Since the day the Affordable Care Act was signed, reasonable observers anticipated that the consequences would include higher costs and reduced employment. The question has been the magnitude, which is still unknowable until the various exemptions and delays have expired and the program is fully implemented. However, a new report from the Congressional Budget Office highlights a more alarming effect: the ACA actually creates a disincentive to work that will cost the economy the equivalent of 2.5 million workers by 2024.
For an economy lumbering along just above stall speed, thanks in part to 40-year lows in worker participation, this is not a welcome development.
It is important to note that we are not discussing how many workers will be laid off or see their hours involuntarily reduced due to Obamacare. That will likely occur as well, but will be a 2015 story as the oft-wdelayed employer mandate takes effect. Rather, the CBO is estimating the number of workers who will make the rational decision to quit working or work fewer hours so as not to lose government health care subsidy payments. In some ways this government incentive not to work is even more deleterious to economic growth than direct job losses.
Economists model an economy’s ability to expand based upon a number of factors including labor supply. Projected expansion under the assumption of full employment is called the potential growth rate, and it depends heavily upon the supply of labor as measured by the workforce participation rate. In other words, the speed limit for economic growth depends upon how many people are willing and able to work. Fewer workers equals slower growth.
CBO recently issued revised guidance for potential U.S. growth through 2024 at just 2.5 percent per year, down from a longterm average of over 3 percent largely due to lower labor force participation. Obviously, any development that contributes to fewer workers being available is not good news. That is why the new Obamacare ciphering from CBO is so concerning.
The health care law’s built-in disincentive for lower wage earners to work is a classic example of a conundrum called the poverty trap. Due to poor design of antipoverty programs and subsidy payments, recipients often face the dilemma of losing government benefits as they accept more wage income. In some cases, wages would have to double in order to replace all the benefits that would be lost. Viewed in this way, many of the working poor face effective marginal tax rates in excess of 70 percent.
The ACA provides subsidies for procuring health coverage on the exchanges. These transfers phase out with increased income up to 400 percent of the federal poverty level. Therefore, many workers eligible for health insurance premium support will make the rational decision to limit hours worked to avoid forfeiting subsidies. Furthermore, some newly enrolled Medicaid recipients may find it advantageous to limit work hours to retain eligibility.
This is unfortunate. For lowwage workers, support programs should encourage rather than penalize advancement. For an economy barely treading water, creating disincentives to work is tantamount to a millstone around the neck.
Chris Hopkins, CFA, is a vice president for Barnett & Co. Investment Advisors. You can ask your personal finance questions for Hopkins at firstname.lastname@example.org.