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

Copyright, The New York Times Company

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.

Standard Errors Can Be Deadly

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Whether you like or dislike the Affordable Care Act, it helps to understand the distinction between statistical significance and practical importance.

Taxpayers want to know whether the government programs they pay for actually make a difference, so measurement is a critical part of policy evaluation. That’s where econometric and statistical analysis comes in: gather data under various policy implementations and try to measure the differences.

Take the act’s major expansion of Medicaid benefits, going to able-bodied adults living at or below 133 percent of the poverty line (without regard to asset ownership), which will occur in most states at the beginning of next year. Will the expansion make adults healthier?

An important study, published in The New England Journal of Medicine in May, set out to help answer the question by examining an Oregon-specific Medicaid expansion in 2008. In their short summary of conclusions, the authors wrote, “Medicaid coverage generated no significant improvements in measured health outcomes.” Opponents of the Medicaid expansion quote that sentence, telling us that we might not want to expand a health program that doesn’t actually make people healthier. Proponents of the expansion acknowledge the conclusion, too, and try to help readers find encouraging results elsewhere in the study.

The New Subsidy for Layoffs

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A major provision of the American Recovery and Reinvestment Act helps predict what will happen in the insurance market next year.

Employees and employers often take steps to avoid layoffs, like working hard to encourage customers and clients to continue buying the goods and services provided by the business.

Sometimes layoffs are not avoided by such efforts, which is why many employers also take steps to ease the burden of a layoff on employees and their families and to minimize disputes between them and the employer. Many businesses voluntarily offer cash severance pay, which is intended to replace the usual paycheck for several weeks or months after the layoff, depending on the length of time that the employee had been with the company. (During the time of unemployment, the former employee can many times collect both the severance pay and state unemployment insurance benefits.)

Employers may also offer to help laid-off workers continue with their health insurance during the unemployment spell. (Indeed, a laid-off worker who intended to spend some severance pay on health insurance premiums would save money on taxes if the former employer were paying those premiums, even if it meant lower severance.) Severance pay and health insurance costs for former employees are significant expenses that employers presumably take into account when they decide the number and timing of their layoffs.

During 2009 and 2010, the American Recovery and Reinvestment Act had the federal government pay some costs of layoffs, especially with its premium-assistance program, which paid 65 percent of the premiums that a laid-off employee would pay to stay on the former employer’s health plan. People who could join a spouse’s employer health plan and people without health insurance on their previous job were ineligible for the program.

Economists understand this premium assistance to be a subsidy to layoffs, making them cheaper and less of a burden. Employers saw it this way, too, according to an Urban Institute study.

“Some large‐firm interviewees reported that before A.R.R.A. they provided some amount of free or reduced cost Cobra coverage for laid‐off workers, based upon the prior duration of employment,” the study found, referring to the Consolidated Omnibus Budget Reconciliation Act, which allows workers who have lost their jobs to purchase coverage. ”Several of these companies reported that they reduced or dropped this prior benefit in reaction to A.R.R.A.”

Although we will learn more when (and if) the United States Treasury releases its final report on the premium-assistance program, it appears that program participation was high. An interim report indicated that perhaps two million households and even more individuals had their health insurance subsidized within nine or 10 months of starting the program.

The law’s premium assistance program ended in 2010, but significant amounts of premium assistance are coming next year as a part of the Affordable Care Act. For families with income between 100 and 250 percent of the poverty line, the Affordable Care Act is even more generous than the Recovery Act, because it helps them pay for both health insurance premiums and out-of-pocket costs like co-payments and deductibles. Also, health insurance is more expensive now than it was in 2009, which makes a percentage subsidy that much more valuable.

Moreover, unlike the Recovery Act’s program, next year’s program welcomes people out of work even if they left work by quitting, retiring or being fired for cause. It also welcomes people who have the possibility of joining a spouse’s plan and people who had no health insurance on their prior job.

Thus, we are about to begin a federal program that subsidizes layoffs to a degree that we have not seen before. Nevertheless, economic and budget forecasts by the Congressional Budget Office and others have yet to consider the effects of the layoff subsidy on the size of the program and the number of layoffs that will occur.

The C.B.O. has concluded that 800,000 people will take early retirements or quit as a consequence of the Affordable Care Act, not from its premium assistance, but based on the assumption that the unsubsidized nongroup health insurance market will operate better. The C.B.O. still needs to estimate how many people will be laid off as a consequence of the new subsidy to layoffs.

Over all, the C.B.O. predicts that 11 million people will receive premium assistance in 2015 (and even fewer in 2014), the vast majority of whom would be employed or dependents of an employed person. Yet the Recovery Act’s experience suggests that three million or four million people will receive premium assistance through unemployment alone, not to mention the millions more that receive it while working.

Be prepared for some unpleasant surprises over the next year or two, both as to the amount that the labor market is depressed and the unanticipated federal spending that will be needed to provide the benefits promised by the Affordable Care Act.

Subsidizing Layoffs

I noticed this in an Urban Institute report:

Some large‐firm interviewees reported that before ARRA they provided some amount of free or reduced cost COBRA coverage for laid‐off workers, based upon the prior duration of employment. ...Several of these companies reported that they reduced or dropped this prior benefit in reaction to ARRA.

In other words, these employers normally were paying for health insurance for workers they laid off, but for a while (from April 2009 to May 2010) the ARRA picked up the tab. This is yet another reason why laying people off during the recession was cheaper than layoffs normally are.

Andrew Greeley: Controversy Needs Careful Measurement

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The Rev. Andrew M. Greeley, who died on Thursday, was a creative and dedicated social scientist who taught economists and others that scholars help resolve controversies by making careful measurements.

Father Greeley was a Roman Catholic priest, well known outside of academic circles for his outspoken views on Church matters (the late Cardinal John Patrick Cody of Chicago refused to assign Father Greeley to a parish) and his best-selling mysteries and romance novels. But he also earned a doctorate in sociology at the University of Chicago in 1962 and was a senior study director at the National Opinion Research Center at Chicago.

Father Greeley actively participated in academic discourse at both of those institutions for the rest of his life. His participation included sharing wisdom and ideas with young social scientists arriving at the University of Chicago, as he did with me when I arrived in the early 1990s.

In his dissertation work, Father Greeley tried to help answer controversial questions by gathering better data. One anecdote from his graduate student days – a time when Americans were actively debating whether it would be appropriate to have a Catholic, John F. Kennedy, as president of the United States – succinctly illustrates Father Greeley’s approach.

He was interested in assertions that Catholics were not segregated from Protestants, especially in Midwestern cities like Chicago. As evidence against segregation, Father Greeley told me, many people pointed to Chicago institutions that included significant numbers of both Catholics and Protestants. The Beverly Country Club on the southwest side of the city was one of those institutions, and in fact had roughly equal numbers of Catholic and Protestant members.

Father Greeley wondered whether the club was nonetheless highly segregated on the inside, but, working long before the days of surveillance cameras and eye-recognition software, was faced with the challenge of measuring internal segregation. He approached the caddy master at the club, who kept records on which club members played golf and at what “tee time.” Up to four members could play golf together, and in doing so they would have a common tee time. Father Greeley was permitted to examine the tee sheets and found that Catholics and Protestants rarely shared a tee time: Catholics and Protestants might have been at the same club, but they were not golfing together.

(If you are wondering how tee sheets would indicate religion, Catholics in the Beverly neighborhood were primarily Irish and had distinctly Irish surnames. Moreover, Father Greeley was the assistant pastor at a Catholic parish in that neighborhood and knew many of the families).

Father Greeley’s passion to inform controversies with new and better data suited him well for his positions at the National Opinion Research Center, where in the early 1970s he helped initiate the General Social Survey, which continues today and is widely used in economics and other social-science research. For example, the survey results he examined helped overturn the belief that Catholics were less educated than the average American. He also helped fund expansions in the General Social Survey, and its international counterpart the International Social Survey Programme, to include additional topics and additional nations.

He and I talked about the welfare state, especially its differences between the United States and Western Europe. One point of view, still held today, is that Western Europeans are more compassionate toward their less fortunate neighbors. After all, the United States had traditionally devoted less of its national income to social programs than did France, Sweden and other nations. But Father Greeley noted that results from international surveys of volunteering and giving showed that Americans spent more money and time in volunteer work than Western Europeans did, so perhaps American compassion takes a different form.

Survey results are criticized when they go against the conventional wisdom. Father Greeley acknowledged that surveys have flaws but explained that conventional wisdom often has those flaws in spades.

“Everybody takes surveys,” he wrote. “Whoever makes a statement about human behavior has engaged in a survey of some sort,” adding:

The difference between the survey takers and the rest of generalizing humankind is that the former (usually) observe large numbers of people in a representative sample that reflects the total population and are precise about their methods of data collection and analysis. Precisely because the professional survey taker is honest about his methods, he becomes an easy target for loudmouth critics who appeal to ‘what everyone knows’ and ‘common sense.’

Do Recessions Save Lives?

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More people die in economic expansions, and fewer die in recessions.  Whether and how policy makers should heed this pattern depends on the hitherto unknown links between mortality and economic activity.

Recessions can be stressful and depressing, especially for the people who lose their jobs.  Suicide rates spike during recessions, and for that reason alone recessions have been called deadly.  Two researchers, David Stuckler and Sanjay Basu, noted that suicides and binge drinking are positively correlated with unemployment and concluded that “Austerity kills” by adding to unemployment.

Even if we could be sure that austerity and related fiscal policies create recessions, it would be premature to conclude that they literally kill people.  Industrial and construction accidents are more common in economic expansions, and less common in recessions because those industries’ activities follow the business cycle.  Overtime hours may be more dangerous than average, and overtime is more common at the peak of the business cycle.  Moreover, the share of people working in construction – one of the most hazardous industries – increases during expansions and falls during recessions.

Highway accidents also follow the business cycle because more vehicles are on the road during economic expansions, and fewer on the road during recessions. (Mr. Stuckley and Mr. Basu noted that the United States’ Great Depression of the 1930s also had abnormally low rates of fatalities due to traffic accidents.)

With more accidents at work and on the road during expansions, expansions have more deaths by such accidents, and recessions have fewer.

It turns out that the business cycle for suicides is more than offset by the business cycle for other deaths.  Mortality and the unemployment rate are negatively correlated.  Christopher J. Ruhm, a professor of public policy and economics at the University of Virginia, has looked at all causes of death and found that most of them – suicide was the exception – occur less frequently at the depths of the business cycle.

Perhaps most surprising is that the business cycle for overall deaths is dominated by the business cycle for deaths among elderly people, perhaps especially elderly women.  Because so many elderly people are retired, they are especially unlikely to have recently been laid off from their job (which can lead to suicide), to drive their car to work hurriedly, or to take part in a dangerous construction project.

We don’t really know how the business cycle for economic activity is connected to the cycle for elderly deaths.  One hypothesis is that economic expansions create air pollution, and air pollution kills elderly people.  Another hypothesis is that nursing homes have more trouble retaining their staffs during expansions because they have to compete with other businesses.  Perhaps family members who are busy at work during expansions spend less time helping their elderly relatives.

Life is valuable, so it may be at least as important to understand what determines mortality and its cycles as it is to understand what causes recessions.

Massachusetts Employees Will Keep Their Health Plans

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Massachusetts and a few neighboring states are likely to experience the Affordable Care Act a lot differently than the rest of America.

Massachusetts is often held up as a window into America’s health insurance future, because it embarked on what came to be called the Romneycare reform six years ago. Like the Affordable Care Act provisions going into effect nationwide next year, Romneycare aimed to increase the fraction of the population with health insurance by imposing mandates on employers and employees and by subsidizing health insurance plans for middle-class families without employer plans.

Because the subsidized plans are available for only low- and middle-income families whose employers do not offer affordable health benefits, some analysts fear employers around the nation will drop their health benefits as the Affordable Care Act goes into full effect, resulting in millions of people losing the opportunity to get health insurance through an employer.

But some people say they believe this fear is likely to be unfounded, because the propensity of Massachusetts employees to receive employer-sponsored health insurance was hardly different after Romneycare went into effect than it was in the years before.

The details and dollar amounts in the Massachusetts health care law differ from the national Affordable Care Act, and for that reason alone I hesitate to infer too much from the Massachusetts experience. Even if the two laws were essentially the same, the effects in Massachusetts could be different than the national effects because Massachusetts has a different population and business environment than the rest of the nation.

Last week I explained how specific types of employers could be expected to drop their health benefits during the next couple of years: those employers that currently offer benefits but nonetheless pay much of their payroll to people living in households below 300 percent of the federal poverty line, who are eligible for the most generous federal subsidies as soon as their employer ceases to offer benefits.

Massachusetts has an extraordinary fraction (almost two-thirds) of its population above 300 percent of the federal poverty line, and as a result practically all Massachusetts employers will prefer to retain their health benefits over the next few years, even though a significant fraction of employers elsewhere will not.

One way to quantify the difference between Massachusetts employers and employers elsewhere is in the percentage of payroll going to employees from families below 300 percent of the poverty line. At a national level, the percentage varies from 4 percent in Internet publishing to about 50 percent in restaurants and private household employers. The national average is 20 percent, compared with 13 percent in Massachusetts.

Employers have a variety of factors to consider in their benefit offering decisions, but I have made some estimates that focus on the payroll-composition statistics noted above. By my estimates, employers with percentages of 26 to 35 percent of employees above 300 percent of the poverty level have a sufficiently high percentage that they are likely to have been offering health insurance benefits before the Affordable Care Act. Yet they have a low enough percentage that their employees gain on average if the employer health benefit is dropped and employees take the subsidies available through the Affordable Care Act’s health insurance exchanges.

About 10 percent of employees with health insurance live in a state and work in an industry with compensation percentages in the range where profits are to be gained by dropping employer health insurance. But none of them live in Massachusetts, and some states that border Massachusetts, including New Hampshire and Connecticut, are in a similar situation.

A number of states and industries – especially the industries I emphasized last week – have more than 35 percent of their payroll paid to people in families under 300 percent of the poverty line and are unlikely to be offering employee health benefits.

But those employers in Massachusetts who have 35 percent of their payroll paid to people in families under 300 percent of the poverty line are more likely to offer some kind of health benefit, in part because of Romneycare’s incentives to create “cafeteria plans” in which employees authorize pretax salary to be withheld from their paychecks for the payment of health insurance premiums.

Under the federal law, the Massachusetts cafeteria plans will lose some of their advantages to employers in terms of avoiding penalties for failure to offer health benefits.

Based on the combination of these two factors — that no Massachusetts industries have 26 percent to 35 percent of their employees under 300 percent of the poverty line, and that Massachusetts employers will lose the advantages of their cafeteria plans — I calculate that employers offering health insurance in Massachusetts are one-third as likely to drop their employee health plans over the next couple of years as are employers in the rest of the nation.

That’s because the percentage of the United States work force at risk of losing its employer insurance (because of the tendencies of their industry and states to have low- and middle income employees) is three times the percentage of the Massachusetts work force in the same situation.

Systematic Patterns of Employer Benefit Offerings after the ACA

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A number of industries can expect big changes in employee health insurance in the next year or two, while others will continue with business as usual.

Beginning next year, states and the federal government intend to create opportunities for families to purchase health insurance, separate from their employers, through insurance “exchanges” in the states. Insurers and the federal government will heavily advertise the new plans. Most important, middle- and low-income families may qualify for valuable federal subsidies that will serve to reduce premiums and out-of-pocket health costs.

To qualify for subsidized exchange plans, workers cannot be offered affordable insurance by their employers. Paradoxically, employers will create subsidy opportunities for their middle- and low-income employees whenever they fail to offer health insurance.

On the other hand, an employer dropping its health insurance next year will put its high-income employees in a tough spot, because they will have to buy insurance on their own without the tax advantages they had in the past by obtaining health insurance through their employer. As a result, employers with relatively many high-income employees will be under pressure to keep their insurance, whereas an employer of middle- and low-income employees may find them asking for health insurance to be dropped from the employee benefit menu.

Administrative costs, rising premiums and other costs have already made a number of employers lukewarm about health insurance, but they offered it in order to attract employees who do not care to be uninsured or to end up on Medicaid. The new insurance opportunities that become available next year may give their employees enough of an alternative that the lukewarm employers can drop their plans.

Both of these situations are closely correlated across industries, which leaves me to suspect that we can readily predict the industries that will retain employer insurance and predict those that will drop whatever health benefits they currently have. The scatter diagram below displays Bureau of Labor Statistics data on several industries according to the percentage of their employees in families above three times the poverty line (horizontal axis) and the percentage of employers offering health benefits as of March 2012 (vertical axis).

Bureau of Labor Statistics

I measured employees relative to three times the poverty line because that is the family income threshold beyond which the new exchange subsidies are less valuable than the income tax preference for employer-sponsored health insurance.

Industries like colleges, utilities and banking almost always offer health insurance, and about 80 percent of their employees will be getting a better deal on employer health insurance than they would from the exchange plans because their families are above three times the poverty line. For these reasons, I am confident that these industries will continue to offer health insurance to their employees in much the same way that they have in the past.

A couple of industries like “accommodation and food services” (i.e., restaurants), leisure and hospitality, administrative and waste services, and construction already have a mix of employers in terms of their health insurance offerings, so it would not be unusual from an industry perspective for those that currently have health plans to drop them during the next couple of years.

Moreover, the diagram shows how 45 to 60 percent of their employees do not come from families above three times poverty and therefore will have a significant federal health insurance subsidy waiting for them as soon as their employers drop coverage.

Employers that do not offer health insurance may be subject to penalties, but the penalties are not levied based on part-time employees, or levied on small employers, and even the penalties levied will be less than the subsidy opportunities created by an employer of middle- and low-income people that fails to offer health insurance.

For these reasons, I suspect that the stories we will hear about employers dropping insurance will disproportionately come from the industries shown in the lower left part of the scatter diagram, which collectively employ about 25 million people. Some employers in these industries have already discussed such plans.

Substitution between Exchange Plans and Employer Plans

I received this question:

Do you believe the incentive effects related to the ACA will be more limited since: (i) they are more difficult to value/understand as compared to an unemployment check and (ii) the impact is less direct and comprehensive.

My reply:

You have hit on a key, and so far uncertain, economic force in the ACA. At one extreme, people may perceive the exchanges [the method of ACA subsidy delivery] to be something like Medicaid -- far inferior from the coverage they get from an employer. At the other extreme, they may view the coverage as quite similar, and then it becomes a question of which approach saves them money.

Note that U.S. Senators and Congressman will be using the exchange plans, so perhaps they will be pretty nice plans, which is why I am inclined to expect the latter case. But I am examining the former case too because (a) it makes more economic sense for Obamacare to be run that way (see also http://economix.blogs.nytimes.com/2013/05/01/health-coverage-worthy-of-a-senator/) and (b) Massachusetts ran their reform that way.

RE difficulty to value and understand, note that employer insurance is complicated, but employers already have HR personnel in place to assist employees in choosing plans, getting enrolled, and getting reimbursed. When employers drop their insurance, I expect that they will use these personnel to assist their employees with the exchanges too. Moreover, the federal government is devoting advertising dollars and enrollment assistance, so that the exchanges may ultimately enjoy a competitive advantage over employer plans.

Also note that the ACA’s employer and individual penalties are economic equivalents of unemployment assistance from a labor supply point of view, regardless of how people perceive exchange plans, because workers will be subject to the penalties but unemployed people will not.

With that said, I expect a transition period during which time the exchange plans are perceived to be inferior and the labor market impacts of the ACA are muted.