Tuesday, February 4, 2014

Obamacare Creates Incentive to Work Less; CBO Estimates Obamacare Will Cost 2 Million Full-Time Equivalent Jobs by 2017

MarketWatch reports Obamacare plans to exceed $1 trillion, create reluctant workers.
The CBO projects that insurance subsidies and related spending will account for increasing chunks of deficit spending, starting at $20 billion this year and steadily increasing to $159 billion in 2024, for a collective cost of just under $1.2 trillion. The cumulative total from the ACA for the next decade could reach $1.35 trillion.

In several charts in its report, the CBO calls these “effects on the cumulative federal deficit.” But in footnotes and other portions of the 175-page report, the CBO points out there are other sources of revenue generated under the ACA that are expected to make it deficit neutral.
Labor Market Effects of the Affordable Care Act

Inquiring minds are also in interested in labor force projections. For that let's dive into the massive 182 page PDF CBO Budget and Economic Outlook 2014 to 2024 report.

Incentive to Work Less

On PDF page 44 (Report page 38) a curious footnote reads "By providing subsidies that decline with rising income (and increase with falling income) and by making some people financially better off, the ACA will create an incentive for some people to work less."

A detailed explanation is found in Appendix C on PDF page 123.
How Much Will the ACA Reduce Employment in the Longer Term?

The ACA’s largest impact on labor markets will probably occur after 2016, once its major provisions have taken full effect and overall economic output nears its maximum sustainable level. 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. Because the largest declines in labor supply will probably occur among lower-wage workers, the reduction in aggregate compensation (wages, salaries, and fringe benefits) and the impact on the overall economy will be proportionally smaller than the reduction in hours worked. Specifically, CBO estimates that the ACA will cause a reduction of roughly 1 percent in aggregate labor compensation over the 2017–2024 period, compared with what it would have been otherwise. Although such effects are likely to continue after 2024 (the end of the current 10-year budget window), CBO has not estimated their magnitude or duration over a longer period.

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. The decline in full-time-equivalent employment stemming from the ACA will consist of some people not being employed at all and other people working fewer hours.

Why Does CBO Estimate Larger Reductions Than It Did in 2010?

In 2010, CBO estimated that the ACA, on net, would reduce the amount of labor used in the economy by roughly half a percent—primarily by reducing the amount of labor that workers choose to supply. 2 That measure of labor use was calculated in dollar terms, representing the approximate change in aggregate labor compensation that would result. Hence, that estimate can be compared with the roughly 1 percent reduction in aggregate compensation that CBO now estimates to result from the act. There are several reasons for that difference: CBO 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.
Don't worry. This won't cost 2 million jobs, only 2 million equivalent full-time jobs.  Perhaps a many as 6 million work fewer hours each week. The CBO did not estimate the breakdown.

Regardless, that cannot possibly happen, can it?  Didn't Obama claim ACA would create jobs? Hmm. What else did he promise?

Mike "Mish" Shedlock

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