She's a 29er

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Much has been made of the burdens of the Affordable Care Act on healthy young men, but young women are the ones most likely to see the law push them out of full-time work.

A “29er” refers to someone working 29 hours per week, the maximum that an hourly employee can work and still be considered part time by the federal government, as defined under the Affordable Care Act.

Before 2014, when the new federal definition took effect, Census Bureau data suggest that hardly anyone worked exactly 29 hours a week: about one in 1,000. Only six in 1,000 worked 26 to 29 hours a week.

The Affordable Care Act requires that, beginning next January, large employers provide health insurance for their full-time employees (by the federal definition) or pay a penalty per full-time employee on the payroll. The annual penalty is $2,000 and, unlike employee salaries and benefits, is not deductible from business taxes. Small employers do not owe a penalty, unless they cross the 50-employee threshold, in which case the annual penalty is $40,000 for having that 50th employee. Subsequent hires would each carry a $2,000 annual penalty.

Part-time employees do not create a health-insurance requirement or a penalty for their employer, which gives large and small employers an incentive to reduce at least some employees’ hours to 29 hours. A number of employers plan to do exactly this.

But the incentives are not limited to penalty avoidance by employers, and began this month. Employees in families with income of less than 400 percent of the poverty line will lose access to generous federal subsidies if they make themselves eligible for employer health coverage by working full time at an employer that offers coverage to such employees.

In other words, employees may have something to gain, or less to lose than they did before this year, by limiting themselves to a 29-hour work schedule. For full-time salaried workers (as opposed to hourly workers) the federal definition is those who work more than three days a week. (For the purposes of discussion, I will refer to the three-day limit as “29 hours,” although in practice it may be, say, a 26-hour schedule).

As the new law goes into full effect the next couple of years, I expect that more than 2 percent of workers will be 29ers, an increase by more than a factor of 10. Moreover, as the labor market adjusts to avoid penalties and enhance subsidies, the adjustments will tend to be those that are least costly.

One of the least costly ways to move full-time workers to the 29er group would be to focus on those who already work slightly more than 29 hours. It is usually less costly for a 35-hour-per-week worker to cut hours to 29 than for a 55-hour-per-week worker to do so.

I used the Census Bureau’s data to put together a sample of people likely to be 29ers over the next couple of years, based on working 30 to 37 hours per week before this year and not having health insurance available through a spouse (if married). Women outnumber men more than 2 to 1 among likely 29ers. The 29ers are also likely to be less than 30 years old.

Naturally, working fewer hours means less pay. By disproportionately reducing women’s work hours, health reform may have the unintended consequence of increasing the gap between men’s and women’s wages and salaries.

[Note: this does not mean that women are "hurt" by the ACA ... it just means that (on average) they experience the ACA's costs differently than men will]

Just Compensation for Jurors

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“Jury service is a serious, meaningful and important responsibility,” says Cook County Court in Illinois and many other courts in the United States. Yet the courts pay jurors far less than minimum wage. In Cook County, jurors are paid $17.20 a day; working eight hours at the state’s minimum wage would pay almost quadruple that.

Employers are sometimes forced by state law to pay jurors while they serve the court, but that is no help for the self-employed, students and people without jobs.

Jurors are selected randomly from state-compiled lists of residents and forced to participate unless excused by the court for specific circumstances, such as a medical condition that prevents service. People who do not report for duty can be punished at to the court’s discretion, including jail time.

With random selection, low pay, medical excuses and the potential for severe punishment, a jury summons has a lot in common with a Vietnam-era draft notice, although, of course, the skill and activities associated with the service itself is far different for jurors than for Vietnam soldiers.

Many people summoned for jury duty search desperately for excuses. Their efforts increase the burden on the court system, which has to summon and process a large number of people in order to empanel its juries.

The court system might alleviate these problems by following the example of the modern military: recruit people for service by paying them far more than minimum wage. Jurors could still be selected randomly, but with a nice paycheck waiting for them, they would not try as hard (or at all) to be excused by the court.

Critics of a market-oriented recruitment system might say the pool of jurors would not fully represent the population because, among other things, people getting high pay in their normal jobs would be less willing to serve on a jury because of the loss of pay. But let’s not pretend that the conscripted jurors we have today are a random sample of the population.

If jurors were paid at a generous hourly rate, might they deliberate longer? And would that be a good thing or not? If it were desirable to shorten juror deliberation time, jurors could be paid a flat rate for that part of their service.

The Fifth Amendment to the United States Constitution prohibits the taking of private property “for public use, without just compensation.” Did the founding fathers really think that it was much worse to take property without just compensation than to take a citizen’s time?

Taking property and drafting citizens into government service without market compensation have many of the same economic problems: they fail to spread the burden of supporting government activity, they encourage socially wasteful avoidance behaviors, and enforcement runs the risk of special treatment for the politically connected.

The modern military pays soldiers with both appreciation and money. Jurors should be paid that way, too.

Do Economic Ideas Matter? The Case of the All-Volunteer Army

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It is easy to exaggerate the importance of economic ideas in shaping public policy. The United States’ move to an all-volunteer army is a good example.

Public policies change over time, as with the emergence of the income tax early in the 20th century, deregulation of airlines and banking and the recruiting methods of the military. In each instance, economists and other intellectuals offer arguments and research results that help inform the policy change.

But intellectuals often press for policy changes that never happen, and I suspect that a number of interesting and helpful policy proposals are hardly researched or discussed because they are deemed “politically infeasible.” So it’s possible that – for reasons related to new costs, technologies and so on – policies would change even if intellectuals said nothing about their ideas and policy research results. Or that scholars’ ideas are sometimes only a minor force among many that drive public policy changes.

Military conscription is a case in point. Economists were studying the topic in the 1960s. At that time, the United States military had long recruited much of its manpower through conscription, forcing able young men to join or inducing them to “volunteer” to avoid being forced into service.

Economists tended to appreciate an alternative approach: recruiting the entire military through the market mechanism, offering soldiers enough pay and benefits that they willingly give up civilian activities in order to join. But it seemed unlikely that politicians would come around to their thinking, which is why most economists spent their time researching other subjects (the economist Gary Becker wrote an article about how he abandoned his study).

But the late Prof. Walter Oi and a handful of others (some of the work has been collected in “Conscription“) plowed ahead. Professor Oi showed how the Defense Department budget and work-force efficiency would be different if the government eliminated the draft and recruited its personnel on a voluntary basis.

Less than a decade later, the United States did in fact eliminate the draft. It seems, as the economists David Henderson and Steve Landsburg put it, that young men of today should thank Professor Oi and the few other economists whose work helped end military conscription in the United States.

But regardless of what economists were saying, I suspect that the military and the politicians who direct them would have changed the policy anyway, because the costs and benefits of the draft were changing, in large part because of technological progress. By the 21st century, the United States was fighting with more capital intensity and less labor intensity than it ever had.

Both economic theory and evidence on the costs and benefits of conscription suggest that the size of the force is a primary determinant of whether a country uses the draft to recruit any of its military personnel, whatever the state of intellectual debate on the issue.

Compare 1971 (during the Vietnam War), when the armed forces totaled about one-sixth of the male population 15 to 24 years old, with 2003 (a time of wars in Iraq and Afghanistan), when armed forces were only one-fifteenth of the male population that age and an even lesser share of the total population (because by then large numbers of women were serving in a wide range of military occupations). Prof. Andrei Shleifer and I found that the change in United States policy between 1971 and 2003 lines up well with international country patterns of military recruitment, suggesting that costs and benefits may have been behind the policy change, rather than economic research.

(This is not to say that conscription ever makes sense, only that its net costs are less when the fraction of men to be recruited are greater.)

Economists may hope that their ideas matter. Perhaps ideas help accelerate policy changes that would eventually occur because of the costs and benefits, or help prevent nations from slipping back into old policy mistakes. (I suspect that another of Professor Oi’s important ideas – that full-time work can be more efficient than part-time work – will be policy-relevant in the coming years as the Affordable Care Act distorts hiring toward part-time positions.)

Nevertheless, economics ironically predicts that actual costs and benefits probably drive more policy changes than economic ideas do.

Policies That Discourage Full-Time Work

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The payroll tax holiday was an important factor helping the workweek recover after the recession, but the holiday is over and new public policies are pushing in the other direction.

Full-time positions pay more than part-time positions, even on an hourly basis.  Part-time positions require less time away from family, schooling, etc., which makes the choice of full-time versus part-time work a trade-off between income received and the amount of the time commitment.

A higher income tax or payroll tax rate tilts the balance toward part-time work because it reduces an important benefit of full-time work: extra income to spend. A lower rate does the opposite.

You might say that work schedules are set by employers, and that workers have no say in the matter.  But that ignores the fact that employers compete for employees, which is why many employers spend resources to offer health coverage, flexible scheduling and other fringe benefits that employees find attractive.

Historically, employers have responded to high income tax rates by creating part-time positions, especially when large numbers of potential employers were facing those rates.

For many years, the Social Security earnings limit reduced the reward to full-time work among elderly people, because a large part of their Social Security benefits were withheld when beneficiaries earned more than the limit.  As a result of the income tax implicit in the Social Security rules, many businesses created part-time positions that were attractive to older workers because their earnings stayed below the limit, and many accepted them.

Between 2007 and 2010, expansions of the food stamp program, known as SNAP, made part-time work increasingly attractive for those who would face the program’s income limit if working full time. About the same time, federal mortgage modification guidelines acted as income-tax increases on homeowners who owed more on their mortgage than their home was worth, because the more the homeowner earned, the less the mortgage balance was reduced. As a result, a few people found part-time work to be a more effective way of cutting their debt.

I have quantified the disincentives for full-time work and their evolution, accounting for the fraction of the population taking part in these and other programs and showing the results in the chart below.  A higher tax rate means less incentive to work full time and more incentive to work part time.

Source: Author’s calculations.

Between 2007 and 2012, there had been little net change in the tax rate on full-time work because the 2011-12 payroll tax holiday largely offset the increases from SNAP and mortgage modification. I think this is an important reason that weekly work hours recovered from the recession much more quickly than employment has.

But a year ago the payroll tax holiday expired and, more important, beginning this week incomes earned will reduce the subsidies that families might hope to receive as part of the new insurance plans created by the Affordable Care Act.

For these reasons, the recovery of the workweek from the recession cannot be taken for granted.

Shorter Workweeks are Likely in the New Year

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Three economic forces are pushing toward shorter workweeks for employees during the new year.

The red line in the chart below is a monthly index of the employment-to-population ratio, normalized to a value of 100 in December 2007, when the recession began. In this series, each employed person counts the same, regardless of how many hours she or he works.

Federal Reserve Bank of St. Louis Average weekly hours of private employees (blue line) have returned to the level last seen before the recession of 2008-9, shown as gray area. But the percentage of Americans with jobs (red line) plummeted in the two years after the recession began and has remained steady since then.

By that measure, there has been hardly any labor market recovery because, as indicated by an index value of 93, employment per capita still remains 7 percent below what it was before the recession began.

Average weekly hours of private-sector employees (the blue line) returned comparatively quickly to near their prerecession level and have maintained that level over the last two years.

I predict that average weekly work hours will decline again over the next year because fiscal policy is now switching from penalizing part-time work to rewarding it.

Since 2008, government benefits for the long-term unemployed have served as a penalty for part-time work, because unemployment benefits are largely – if not entirely – withheld when an unemployed person accepts a part-time position. Moreover, people moving to part-time work from either full-time work or unemployment will find that the move renders them eligible for fewer benefits the next time they are laid off from a job.

Many of the part-time-work penalties disappear this week when the federal government stops paying long-term unemployment benefits (short-term unemployment benefits will continue, and they embody some of the same incentives), although the penalties would reappear should Congress resurrect the program.

Full-time work has traditionally offered health and other benefits that part-time jobs rarely do, and those benefits have kept a number of workers in full-time positions. The Affordable Care Act aims to end that advantage, by giving workers opportunities to obtain insurance outside the workplace.

In addition, in some cases the new insurance opportunities can be so inexpensive compared with employer insurance that people stand to, paradoxically, have more disposable income from working part time than they do from working full time.

The third economic force is that in January 2015 the Affordable Care Act begins to penalize employers that do not offer affordable health insurance, except that part-time employees (working less than 30 hours or four days a week) are exempt for the purposes of determining the penalty. This is another reason that part-time work – especially positions with 29-hour weekly work schedules – would increase at the expense of full-time work, at least if the mandate goes ahead as planned.

All together, it looks like many of the jobs in the new year will involve less work.

Welfare Benefits for Big Business?

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News reports have emerged this year that some of the nation’s largest and best-known corporations – like Walmart and McDonald’s – may have disproportionate numbers of their employees taking part in public assistance programs like Medicaid and food stamps. A video that went viral on YouTube criticized McDonald’s for offering its employees assistance with navigating the complex web of federal government assistance programs.

Most public assistance programs are aimed at poor people and limit participants’ incomes to a maximum somewhere around the poverty line (about $20,000 a year for a family of three). Because jobs generate incomes, it’s difficult for a worker to be admitted into antipoverty programs unless he or she works part time or earns near the minimum wage. Thus, it is no surprise that employers like McDonald’s and Walmart offering part-time or minimum-wage positions would have a disproportionate number of their employees in such programs.

One point of view is that employers just want to be helpful, and some of them happen to be in a line of business where they can create job opportunities for low-skilled people, many of whom can also benefit from knowledge about antipoverty programs. But critics assert that low pay is a deliberate corporate strategy to use government program revenues to enhance their bottom line.

Economists have long cataloged the winners and losses from antipoverty programs – we call it the “economic incidence” – and the answer is more subtle than either side acknowledges.

First and foremost, antipoverty programs raise wages and reduce profits in the short run because they implicitly penalize work, especially the full-time work that is most likely to raise an employee above the poverty line. In effect, employers not only have to compete with each other for employees, but they have to compete with the welfare state, too (as a recruiter, Stacey G. Reece, explains in his congressional testimony).

But the welfare state may also give big employers an advantage over small employers. Big employers achieve a scale large enough to host a number of employee benefit programs from education assistance and retirement plans to advice and assistance with welfare programs that small employers cannot afford. Going forward, I expect that large employers will offer more help for employees to navigate the Affordable Care Act than small employers will.

Although the earned-income tax credit is an exception, many safety-net programs permit participation on a part-year basis, which conveys an advantage to seasonal businesses, large and small. Employees at seasonal businesses have two sources of income – an employer paycheck during the parts of the year that they’re on the payroll and government program benefits during the rest of the year – while employees at nonseasonal businesses just have one income source.

Government transfer payments move purchasing power from those who finance the programs – taxpayers and the buyers of government debt – to the transfer programs’ participants. The transfers hurt businesses that serve, or borrow from, the program financers but may help businesses who serve transfer program participants. Walmart and McDonald’s may be among the latter group, too.

On the whole, social safety-net programs make it more costly to do business but nonetheless may confer competitive advantages on particular types of businesses.

Inequality and Good Intentions

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A new book says good intentions are a barrier to equality and to progress among the world’s poor.

For most of human history, family incomes were barely enough to survive and life was short. But in “The Great Escape: Health, Wealth and the Origins of Inequality,” Professor Angus Deaton of Princeton writes that while economic progress allowed much of the world to escape poverty, “escapes leave people behind, and luck favors some and not others; it makes opportunities, but not everyone is equally equipped or determined to seize them.”

Professor Deaton also deals with the events after the great escape: that is, how the progress of some families and nations affects the prospects for progress of those initially left behind.

Imitation is one force and works in the direction of progress for all. The poor can look to the progress of others to embark on their own escape. Professor Deaton shows how the imitation of new methods has occurred, for example, with medical technologies that have allowed the residents of a number of poor nations to live longer than Americans did just a hundred years ago, and sometimes longer than Americans live today.

But new methods can harm those with vested interests in the old ones, and the vested interests can use their political power to block competition and progress. Professor Deaton explains how “the emperors of China, worried about threats to their power from merchants, banned oceangoing voyages in 1430,” adding, “Similarly, Francis I, emperor of Austria, banned railways because of their potential to bring about revolution and threaten his power.”

Progress begets inequality, and the resulting inequality can either encourage more progress or impede it, or both. Professor Deaton suggests that inequality in the modern United States has had both of these effects.

He points to a third influence of progress and inequality on outcomes for those left behind: good intentions. As part of the world becomes rich and no longer worries about day-to-day survival, it can look outward. Many residents of developed countries have a “need to help” those less fortunate.

But the attempts to help often – perhaps even usually – go awry.

As medical progress began to diffuse around the world, people stopped dying so young, and that made for an increase in population, especially in less-developed countries. Developed countries thought they would help poor nations by encouraging population control, based on the dubious proposition that more people means more poverty.

“What the world’s poor – the people who were actually having all these babies – thought about all this was not given much consideration,” Professor Deaton says, citing China’s continuing one-child policy as an example. He adds: “The misdiagnosis of the population explosion by the vast majority of social scientists and policy makers, and the grave harm that the resultant mistaken policy did to many millions, were among the most serious intellectual and ethical failures of a century in which there were many.”

Other types of foreign aid to developing nations have also been a disaster, he says, with “pictures of starving children being used to raise funds that were used in part to prolong war, or to N.G.O.-funded camps being used as bases to train militias bent on genocide.”

Professor Deaton’s book is primarily international in focus, and he insists that help for the American poor is different and more effective than aiding the world’s poor. Nevertheless, American readers may be left wondering how much aid to American poor, is, as Professor Deaton says, “more about satisfying our own need to help, and less about improving the lot of the poor.”

Doctor Shortage?

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The supply and demand for health services will experience a variety of changes in the near future, especially those from the Affordable Care Act. But nobody has quantified their net impact on the market for doctors. The new law pushes demand for physicians in both directions, making it is easy for advocates on either side of the law to cherry-pick provisions they support.

The law is beginning to build new markets for individual insurance policies that in some ways can reduce the demand for health care and doctors.

Participating families above 250 percent of the poverty line will, on average, pay 30 percent of their medical expenses out of pocket, as compared with the 17 percent out of pocket that is typical for employer-sponsored health plans. That gives patients almost twice the incentive to avoid using doctors or to seek treatments that are less expensive and likely less physician-intensive.

In some states, patients are being pushed toward less physician-intensive care because the insurance plans offered on the exchanges have narrower networks that exclude some of the more expensive facilities. Some of these excluded providers may be considered among the best in the industry, because state regulators seek to keep insurance premiums low. This is a force that could help limit the demand for doctorss in narrow-network states.

Other states include their top facilities in the networks accessible by residents who buy their insurance on the exchanges and do not have this force limiting physician demand. Moreover, the broad-network states will likely pull dcotorss away from the narrow network states where demand for them is less.

Although the new law pushes the insured to shoulder a larger share of their health expenses, the law also mandates that insurance pay for a wider range of health goods and services. That mandate by itself could increase the demand for doctors.

The Affordable Care Act is supposed to increase the fraction of the population with health insurance, and it will in the long run because of the individual mandate, the large insurance subsidies and Medicaid expansions in a number of states. (In the short run, the act is reducing the number of people with health insurance, as many longstanding policies have been canceled because they do not conform with the new law.)

It is a mistake to assume that every person getting insurance coverage is an additional person demanding health care, because many of the so-called uninsured are actually insured in one way or another. Take Medicaid enrollment, for example. Sixteen million people were not enrolled in Medicaid in June 2010 yet participated in the program at other times during the fiscal year, largely because they don’t bother enrolling (or know that they can) when they are healthy and turn to it only when need arises.

If and when those who are eligible but unenrolled make contact with hospitals and other providers – when they actually need the coverage – they are reminded to enroll. In an economic sense, these 16 million were, in effect, insured all along, despite their absence from the official statistics. The new law’s individual mandate encourages some of these people to be perpetually enrolled, even when they are healthy, which is more a change in their official classification than a change in their use of health care.

The numbers of slots in medical schools and residency positions, and rules that permit nurses to perform a wider range of services, have important effects on the incomes of doctors, because easier entry into the medical profession reduces physician incomes. I’m not sure that the new law does much to change these entry barriers, though.

Proponents of the Affordable Care Act can point to the provisions that reduce physician demand and help prevent a doctor shortage; opponents can say that more insurance means more demand on an already strained profession.

A good economist should be able to examine all the provisions and tell us the net result. But none have done this. The most we have in terms of a comprehensive calculus of health reform and the demand for physicians is the example of Romneycare from Massachusetts, which Scott Gottlieb and Ezekiel Emanuel hold up as proof that there will be no doctor shortage.

But Romneycare is a different law than the Affordable Care Act and covered a different population. Even without those differences, Massachusetts could increase health care in the state in part by pulling in medical professionals from elsewhere in the nation.

The Affordable Care Act cannot do the same, except to pull medical professionals from abroad, where the barriers to moving are much greater.

If only the payments to physicians were free to adjust in response to the law, entry barriers, demographics and other forces, there would be neither a shortage nor a glut in the sense that doctors would be available to whoever would pay the market price and positions would be available for qualified doctors willing to work for that price.

But the new law limits payments to physicians and other medical providers. If patients are lucky, the demand for doctors will be low enough that the limits will not matter. But if the new law results in a significant net increase in physician demand, the payment limits will help remind us of Soviet-era limits on the price of bread, with queues and black markets to follow.

Robots and Property Values

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As robots begin to move goods and people from place to place, urban land might become more valuable.

Amazon.com has announced that it is testing package delivery by drones — small, unmanned helicopters that would bring a purchase from Amazon’s fulfillment center to the customer’s front porch. Driverless cars are being developed to help move goods and people from place to place.

“Location, location, location” is the saying in real estate: a property’s value is determined primarily by its location. An apartment in central Illinois might be worth 20 times as much in Manhattan, because a Manhattan apartment gives its resident access to many more goods, activities and high-paying jobs.

This is not to say that urban living is always the best, or that all urban properties are created equal. Locations involve trade-offs, and rural areas offer amenities that big cities cannot. But for centuries, real estate markets have shown that people and businesses are willing to pay more for urban properties.

As technology helps with moving goods and people more cheaply, it might seem that urban real estate would give up some of its price premium because distance becomes less of an obstacle to economic transactions. Wouldn’t a driverless car cause some workers to sell their Manhattan apartments and commute to their jobs from more spacious homes in the suburbs or even rural New York State?

But don’t forget that many people and businesses currently avoid urban areas because of the monthly expense of owning or renting urban property. New technologies might allow them to use urban properties on a part-time basis, or use less urban property to accomplish the same tasks, which would make urban property more valuable.

A restaurant may need less refrigeration and storage space because it takes multiple food deliveries per day. Grocery stores may save on shelf space by having a greater fraction of their items delivered directly to customers without being shelved in the store. Households may opt for less storage space or parking, for example — and more room for people — when they can get items and transportation cheaply and on time.

For every Manhattan resident who leaves his apartment for the suburbs, there could be many others for whom technology induces them to use a Manhattan property on a part-time basis.

New technologies are more likely to emerge in urban areas, because that’s where the innovators expect to find the most customers. Amazon said that it planned to start its drone service in urban areas, and I wouldn’t be surprised if the first commercial uses of driverless cars were in big cities like San Francisco or Los Angeles.

Thus, while cities already give their residents access to more goods and services, technology may further shift that advantage and thereby increase urban property values.

Changing Assistance for the Unemployed

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Even if federal unemployment insurance expires at the end of the year, it will be replaced by an even more generous assistance program for people leaving their jobs.

Unemployment insurance is jointly administered and financed by federal and state governments, offering funds to “covered” people who lost their jobs and have as yet been unable to find and start a new one. The cash assistance comes weekly, with states paying benefits of about $300 a week for 26 weeks or until the person starts a new job, whichever comes first.

Normally, the assistance stops after 26 weeks, even if the beneficiary has yet to find a job. But during recessions the federal government’s temporary “extended” and “emergency” unemployment compensation programs pick up benefits after the state benefits are exhausted.

During the recent recession, the federal government paid benefits for up to 73 additional weeks, making the total benefit duration 99 weeks.

The temporary federal programs have expiration dates, but Congress has routinely extended them, at least through 2012. A couple of the federal programs fully expired that year, so in 2013 the unemployed could get benefits for no longer than 73 weeks.

The last remaining federal program, known as Emergency Unemployment Compensation, is set to fully expire at the end of this year. Congress has extended its final expiration date several times in the past – most recently as part of the fiscal cliff deal – but there is no guarantee that Congress will continue its extensions.

If the emergency program continues while the new health care assistance comes on line, the incentives of workers and employers to create and retain jobs will take a big hit. The solid line in the chart below shows my estimates of the average marginal tax rate on worker’s income, accounting for the fact that earning income on a job results in both additional taxes and withheld federal benefits. The higher the tax rate, the less is the incentive to work.

Casey B. Mulligan’s estimates of the impact of emergency unemployment compensation ending in December 2013.

The dashed line shows the marginal tax rate if the emergency program really does expire at the end of the year. Tax rates will increase in January, but much less than they would without the expiration, because the assistance lost from the emergency program will be offset by the health assistance coming online.

The federal unemployment benefits at risk of expiration are economically more important than the already-expired programs, because it is less common for unemployment to last more than 73 weeks (when the expired programs kicked in) than it is to last 26.

Unemployment benefits from any program help people who desperately need it, but they also keep the labor market depressed by permitting people to remain unemployed longer and making layoffs more common. The remaining emergency program is the most important and thereby does the most to help people and the most to keep the labor market depressed.

Even if the emergency program is allowed to expire on Jan. 1, it will ‘be replaced by an even larger program — the Affordable Care Act — assisting the unemployed and others, including premium subsidies for health insurance.

Most people have jobs that provide health insurance and will be ineligible for premium subsidies for as long as they work. But as soon as they are fired, quit, retire or otherwise leave the payroll, they will be eligible for monthly assistance to pay for their health insurance premiums and out-of-pocket expenses.

For households between 100 and 400 percent of the poverty line – that’s about half of households – the new assistance will average about $110 a week, tax free (unlike unemployment benefits, which are taxable). Moreover, the premium assistance is not limited to 26 weeks; it can last for decades.

Regardless of how you evaluate the relative costs and benefits of the emergency program, now is the time for Emergency Unemployment Compensation to expire to make way for new assistance programs.

The Labor Market and Labor Policy Since Kennedy

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Fundamental changes in economic performance since the John F. Kennedy presidency help explain why economic policy debates are so polarized these days.

In its 34 months, the Kennedy administration embraced a range of interesting federal economic policies. Kennedy proposed permanently cutting personal and corporate income tax rates to promote economic growth, and his cuts became law. During his administration, the maximum duration of unemployment benefits was temporarily extended only 13 weeks, less than in any other recession since then.

He expanded the federal space program. He wanted a strong peacetime military and was willing to use it to stand up to communism. His Department of Justice, led by his brother Robert F. Kennedy, was tough on labor unions.

President Kennedy pushed for national health reform, although he did not see any legislation passed during his term. As a candidate and then president, Kennedy was initially cautious on civil rights issues, but ultimately worked to put together a civil-rights bill that became the Civil Rights Act of 1964.

From today’s perspective, Kennedy looks like a hybrid of a Democrat and a Republican, and as America remembers his assassination in November 1963, journalists and scholars continue to debate whether Kennedy was a liberal.

In my view, Kennedy was entirely a Democrat, but that’s less visible today because Democrats and Republicans, and their respective economists, were a lot less different than they are now, especially on matters of microeconomics. Kennedy was advised by James Tobin of Yale, a Nobel laureate who advised other Democratic presidents, too.

Both Tobin and Milton Friedman, who subsequently advised several Republican candidates and was an adviser to President Richard M. Nixon, were concerned that antipoverty programs would perpetuate poverty by giving people too little reward for taking care of themselves. Tobin wrote that high marginal tax rates cause “needless waste and demoralization,” adding:

This application of the means test is bad economics as well as bad sociology. It is almost as if our present programs of public assistance had been consciously contrived to perpetuate the conditions they are supposed to alleviate.

Tobin thought public programs had gone seriously awry whenever program participants kept less than a third of what they earned on a job, rather than losing it to extra taxes or withdrawn benefits. Friedman thought that people should keep at least half of their earnings after taking into account taxes or lost benefits. Yet in modern times, Friedman and Tobin appear to be quibbling, because now we have millions of citizens who keep a quarter of what they make, or less, in net earnings beyond the benefits they forgo, yet few Democrats are concerned that federal antipoverty programs might be counterproductive.

In “Roofs or Ceilings?” Milton Friedman and George J. Stigler wrote about the economic damage done by minimum wages, rent controls and other restrictions on market prices. Tobin offered similar explanations, writing:

People who lack the capacity to earn a decent living need to be helped, but they will not be helped by minimum wage laws, trade union wage pressures or other devices which seek to compel employers to pay them more than their work is worth. The more likely outcome of such regulations is that the intended beneficiaries are not employed at all.

(Unlike Friedman, Tobin did subsequently support a minimum-wage increase, because he thought better antipoverty tools would not be used).

These days, Democrats push for higher minimum wages, without any apparent concern that poor people might have more trouble finding work.

My point is not that Democrats are more wrong about economics that they used to be, but that, regardless of who is right or wrong, the gaps between Democrats and Republicans in economic reasoning are greater now than they used to be.

The economy is different now than it was in the 1960s, especially in that the incomes of the poor have not kept up with national incomes. When the poor are prevented from working by minimum wages or high marginal tax rates, a lesser fraction of national income is lost than in Kennedy’s era, when the poor could produce a more significant piece of the national economic pie.

So proponents of big social programs have less reason to be cautious about program expansions.

As long as the American economy produces such a wide range of labor market outcomes, we may never see a president, who, like Kennedy, has such wide-ranging economic policies.

The Slow Death of the Employer Mandate

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Students of health reform can be informed and entertained by revisiting a book by the health reform champion John E. McDonough.

As a member of the Massachusetts House of Representatives from 1985 to 1997, Mr. McDonough had worked for state health reform well before the now famous Romneycare health reform of 2006. During that time he also earned a doctorate in public health.

Like many other former legislators, he wrote a book about his experiences and relationships in office. “Experiencing Politics” (published 13 years ago) organizes his stories around social science models of the political process, including the principal-agent model and punctuated equilibrium theory.

The models are known by fancy phrases in the academic literature, but Mr. McDonough quickly brings them down to earth with explanations that are nontechnical and addressed to the general public. His stories are engaging and bring the models alive, even to social scientists who have seen the models on paper, yet may be dubious that they have much practical value.

Mr. McDonough is not trained as an economist, but usually shows good economic instincts in the book (though he does not mention that per-employee penalties and minimum wages might reduce employment among low-skill workers).

Why is politics so contentious and polarized these days? Mr. McDonough explains that there’s a lot at stake: “We invest enormous authority and trust in our government” and “we give our legislatures remarkable powers to pass laws that govern our own behaviors, from the trivial to the profound.”

Of particular interest today are his Chapters 6 and 7 on Massachusetts health legislation between 1988 and 1997. Mr. McDonough describes how the state’s previous system of hospital rate regulation had been put in place for the purpose of controlling medical spending and how he believes it might have worked for a time.

But he says the academic studies on which he relied became outdated. “I didn’t see it coming,” he says, adding, “Massachusetts government lost the ability to manage its hospital regulatory system with discipline and integrity.” He and other legislators concluded that “market-based contracting, organized around managed care, could correct the worst aspects of market failure, not perfectly but far better than regulation.”

Mr. McDonough describes how Gov. Michael Dukakis’s 1988 law sought to achieve universal coverage in Massachusetts with a legislative package that included a $1,680 penalty (per employee, per year) on employers who did not provide health coverage to their employees. Adjusted for inflation, that would be like proposing a $2,863 penalty in 2006, when Romneycare was passed with a mere $295 employer mandate.

The Dukakis package passed narrowly, and to gain legislative approval the final law delayed the employer mandate’s implementation by four years. Does that sound familiar? The national Affordable Care Act was passed in 2010, with an employer mandate to begin in 2014.

Mr. McDonough describes how those four years gave Massachusetts employers time to organize their opposition. Moreover, as 1992 approached, the Massachusetts labor market was weak. Arguably both of these things happened nationally between 2010 and 2013.

As a legislator, Mr. McDonough met with business executives to respond to their concerns over health reform. He recalls one of those meetings where “sitting quietly through my presentation was the owner of a Domino’s Pizza shop.” The shop owner explained: “I compete against pizza stores that pay everything and everyone under the table. I pay unemployment, worker’s comp, FICA, you name it, and you want to add one more thing that I have to dig up while my competitors pay none of those things? Come on.”

Mr. McDonough had no reply to alleviate that concern. With a few months to go until the originally scheduled implementation, Massachusetts lawmakers decided to delay the Dukakis employer mandate for three years. It would be delayed two more times and then, in exchange for business community support for a coverage expansion for children, ultimately repealed.

On the national level, while Congress was not consulted, with six months to go before the originally scheduled implementation, the Obama administration delayed its employer mandate one year.

Although today Mr. McDonough notes the differences rather than the parallels between the Dukakis law and the Affordable Care Act, proponents of the national employer mandate should be worried that it may be approaching the end of its political life.

In the Death Spiral We Trust

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The insurance-market death spiral makes sense in theory, but economists do not really know if, and how often, it is a practical consideration in real-world health insurance markets.

Adverse selection refers to a failure of buyers and sellers to transact because one or the other has additional information about the quality or cost of the product to be traded. A classic example from the 2001 Nobel laureate George Akerlof is the market for quality used automobiles, which in theory cannot exist, because buyers of used cars demand a heavy discount because of the likelihood that a used car they might buy will be defective. In theory, nobody sells a quality used car, because it would have to be priced like a lemon.

The used car market is, in theory, caught in a kind of self-fulfilling prophecy in which only defective cars are traded in the marketplace and are priced accordingly.

The same phenomenon has been used to describe the health insurance market. In theory, absent government intervention, only sick people will buy health insurance, which means that insurers have to charge a lot for the insurance, which means that healthy customers will not buy insurance. This is the supposed “death spiral” for health insurance markets.

The solution to this purported problem is to force everyone – especially the healthy – to buy health insurance. That starts a domino effect of other problems, including the unfortunate side effects of the redistribution, such as discouraging employers from creating and employees from accepting full-time jobs, which authors of the Affordable Care Act found to be necessary in order for everyone to be able to comply with the mandate to buy insurance.

I agree with the 2001 Nobel committee, which explained that the adverse selection idea is “a simple but profound and universal idea, with numerous implications and widespread applications.” Still, we don’t really know if the side effects of proposed market interventions are more tolerable than the disease itself.

The used automobile market is a good example. A prudent car buyer should be aware that defective cars are out there.

Nonetheless, the market for used cars did not experience a death spiral and today is active and vibrant. Without any government mandate that the owners of quality used cars sell them, the marketplace has devised a number of practices, such as cars leased from the manufacturer, manufacturer warranties and fleet resales, that help buyers expect quality used cars and thereby prevent the death spiral.

Economic theory predicts that all consumers buy actuarially fair insurance – that is, insurance in which each buyer expects to receive as much as he pays – so the mere fact that many people do not have health insurance (especially healthy people, who do not buy because it is too expensive) would seem to prove that the health insurance market is failing.

But the fact is that health insurance companies, like just about any business, have significant capital and labor overhead costs. Insurance premium revenue is needed to pay those costs. Under such conditions, the average consumer must expect to receive less than he pays. Many healthy people may thereby be uninsured for a good reason: the overhead costs are too much to justify whatever feeling of safety that insurance might give them.

The market might be selecting participants in a productive way. Forcing the insured to buy insurance may be a waste of society’s resources by adding to the already significant overhead costs.

Without proof that adverse selection outweighs other kinds of selection in health insurance, the death spiral may not be a serious threat, and government actions to prevent it may be unnecessary.

Work Now, and Let Uncle Sam Pay You Later

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Notwithstanding quirks in the Social Security system, public policy has sharply reduced the reward to work since 2007.

On Monday, the Economix blogger Nancy Folbre helped explain some of the complex factors that determine the rewards of working. Among other things, she noted the roles of work experience and Social Security benefits, both of which are examples of future consequences of working in the present.

This week I will examine Social Security and Medicare benefits from her forward-looking perspective, and in a future post I will examine work experience.

Professor Folbre says the payment of Social Security payroll taxes confers a benefit on the taxpayer in the form of additional Social Security benefits later in life. Indeed, the Social Security Administration calls the payroll taxes “contributions,” although employers are subject to penalties and even prosecution if they fail to deliver the “contributions” on time and in the legally prescribed amounts.

Technically, a worker’s lifetime history of taxable earnings, rather than the taxes themselves, traditionally determine a person’s old-age benefits, with more lifetime earnings sometimes resulting in more benefits (this book by the longtime Social Security actuary Robert J. Myers has all the details).

A classic paper by Martin Feldstein and Andrew Samwick was able to quantify the the link between lifetime earnings and old-age benefits as it was in 1990, assuming that Social Security rules would be unchanged over the next several decades. They found that secondary earners — in their view, spouses with significantly lower lifetime earnings than the other partner — would receive no future old-age benefits as a consequence of working, but that the value of benefits to patient, primary earners nearing retirement could be significant, especially if they were married.

If payroll taxes were always the same share of taxable earnings, we could ignore the distinction between the two for the purposes of quantifying incentives to work. But payroll tax rates have varied over time, most recently with the partial payroll tax holiday of 2011 and 2012 (interestingly, the Obama administration refers to the two-point reduction as a “tax cut”). Because the payroll tax rates are higher now than in 2012, a person moving earnings from 2012 to this year would increase his payroll tax but not increase his Social Security benefits.

That’s why I count the entire payroll tax cut as an increase in incentives for as long as the cut lasted, even if the rest of the payroll tax confers the benefits that Professor Folbre contends. If all we wanted to know was the amount by which incentives changed over the last 10 years or so, Professor Folbre’s assertion about the future pension benefits conferred would hardly be relevant, unless we thought that the link between present earnings and future benefits had been changing during that time frame.

I agree with Professor Folbre that the best quantitative estimate of marginal tax rates would account for the future consequences of working in the present, but writing in 2013 I am not willing to follow Professors Feldstein and Samwick and assume that Social Security rules will remain unchanged for the remaining lifetimes of today’s workers. In one way or another, we can expect health benefits or cash benefits for the elderly, or both, to be taxed or means-tested more than they are under current law.

Democrats have suggested means-testing Social Security and Medicare, with the likely result that people who worked and saved more during their lifetimes will find themselves with fewer benefits from those programs, compared with people who worked and saved less. Republicans have proposed means-testing Medicare, as part of transforming it to a health insurance premium-support program. The common denominator here is means-testing and the marginal tax rates that go with it.

Professor Folbre is unwilling to assume that “taxpayers derive no marginal benefits from programs such as Social Security.” But that’s hardly relevant for understanding how incentives evolve over time. Based on the considerations cited above, my guess is that the effect of working in the present on future Social Security and Medicare benefits was once somewhat positive (primary earners) or zero (secondary earners), and for primary earners has become less positive (or even negative) over time. By approximating these changes as zero, my work has thereby understated the amount by which marginal labor income tax rates have increased since 2007.

Regardless of whether redistribution is achieved by collecting more taxes from families with high incomes, providing more subsidies to families with low incomes, or both, an essential consequence is the same: a reduction in the reward for activities and efforts that raise incomes. New and revised federal programs do exactly that, in myriad ways, and will be doing so for the foreseeable future.

The Power of the Individual Mandate

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If and when the Affordable Care Act is executed as planned, it will leave few members of working families uninsured.

About 31 million members of nonpoor working families are without health insurance (according to my calculations from the Census Bureau’s current population survey). An important reason they do not have private health insurance coverage is that, in one way or another, they find it too expensive. Their employer may offer health insurance, but they decline coverage because the premiums are too much.

If their employer doesn’t offer insurance, the uninsured workers are, judging from their behavior, unwilling to switch to an employer that does offer health insurance in exchange for lower cash pay (of course, finding such an employer may not be easy and may require a move across state lines, but that’s my point: getting private insurance is costly).

The Affordable Care Act has at least two provisions to make insurance cheaper to workers who have so far been uninsured, compared with what employer insurance would have cost them in previous years, and these will take effect in the next couple of years (or whenever the federal government gets its systems running, whichever comes later).

The first provision is the “individual mandate penalty” for being uninsured, which will eventually reach the greater of 2.5 percent of husband-and-wife income, or $695 per uninsured family member (up to three, with uninsured children counting half, and the $695 indexed to inflation). Undocumented immigrants are not liable for the penalty.

The penalty effectively makes insurance cheaper because people can avoid it by getting insurance. In effect, all nonpoor legal residents pay the penalty, but people who purchase health insurance get their penalty applied toward their health insurance premiums.

The law’s premium assistance tax credits are another provision that makes insurance cheaper, at least for uninsured nonpoor people living in households below 400 percent of the federal poverty line.

These two provisions are a potent combination — and might be reinforced by the prospect of Internal Revenue Service enforcement of fines due.

I estimate that nine million of those who would have been uninsured without the law will find their own health insurance to be free, or even better, in the sense that their penalty (in the years 2016 and beyond) for being uninsured exceeds the premium that they probably would pay on the law’s new health insurance marketplaces (I use the Kaiser Family Foundation calculator to make these estimates because the marketplaces are not yet operational). As taxpayers, each of these families will be helping to pay for other people’s health insurance; those taxes will be owed regardless of what the family decides about its own insurance.

Without the individual mandate, those nine million people might be tempted to remain uninsured.

Although the remaining 22 million nonpoor workers (and their dependents) will have to pay something to have health insurance, most of them will find insurance to be cheaper than it was before the Affordable Care Act. In addition to the nine million who will find insurance to be free (in the sense defined above), another 13 million will find insurance to be at least 25 percent cheaper than it was to get employer insurance before the law passed, and they are therefore more likely to purchase it.

The individual mandate is politically unpopular, and we don’t yet know how vigorously the Internal Revenue Service will enforce it. The law precludes the I.R.S. from criminally prosecuting taxpayers who refuse to pay their penalty, and on this basis some observers have predicted that the I.R.S. will collect hardly any penalties. Others believe that the I.R.S. can get its penalty revenue if it tries hard enough.

After all, banks and other private-sector creditors cannot criminally prosecute either, yet they still manage to collect from most of their borrowers. Senator Tom Coburn, Republican of Oklahoma, explains how the I.R.S. can add penalties and interest to unpaid individual mandate penalties and establish a lien against the delinquent taxpayer’s property so that, should the property be sold, sales proceeds can go toward paying the I.R.S. The I.R.S. can also press delinquent taxpayers for payment.

The Affordable Care Act prohibits the I.R.S. from filing a Notice of Federal Lien, which would give its lien priority over other liens, but, again, that makes the I.R.S.’s collection toolbox more like the toolbox that private-sector creditors have.

For all of these reasons, the individual mandate can be enforced and thereby help discourage millions of people from going without health insurance.

Aging, Taxes, and the State of the Labor Market

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As people age each year, that tends to increase average ages. At the same time elderly people die and babies are born, and that tends to decrease average ages. The combination of these two forces can keep the average population age constant over time.

The baby boom from the late 1940s to early 1960s changed this calculus, because the number of babies born in those years was well above normal. Average ages fell when the baby boomers were born, and have risen thereafter because the baby boomers’ birthdays tended to outweigh the arrival of subsequent birth cohorts.

For decades, people tended to reduce the amount they worked – especially through retirement – as they reached 62 and beyond, because their health declined, they became eligible for Social Security, they wanted to spend time traveling or they looked forward to extra time with grandchildren. Still, retirement behavior need not reduce total workers per capita because people turning 62 can be replaced by young people coming into the work force.

In about 2008, the first baby boomers started to reach normal retirement ages. Their numbers are so large that the people coming out of school are too few to fully replace them. This historically unusual rate of population aging is expected to reduce employment per capita.

You might say that the natural rate of employment has been falling in recent years, for labor supply reasons that have nothing to do with the recession, financial crises and other economic events.

For this reason, in my book and elsewhere I look at labor time series that are adjusted for population aging. The chart of work hours per person below is an example. The chart is on an index scale, with the last month before the recession normalized to 100. An index value of, say, 90, means that hours per person were 90 percent of what they were in December 2007: a drop of 10 percent.

Calculated with data from the Bureau of Labor Statistics, the Census Bureau and the Bureau of Economic Analysis

The red series shows that, without any adjustment, the labor market is still about 6 percent below what it was: less than half recovered from its 10 percent drop. But the recovery is more significant if we adjust for age: the gray series had reached 96.3 by August 2013.

In other words, two of the six percentage points of the current depression of the red series is a consequence of population aging between 2007 and 2013. Because the Federal Reserve and other policy makers cannot stop the aging process and the labor supply shifts that go with it, they should understand that their job of helping recovery will be finished before the red series gets back to 100.

Economists disagree about many things, but they seem to agree with the basic idea that the lack of recovery is partly attributable to population aging, and that policy makers cannot stop the aging process. Paul Krugman, for example, notes that we need to adjust for demographics. He uses a slightly different adjustment, but his measure and mine agree that population aging by itself depresses the usual labor market indicators by 1 or 2 percent.

But aging is not the only change affecting labor supply. Marginal tax rates have increased five percentage points since 2007 and will increase another five percentage points over the next 15 months, a trend attributed especially to expansions in health and other safety net programs. By 2015, a typical worker will keep only half of the value created by employment, compared with 60 percent kept before the recession.

Economists have traditionally recognized that a 17 percent reduction in the reward to working (from keeping 60 to keeping 50) would significantly contract the labor market, and do so at least as much as the 2 percent that the aging of the baby boom does. Yet this time many economists are reluctant to acknowledge marginal tax rate increases, even though marginal tax rates affect labor supply in many of the same ways that aging does.

Perhaps the economists who are silent about marginal tax rate hikes are worried that acknowledging the new rates would overshadow their well-intentioned origins: helping the poor, the unemployed and people without health insurance.

Professor Krugman, for example, says life is too short for him to look closely at my criticism and at the marginal tax rates I’ve measured, and doesn’t indicate that he’s looking at anyone else’s measures either. He’s not the only one: I have visited several Federal Reserve banks since 2009, and hardly any of the economists there seemed to be aware of what’s happening to marginal tax rates.

The Federal Reserve cannot reverse the tax rate increases any more than they can reverse the aging process. Perhaps Congress should ask Janet Yellen, nominated as chairwoman of the Federal Reserve, what she knows about changes in tax and retirement rates, and what they say about the future of the labor market.

Public Policy and Wages in the US and UK

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Between 2009 and 2011, the value-added tax in Britain increased to 20 percent from 15 percent. (The value-added tax is essentially a national sales tax.) Because the tax is part of the overall price of essentially anything bought in the country, it was no surprise that the rate of inflation of prices on consumer goods was elevated during those years as businesses passed on the cost of the taxes they paid to their customers.

In many circumstances, wages roughly keep up with consumer price inflation as the sellers of consumer goods use their extra revenue to compete for workers. But wage inflation is not guaranteed when consumer price inflation comes from sales tax increases, because the extra revenue goes to the public treasury in the form of sales tax receipts rather than going to the sellers of consumer goods.

In this way, increasing the sales tax rate to 20 percent from 15 percent should reduce real wages by 4 or 5 percent. (By real wages, I mean the resources that a person has as a consequence of working after taxes, subsidies and inflation. Because of taxes and subsidies, those resources are less than the aggregate economic value created by working and less than the cost to employers of having employees on the payroll.)

A recent study of wages in Britain confirmed this: inflation-adjusted wages fell 4 or 5 percent in Britain between 2009 and 2011.

While British workers saw their purchasing power eroded by the sales tax increase, the unemployed did not, because unemployment benefits in Britain are automatically indexed to inflation. Additional inflation of 5 percent meant a 5 percent rise in unemployment benefits. By giving a raise to the unemployed without giving a raise to workers, the added sales tax in Britain reduced the reward of working.

The United States does not have a national sales tax. A few states did increase their state sales tax rates between 2011 and this year (others decreased it), but the national average increase since 2007 has been only a couple of tenths of a percentage point.

Nevertheless, adjusted for taxes, subsidies and inflation, wages are lower in the United States, too. As I showed in a post last year (see especially the second chart), public policies in the United States reduced real wages by increasing the incomes of unemployed people through new unemployment benefits, food stamp expansions and other increases in benefits of the social safety net.

As long as the United States and Britain retain their wage-depressing public policies, neither country should expect its labor markets to return to what they used to be.

Low-Wage Work Incentives Take a Big Hit

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Beginning this week, families can use the Affordable Care Act’s marketplaces to enroll for health insurance coverage that begins Jan. 1, and in many cases receive federal assistance with their premiums and other health costs on the basis of their expected income for calendar year 2014.

Because people who work part time or are unemployed for part of the year have less annual income than people who work full time and all year, working less means qualifying for more generous subsidies. By working part time or not at all, participants in the marketplaces will also create fewer penalties for employers who don’t make affordable coverage available once those penalties go into effect in 2015. (Employers are penalized only for full-time employees and only during the months that they are on the payroll.)

These new rules will make it less rewarding to be a full-time worker and a little less burdensome to be unemployed or underemployed. In my testimony in June before the Subcommittee on Human Resources of the House Ways and Means Committee, I quantified these new disincentives in terms of marginal tax rates — the percentage of compensation lost from paying taxes and replacing benefits associated with not working. The group I looked at was non-elderly household heads and spouses whose earnings abilities – that is, the amount that they earn when they are working full time – are in the middle of the distribution, earning roughly $800 per week when the work is full time.

Such workers (hereafter “midwage workers”) will see their marginal tax rates increase by an average of five percentage points between now and 2016, taking into account that many people will not take part in programs for which they are eligible for help. Before the Affordable Care Act, the compensation for each additional hour of work by a midwage worker was, on average, split 55 percent for the employee and 45 percent for the government (the government got its part by receiving more taxes from the employee, and paying fewer benefits, such as unemployment insurance payouts and food stamps, to the employee). Under the act, the split will be 50-50.



The unemployment rate, the employment rate and the propensity to work full time are usually measured nationwide, with every adult counting in the average regardless of whether he or she is a low-wage worker, a high-wage worker or somewhere in between. It’s worth giving attention to midwage workers because, by definition, much of the population is fairly close to the middle.

But is also informative to look at low-wage workers, because they are more likely to fall into poverty and their employment patterns may be more sensitive to incentives.

It turns out that low-wage workers will also see a reduction in their reward to work over the next couple of years, and to a greater degree than workers in the middle will. The chart below compares the five-percentage-point result for midwage workers and its components, with the tax-rate changes for low-wage workers (by which I mean workers who earn roughly $550 per week when they work full time, which is roughly twice minimum wage).

Work incentives for low-wage workers are eroded more than 10 percent of their compensation over the next couple of years, compared with 5 percent for midwage workers. Before the Affordable Care Act, the compensation for each additional hour of work by a low-wage worker was split 50 percent, on average, for employee and 50 percent for the government. Under the law, it will be 39-61.

One reason that low-wage workers will have a greater shift in their incentives is that, because they earn less, a given dollar amount is a greater percentage of their compensation than it would be for a midwage worker.

More important, low-wage workers will qualify for larger dollar subsidies in the marketplaces than midwage workers will. Working full time or spending fewer weeks unemployed will mean less, or even zero, assistance with health expenses.

In other words, some good news from the new marketplaces is that low-wage workers will be given a lot of assistance with their health expenses. But that assistance has the unfortunate consequence of higher income taxes on low-wage people: working more rather than less will not pay as well under the Affordable Care Act than it does now.

When Medicare Opened for Business

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The Affordable Care Act creates health insurance marketplaces or “exchanges” where families and individuals can purchase private health insurance. Most people currently without insurance will be eligible for assistance with their health insurance premiums, capping their payments at 2 to 10 percent of their household income.

The federal budget, and perhaps also the health of millions of people, depends on how many people take advantage of the new program.

People will not be forced to take part in the exchanges, but those who do not will be assessed a small penalty for not being insured (whichever is greater, 1 percent of household income, or $95 per person) that would appear on their federal tax return when they file in early 2015. Doctors and hospitals may also insist that their uninsured patients join the exchanges rather than requesting “free” care.

On July 1, 1966, Americans 65 and older were first eligible to take part in the new Medicare health insurance program, in which the federal government paid much of the cost. Previously, almost half of the elderly had no health insurance.

By the end of 1966, 19 million people were enrolled in Medicare, almost exactly the same as the number of Americans who were 65 or older at the time. The first full year of the program was 1967.

Source: Bureau of Economic Analysis

Those were the days before rapid Internet communication, and a number of elderly people lived in rural areas away from major hospitals and medical centers. In the current environment, the health insurance programs coming on line next week might spread even more quickly than Medicare did.

On the other hand, the elderly population may have been easier to reach than today’s uninsured nonelderly people, because the elderly had already been participating in the Social Security pension program. Also, the new health insurance exchanges will have staggered enrollment periods (about two months near the end of each calendar year), whereas elderly are enrolling in Medicare all year long (a person’s Medicare enrollment period is seven months based on the date he or she turns 65).

The Medicare-eligible population – essentially people 65 and over – is also less policy-sensitive than the population eligible for the new exchange plans. People over 65 are created by waiting for 64-year-olds to have another birthday, and there’s not much policy and economic events can do about that. But people eligible for the new exchange subsidies must be in families with income of 100 to 400 percent of the poverty line and must not have a job that offers affordable coverage — conditions that economic change or policies might affect.

Incentives and economic events are likely to increase the number of people eligible for the exchange subsidies, but those economic behaviors may take some time to play out. For that reason, participation in the exchange plans may continue to increase significantly even after 2015, when the program will have been two years old.

Based on the Medicare experience, I expect more than 15 million people to enroll in the new exchange plans by 2015, with millions more joining thereafter as the economy adjusts to the new law.

The "Coase Theorem" and Big Business

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Big businesses, especially those with large shares of the markets in which they sell, are sometimes thought to harm the economy because they sell to customers with little fear of competition from other sellers. Big businesses charge too much, the argument goes, and all customers can do in response is to purchase less. (The seller understands that customers respond to high prices by purchasing less, but the high profit margins are thought to more than compensate for the lower volume.)

If the industry had more sellers, or the customers themselves were in charge of production, prices would be lower, consumers would buy more and in aggregate the industry’s sellers would produce more and need more employees.

This “monopoly view” is that dominant businesses result in less industry production and employment than would emerge in a competitive marketplace.

Consistent with the monopoly theory of big business, the federal government, especially the antitrust division of the Department of Justice, is authorized to punish businesses that are thought to be too large for the efficient operation of their marketplace, and in some instances to break them apart.

In the labor market, unions can sometimes be a dominant seller, and on that front there are opposing “monopoly” and “bargaining” theories, as I noted in last week’s post. The bargaining theory of labor unions suggests that they limit the economic damage that they do.

The same sort of bargaining theory is present in the antitrust field. A big business should not be satisfied with a high-price/low-volume outcome, even if it yields more profits than a low-price/high-volume outcome, because a price above marginal cost of production is inefficient: there may be ways that the buyer can be given a better deal and enhance the seller’s profits.

Profs. Kevin Murphy, Edward Snyder and Robert Topel of the University of Chicago have written about some of the results of bargaining between big businesses and their customers. Big businesses often offer volume discounts, quote nonlinear prices and give loyalty incentives to customers. All these policies can encourage customers to purchase more, perhaps in a quantity similar to what they would buy in a many-seller market with lower prices. If the bargaining view of monopolies is correct, then the monopoly view of big business has exaggerated the degree to which dominant sellers harm the economy.

While one point of view is that federal antitrust policy is not vigorous enough, Professor Coase reminds us that it is easy to exaggerate the economic problems created by dominant sellers.