by my example avoid the penalty by continuing to offer comprehensive insurance to full-time employees. Those penalties create yet another set of reasons that part-time employment will become more common next year.

Shifts from full-time to part-time work will be remarkably more attractive for employers and employees than they used to be, and taxpayers will be picking up the tab.