CBO Report Revisits the Effects of Obamacare

On February 4th, the Congressional Budget Office (CBO) released a report analyzing the outlook of the national budget and the economy. In this report, they included an appendix revisiting the effects of the Affordable Care Act (ACA), also known as ObamaCare, on the domestic labor market. This controversial report suggests 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 of 2017 to 2024.” Republicans have pointed out that this loss in hours of labor reported by the nonpartisan CBO is essentially equivalent to the loss of 2 million jobs in 2017, evidence that Obamacare is a job killer. Ted Cruz (R-TX) tweeted for a “#FullRepeal” after the report was released. However, the reality is more nuanced.

The CBO reported that there would be an aggregate reduction in total hours worked rather than jobs demanded. This is an important distinction because each scenario has very different consequences. The way that some media outlets, such as Forbes, have publicized this report is misleading and deceptive. Although the report does suggest that the ACA will cause a negative impact on the labor market, it does not suggest that the number of unemployed Americans will increase by 2 million people. The report claims that the loss of labor supply in marginal hours of work foregone over the next seven years is equivalent to a 2.0 million reduction in employment in 2017.

As with any entitlement program, the ACA focuses on providing healthcare coverage for those on the lower end of the income spectrum, meaning that the lower your income the higher coverage subsidization you receive. It follows that the higher your income, the less help you will get with your insurance coverage. This creates a distortion in labor incentives in the form of people wanting to work less in order to optimize their net income, or the total amount of goods and services they take home at the end of the day. Like most entitlement programs, there is a point at which an extra hour of work would translate into a reduction in the amount of net income a worker takes home. The CBO predicts that this is going to cause people to work 1.5% to 2.0% less because the introduction of the ACA creates incentives that render individual labor supply reduction an economically sensible decision. The Graph Below shows the marginal tax rate paid by non-elderly citizens. It represents the amount of income that is paid towards taxes and lost from a reduction in subsidies for every additional dollar earned. As the graph demonstrates, this marginal tax rate will increase because of ObamaCare by at least 1% according to University of Chicago economist Casey Mulligan.

Moreover, the CBO considers that an increase in income taxes used to fund the ACA will cause people to work less. The ACA calls for an increase of 0.9% in income tax for those earning above $200,000 which will reduce the marginal returns on extra hours of work for people in that tax bracket. Consequentially, the CBO believes that those subject to the tax increase will reduce the amount they work as well.

Another cause of labor supply reduction is the penalty on firms with over 50 employees. The CBO projects that such firms will pass the penalty onto their workers in the form of wage reductions. As opposed to reducing the number of workers who are hired, firms will reduce wages and consequentially the incentive to work. According to the report, his deduction in salary will contribute to the overall reduction in labor supply.

The Congressional Budget Office also predicts that people will retire earlier because health insurance providers will not be able to discriminate on the basis of age. Earlier retirement will intuitively cause total labor supply to decrease because older citizens do not have the incentive to keep working.

Like most other tax-based entitlement programs tiered by income, the ACA will alter incentives in the labor market such that people work less. It is important, however, to make the distinction between people working less and fewer people working. In this case, the right-wing media has by-in-large misrepresented the report’s findings.