Pethokoukis, Economics, U.S. Economy

Obamacare’s effect on work is 3x worse than previously expected is down every day from 1am to 5am for improvements. is down every day from 1am to 5am for improvements.

The Affordable Care Act is going to have an even bigger impact on the US labor market than first thought, according to the Congressional Budget Office. And it’s not good. Back in 2010, CBO estimated that the ACA would, on net, reduce the number of full-time workers — either due to quits or reduced hours — by around 800,000 over a decade. But now that number has jumped by a huge amount:

CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor—given the new taxes and other incentives they will face and the financial benefits some will receive

The reduction in CBO’s projections of hours worked represents a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024. Although CBO projects that total employment (and compensation) will increase over the coming decade, that increase will be smaller than it would have been in the absence of the ACA.

Because some people will reduce the amount of hours  they work rather than stopping work altogether, the  number who will choose to leave employment because of  the ACA in 2024 is likely to be substantially less than  2.5 million. At the same time, more than 2.5 million  people are likely to reduce the amount of labor they  choose to supply to some degree because of the ACA,  even though many of them will not leave the labor force  entirely.

Or as JP Morgan writes in a new note: “CBO now believes that the work disincentives created by the ACA will hold back the amount of labor supplied by households, thereby restraining overall economic activity.”

Here’s what’s going on: this is a story of trade-offs. Subsidies help people buy health insurance. But as those subsidies are phased out (to save money) as incomes rise, effective marginal tax rates increase. That discourages work. None of this is a revelation to the CBO, but the agency has “now incorporated into its analysis  additional channels through which the ACA will affect  labor supply, reviewed new research about those effects, and revised upward its estimates of the responsiveness of labor supply to changes in tax rates.” New thinking, new estimates.

OK, fine. One option is to accept this trade-off as the necessary price to pay for more people getting health insurance. Of course, how health insurance affects health outcomes isn’t so clear or straightforward. For instance: a fascinating new study from Ghana found that giving people free, formal healthcare had no impact versus the control group population. Closer to home, a much-hyped, randomized trial in Oregon found that putting people on Medicaid “generated no significant improvement in measured physical health outcomes.” This doesn’t mean universal coverage is a bad idea, but we should be aware of secondary effects, such disincentives to work at time of falling labor force participation and rising disability rolls.

As economist John Cochrane has put it, “If you means-test any benefit, you introduce a steep marginal tax rate at means-testing point. If you don’t means-test a benefit, you blow out the budget. It’s a hard nut, that you can’t get around.” And Obamacare doesn’t.

Follow James Pethokoukis on Twitter at @JimPethokoukis, and AEIdeas at @AEIdeas.

2 thoughts on “Obamacare’s effect on work is 3x worse than previously expected

  1. At a time when there are something like 4 job seekers for every job available, why is reducing the supply of labor a bad thing?

  2. I am absolutely shocked that CBOs original prediction was 200% off, and that the CBO – which is always right – could be so very, very wrong.

    Oh, remorseful day.


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