Law’s Laborers Lost: The Congressional Budget Office and the Labor Effects of the Affordable Care Act

Law’s Laborers Lost: The Congressional Budget Office and the Labor Effects of the Affordable Care Act

On the same day that the Congressional Budget Office published its Budget and Economic Outlook: 2014 to 2024 report, I was sitting at lunch with a colleague about 10 years my senior. We also chatted a bit with another colleague roughly his age peer.

Much of the conversation was about retirement.

People retire for a variety of reasons. Some are compelled to do so by mandatory retirement ages. Some are compelled to do so by failing health or reduced capacity to meet their employment obligations. Some opt to retire because it gives them freedom, either from the routine of work in general or from a particular routine of work. Some, indeed, begin whole new careers upon retirement, including many of our first responders.

Retirement, if it does not involve the substitution of one full-time career for another, can be described as a decision to supply less labor. That’s an odd-sounding phrase to most ears, but it’s the language economists use to describe choices individuals make to work less, for whatever reason. When a parent decides to quit work, or to take extended leave, or to shift from full-time to part-time employment, in order to be with his or her children, that’s a decision to supply less labor. When an adult child makes the same decision to care for an ailing parent, that’s a decision to supply less labor, too.

So is the choice to work less so one can sleep more, or play video games more, or annoy the neighbors more.

It’s all about the supply of labor, and how much labor individuals choose to supply.

And none of this conversation is about the demand for labor . . . that is, how many employers are offering how many positions at how many hours a week.

Understanding the difference between supply and demand is critical to understanding how policies affect employment.

Take unemployment compensation. There is research that supports the argument that unemployment compensation may diminish the motivation to seek work . . . or, at least in the case of the particular systematic review I read, the imminent threat of loss of benefits seems clearly to increase “exits” from unemployment into employment.

So unemployment compensation, because it provides a cushion for the loss of income, may prompt at least some to supply less labor, at least for a period of time.

The Congressional Budget Office’s most recent Outlook has generated a lot of headlines because of its finding that the Affordable Care Act will have a much larger impact on employment levels than previously estimated: roughly 2.3 million full-time equivalent workers will be lost, the CBO estimates, in the next decade.

But the cause of the vast majority of that “loss,” according to the CBO, isn’t likely to be businesses reducing the number of their employees or reducing employee hours either to avoid the penalties for not providing health insurance or to reduce and absorb the costs of those penalties. That has been the dominant attack on the ACA as a “job killer,” but the CBO says it’s not that big a deal.

A bigger deal: in various rather complex ways, the Affordable Care Act, like unemployment compensation, will create incentives for at least some workers to supply less labor. In other words, the CBO expects that it will be the workers, not the employers, who choose to reduce the level of employment.

Some workers will stop working because they no longer have to work in order to have health insurance (and insurance was the primary reason for working). Some will reduce their hours for the same reason, and in order to drop below or stay below the various thresholds of eligibility, whether for Medicaid or for certain levels of subsidy for a health plan purchased on an exchange.

What sort of workers are these? Mostly low-wage workers, based on the CBO’s analysis.

What sort of things will they do with their time?

All the things I listed above, and more I haven’t imagined.

So . . . is this economic impact of the ACA a good thing or a bad thing?

The answer may lie, in large part, on one’s view of the value of paid work . . . and whether or not there are other values (like caregiving) of equal or greater merit.

2 Responses to Law’s Laborers Lost: The Congressional Budget Office and the Labor Effects of the Affordable Care Act

  • Jim Frishe

    One of the reasons the CBO has made a bigger deal of the decreased incentive to work is a lot of the original cost projections ignored this incentive to qualify for additional subsidy from the federal and state governments. The states that took the bait and opened up Medicaid to a wider audience have seen the impact in more than projected enrollments.
    The voluntary decrease of earned income will have a twofold effect: larger than projected expenditures for the ACA subsidies along with new qualifiers for other existing subsidies and an unknown reduction in tax revenues. This will put massive pressure on the budget to increase taxes on . . . . (wait for it)….. the people who would create jobs. As the population of job seekers grows every year, we need to produce new jobs to absorb them into the economy. If you think this indicates that the incentives are all going in the wrong direction, you may be right. Just wait until the $2,000.00 per employee penalty kicks in later this year.

    • Dr. Scott Paine

      Thanks, Jim. Definitely part of the larger equation. So, too, is this other element of the complex mix: people choosing to supply less labor should, in turn, create opportunities, by their withdrawal of labor supply, for people currently wishing to supply more labor (i.e., some of the underemployed, unemployed, and those entering the job market). It may not be one-for-one, hour-for-hour, as employers evaluate and re-calibrate their work forces, but there is almost certainly going to be some hiring that results from the reduced supply of labor provided by those currently employed.

      These new hires or expanded hours individuals, in turn, will come off of, or place less demands upon, or be less at risk of falling onto, the social safety net. That, in turn, will reduce costs for those programs (and may, to a limited extent at least, increase tax revenues). And this, in turn, should mean more consumer demand.

      How much of any of this will occur? I haven’t seen any attempts to estimate it (I welcome suggested links!) But it’s all part of the complex interplay of the Affordable Care Act and the economy.