- - Friday, March 7, 2014


An employment decline is the much-publicized verdict of the Congressional Budget Office’s recent analysis of Obamacare, but increased income inequality is the overlooked threat arising from it.

Because the health care act’s incentives will have their greatest impact on the lowest earners, these subsidies will serve to inhibit workers most needing increased workplace skills from attaining them at the rate they otherwise would have.

The nonpartisan CBO report made job-loss headlines when it estimated: “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.”

Far more significant than how many jobs will be lost is where the loss will be centered — low-income workers — and the deleterious effect it will have on long-term income mobility.

The CBO’s report outlined three ways in which Obamacare will increase job loss among low-income workers: insurance subsidies, Medicaid expansion and employer penalties.

Many buying insurance through the Obamacare exchanges “will be eligible for federal tax credits to defray the cost of their premiums, and some also will be eligible for cost-sharing subsidies to reduce out-of-pocket expenditures.”

As the CBO notes, “those subsidies are largest for people whose income is near the federal poverty guideline and they decline with rising income.”

How could such good intentions have negative employment effects? “For some people, the availability of exchange subsidies under the [Affordable Care Act] will reduce incentives to work both through a substitution effect and through an income effect.”

The substitution effect occurs because a worker could be reluctant to take a job or earn a higher income if it reduces the subsidy by an even greater amount — effectively becoming an implicit tax. The income effect occurs “because subsidies increase available resources — similar to giving people greater income — thereby allowing some people to maintain the same standard of living while working less.”

The same dynamic applies to Obamacare’s Medicaid expansion: “As with exchange subsidies, access to Medicaid confers financial benefits that are phased out with rising income some people will thus work fewer hours to become or remain eligible.

Moreover, those financial benefits will lead some people to work less because the increase in their available resources enables them to reduce work without a decline in their standard of living.” Unsurprisingly, “CBO estimates that expanded Medicaid eligibility under the ACA will, on balance, reduce incentives to work.”

The final way Obamacare will reduce low-income employment comes from the employer penalty to be imposed on some businesses — primarily for not offering Obamacare-compliant insurance.

“In CBO’s judgment, the costs of the penalty eventually will be borne primarily by workers in the form of reductions in wages or other compensation the employer penalty will ultimately induce some workers to supply less labor.” In the near term, however, “those penalties will tend to reduce the demand for labor more than the supply.”

Either way, there will be less low-income employment than otherwise would have occurred.

The CBO removes any doubt that there will be a net reduction in employment relative to what otherwise would have happened. “CBO anticipates that the ACA will lead to a net reduction in the supply of labor.”

The CBO is equally clear that decline will be centered on low-income workers.

This is true whether they choose to leave the workforce or their employers let them go. Subsidies are highest for those with the lowest income, thus giving these workers the greatest economic incentive to leave.

Low-income workers’ wages have the highest wage-to-health insurance cost ratio, so employers will have the greatest economic incentive to eliminate those workers.

This dual reduction in employment among low-income workers would seem to be the ultimate irony: a law designed to help them the most will end up hurting them the most. However, the result goes well beyond irony.

Low-income workers generally earn less because they are the least skilled. Therefore, they are most in need of additional training. On-the-job experience is the most cost-effective training, and anything that inhibits their progression toward better skills works to the detriment of their ultimate long-term earning power.

As the CBO’s analysis demonstrates, Obamacare will result in more low-income, low-wage workers leaving the workforce and dropping off the skills ladder that can lead them toward a more prosperous future.

J.T. Young served in the Treasury Department and the Office of Management and Budget from 2001 to 2004.

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