Thursday, August 15, 2013

Four Million Jobs?

I have been working on measuring the labor market incentives created by the Affordable Care Act, and it looks like the Act will, on average, add five or six percentage points (of employee compensation) to marginal labor income tax rates. That average includes zeros for people with no hike.

Five or six percentage points added to the average is a historically unusual addition.

Naturally, people are wondering how many people will not be employed as a consequence of the tax hike. I don't have a quantitative answer yet, although my book is clear enough as to how to make predictions for work hours per capita.

What I have done so far, in the context of a debate with David Cutler, is to take David Cutler's estimate of each tax rate points effect and rescale it to fit my 5 or 6 point estimate, concluding that work hours per capita (including zeros for people not working) would be reduced by about 3 percent.

A few readers have interpreted the -3% as -4 million jobs. That's not quite right:

  • I'm not sure David Cutler's estimate is the right one to use ... its primary usefulness is that Cutler cannot say that it's grossly inaccurate.
  • The new taxes are both on employment and work hours per employee. The latter is historically unusual and may feed back on employment (I'm not sure about the sign yet).

Nevertheless, -4 million jobs is in the ballpark. The final answer will probably be closer to -4 million than to the CBO's -800,000.

More important, we need to take the time to get each of the steps right ... too bad for America that the law went on the books long before the analysis would be done.

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