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ACA means bigger effect on workforce, costs government $1.48 trillion by 2024, CBO says


By Jessica Zigmond
Posted: February 4, 2014 - 4:00 pm ET
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The 2010 healthcare reform law will cost the federal government about $1.48 trillion and the nation about 2.5 million full-time workers by 2024, the Congressional Budget Office projected in a new report released Tuesday.

People will opt to work less or not at all as their incomes reach levels where they must pay more for health insurance as their ACA subsidies disappear, the report asserts.

“In particular, the health insurance subsidies that the act provides to some people will be phased out as their income rises—creating an implicit tax on additional earnings—whereas for other people, the act imposes higher taxes on labor from income directly.”

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White House Press Secretary Jay Carney was quick to respond to the CBO report, saying the private sector has had more than 8 million jobs since the Patient Protection and Affordable Care Act became law in March 2010. Carney's statement also noted that the CBO report says there's no compelling evidence that part-time employment has increased as a result of the ACA, which fierce opponents of the law have argued. He also pointed to a CBO finding that one key immediate effect of the law is to induce some employers to hire more workers or increase the hours of current employees between 2014 and 2016.

“In addition, the CBO itself confirms that this analysis of the implications of the ACA on the labor force is incomplete,” Carney said in his statement, adding that experts have said “slower growth in health costs due to the ACA will cause the economy to add an additional 250,000 to 400,000 jobs per year” by the decade's end.

The law's exchange subsidies will lower incentives to work through both a “substitution effect” and an “income effect,” the report elaborates.

In the first, as incomes rise, subsidies fall, which makes work less attractive. In that case, some people will choose not to work or work less and substitute other activities for work. The income effect occurs because the subsidies increase resources for people, which allows them to maintain the same standard of living while working less.

Meanwhile, the law's provision that employers with 50 or more full-time employees will face a penalty if they don't offer insurance also will have an effect on the labor supply. CBO researchers project workers will bear the cost of those penalties in the form of reduced wages or other compensation. And because the supply of labor responds to changes in compensation, the employer penalty will cause some workers to supply less labor.

Even though the CBO estimates that total employment and compensation will rise in the next decade, that increase will be “smaller than it would have been in the absence of the ACA,” researchers said in part of 182-page budget outlook and analysis. The Affordable Care Act includes a host of provisions—such as subsidies for the health insurance in the exchanges, the Medicaid expansion, penalties for employers who don't offer insurance, and new taxes imposed on labor income—that will take effect over several years and influence the supply of and demand for labor, CBO analysts explain in the report

The ACA's major impact on the labor market is expected to happen after 2016, once the law's major provisions have taken hold. Analysts estimate that the ACA will reduce labor compensation by about 1% between 2017 and 2024, twice what the CBO projected in August 2010, when researchers said the ACA would reduce the use of labor (calculated in dollar terms, reflecting the compensation that would result from that labor) by one-half of a percent. The revised estimate is based on a more detailed analysis of the ACA that accounts for other channels through which the law will affect the labor supply and also additional findings and studies about the law since 2010.

Overall, the CBO's projections of hours worked reflect a decline in the number of full-time workers of about 2 million in 2017 and 2.5 million by 2024. As a point of comparison, the CBO estimates that the ACA will decrease the number of full-time jobs by 2.3 million in 2021, compared with its earlier projection that the law would reduce employment by about 800,000.

The estimated decrease in jobs will happen primarily because of a net decline in the amount of labor that workers will choose to supply, rather than from a drop in U.S. business' demand for labor, researchers noted. So this will appear “almost entirely” as a reduction in labor force participation and hours worked relative to what would have occurred otherwise, as opposed to unemployment (more workers looking for but not finding jobs) or underemployment (part-time workers who would prefer to work more hours each week).

The ACA will cause smaller reductions in employment between 2014 and 2016 than in the long term, the report outlines. First, researchers noted that that fewer people will receive subsidies in that period, so fewer people will face the tax that results when higher earnings reduce those subsidies. Also, the CBO expects the unemployment rate to remain higher than normal in the next few years, so more people will be applying for each open job. This means that if some people choose to work less, other applicants will be available to fill those positions and the overall effect on unemployment will be muted. And lastly, the healthcare law's subsidies for health insurance will both stimulate demand for healthcare services and also allow low-income households to spend the money they would have spent on healthcare on other goods and services, which will increase overall demand.

“That increase in overall demand while the economy remains somewhat weak” the report said, “will induce some employers to hire more workers or to increase the hours of current employees during that period.”

Follow Jessica Zigmond on Twitter: @MHjzigmond


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