Why Affordable Care Act 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.

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'shealth 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.

Obamacare’s tax increases will have a negative impact on labor’s 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:

“The 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.”.

In addition to the tax, the law also provides more subsidies to low-income families, and adds “four significant, permanent, implicit unemployment assistance programs, plus various implicit subsidies for underemployment.”

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 American’s 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: “In 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.”

In other words, we can expect tax increases to have an impact on the available labor supply.

But Prescott’s other big insight is that a generous redistributive system makes it easier to reduce one’s labor supply. As George Mason University economist Garett Jones explains, “Prescott argues that if you raise taxes for pure redistribution from the ‘average person’ back to the ‘average person,’ then the tax hike doesn’t make the ‘average person’ poorer: The government is taking money out of everyone’s right pocket and slipping it into their left. But if the income effect is gone, what’s left? The disincentive to work: The pure substitution effect.”

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 don’t. At this level of income, one isn’t that wealthy, yet subsidies aren’t available.

Now, considering that premiums are likely rise for millions of Americans because of requirements that policies provide certain benefits they didn’t 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: “You can also consider reducing your 2014 income by working just a bit less.”

Obviously, while there’s 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.