How the Affordable Care Act is Killing Jobs

COMMENTARY Health Care Reform

How the Affordable Care Act is Killing Jobs

Feb 11, 2014 2 min read

Research Fellow, Labor Economics

As research fellow in labor economics at The Heritage Foundation, James Sherk researched ways to promote competition and mobility.

Fewer Americans either have or are looking for jobs today than at any point since 1978 – and  President Obama’s health care law is about to make this problem much worse.  

The Congressional Budget Office (CBO) just estimated the Affordable Care Act will eliminate the equivalent of 2.5 million jobs a year. Obamacare is reducing both the supply of and demand for workers.

On the demand side, the law’s regulations have made employer-sponsored health insurance more expensive. Many businesses have seen their health insurance costs skyrocket. If they do not provide “qualifying” benefits, however, they must pay stiff penalties.

Over time, businesses will pass most of these costs on to their workers through lower wages and smaller raises. In the short term, however, many businesses must eat these costs. So they have held back on hiring. 

Gallup polls find two-fifths of small-business owners reporting Obamacare caused them to hire less. Federal Reserve Banks hear similar concerns from their contacts. Recent Fed reports on the economy contain repeated variations on this theme: “Employers continued to express concern about potential cost increases related to the Affordable Care Act.”  

In short, the Affordable Care Act has made health care less affordable. Businesses have responded by hiring less. 

Obamacare will also encourage businesses to create part-time jobs instead of full-time jobs. Employers only pay the penalty on full-time workers. If they cut workers’ hours to part-time status, they owe no fines. So full-time jobs will become harder to come by when the penalties kick in. 

The recent CBO report also finds Obamacare will strongly discourage many Americans from working. The Affordable Care Act subsidizes health insurance premiums. As workers’ incomes rise, their subsidies fall -- a lot. The health-insurance premiums for a family of four double when their income rises from one and a half to twice the poverty level.  These higher premiums come on top of additional taxes owed. 

University of Chicago economist Casey Mulligan -- whose work the CBO relied on -- finds that Obamacare will raise the effective tax rate on workers with median incomes to 47 percent. Each additional dollar earned will raise their income by just 53 cents. The rest goes to taxes and higher health insurance premiums.

 Lower-income workers, who qualify for more benefits, will face effective tax rates exceeding 75 percent. Not surprisingly, the CBO projects this will cause millions of Americans to work less -- or not at all.  

Obamacare’s defenders have spun this as good news: people who do not like their jobs can now leave the labor force without losing healthcare. They should temper their enthusiasm. Aside from the perversity of celebrating idleness (even the Soviet constitution required comrades to work), this feature makes the poverty trap worse. 

Working less is a very rational short-term response to Obamacare’s incentives. Few Americans at any income level would work much at 75 percent tax rates. Why work 40 hours a week if you can make almost as much after-tax and after-health premiums working part-time? Why work if it adds almost nothing -- after tax and premiums -- to your spouses’ income? 

In the short-term Obamacare makes working less a very sensible choice. But in the long term this makes it much harder to gain the skills and experience necessary to get ahead. The government heavily penalizes Americans who work hard and try to lift themselves out of poverty. Nobody should celebrate such a system. 

Reduced labor supply will also hurt the broader economy. Fewer workers and fewer jobs mean less wealth in the economy. This hurts the governments’ finances too -- payroll taxes fund Social Security and Medicare. Encouraging workers to stop working puts more stress on America’s retirement programs.

The Affordable Care Act has discouraged companies from creating jobs and workers from accepting them. No doctor should prescribe such a policy to an already weak economy.


 - James Sherk is a senior policy analyst in labor economics at The Heritage Foundation

Originally distributed by McClatchy-Tribune News Service

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