Washington Examiner
Why Obamacare will make America less productive
Washington's shutdown is over and the debt ceiling has once again been raised, yet the long-term
budgetary and economic outlook is no more certain that it was before Congress struck a deal.
Adding to the uncertainty is the implementation of President Obama's health care law, also known as Obamacare. Let's look
specifically at the potential impact of Obamacare on the supply and demand of
labor.
On the demand side, the health care law requires employers with more than 50
workers to provide health insurance to all full-time employees (defines a
full-time job as 30 hours or more per week) or pay a $2,000 penalty per
worker.
In that sense, the law increases the cost of current and future employees. It
also gives businesses an incentive to hire more part-time workers to avoid the
costs of providing health insurance or paying the penalty for full-time
employees.
There is increasing evidence that this is already happening. Employers
ranging from companies such as Walmart and Forever 21 to community colleges in
Virginia have already started increasing their share of part-time employees
rather than full-time ones.
Obamacarefs tax increases will have a negative impact on laborfs supply side,
as well. University of Chicago economist Casey Mulligan has done a significant
amount of research on this issue.
In his August piece in the New York Times about health-care
inflation and the arithmetic of labor taxes, he wrote:
gThe Affordable Care Act also creates explicit taxes on employers, subsidies
for layoffs and various implicit taxes on employees with many of the same
economic characteristics as taxes on employers.h.
In addition to the tax, the law also provides more subsidies to low-income
families, and adds gfour significant, permanent, implicit unemployment
assistance programs, plus various implicit subsidies for underemployment.h
In a National Bureau of Economic Research paper published in August, Mulligan
calculated the combined effect of higher taxes and more generous subsidies.
He found that it will have an important depressing impact on Americanfs
incentive to work, and hence, on our labor supply. In other words, Obamacare
will contract the labor market.
Mulligan's findings are unfortunately consistent with the work of other
economists. Take the work of Nobel laureate Ed Prescott.
As I earlier wrote in this column: gIn his famous 2004 paper 'Why do
Americans work so much more than Europeans?' [Prescott] shows that workers spend
considerably more hours working when marginal tax rates on their incomes are
lower. So basically, over time, people will reduce the number of hours of work,
economic growth slows down, and less revenue is collected.h
In other words, we can expect tax increases to have an impact on the
available labor supply.
But Prescottfs other big insight is that a generous redistributive system
makes it easier to reduce onefs labor supply. As George Mason University
economist Garett Jones explains, gPrescott argues that if you raise taxes for
pure redistribution from the eaverage personf back to the eaverage person,f then
the tax hike doesnft make the eaverage personf poorer: The government is taking
money out of everyonefs right pocket and slipping it into their left. But if the
income effect is gone, whatfs left? The disincentive to work: The pure
substitution effect.h
In a nutshell, higher taxes coupled with more generous benefits equal a
strong incentive to work less.
Finally, there is another group of people who may have a strong incentive to
work less under the new law. Obamacare requires nearly everyone to buy
insurance.
However, someone between 138 and 400 percent of the poverty line is qualified
to receive a federal tax subsidy for health insurance bought on a government
exchange.
People making just above the 400 percent threshold donft. At this level of
income, one isnft that wealthy, yet subsidies arenft available.
Now, considering that premiums are likely rise for millions of Americans
because of requirements that policies provide certain benefits they didnft offer
before, plenty of people will now have pricier plans, and no way to defray the
cost.
In that context, it is not crazy to think that some people will try to reduce
their income below the 400 percent level among other ways by working a little
less.
In fact, over the weekend, an article in SFGate recommended that people in that situation
should do exactly that. As the author writes: gYou can also consider reducing
your 2014 income by working just a bit less.h
Obviously, while therefs no way to know how many Americans will decide to
work less or even how much less to benefit from the subsidy or as a response to
higher taxes.
But we can be sure it won't be zero and there is a chance it will be
many.
VERONIQUE DE RUGY, a Washington Examiner columnist, is a senior
research fellow of the Mercatus
Center at George Mason University.