Effects of the Affordable Care Act

Effects of the Affordable Care Act on Economic Productivity

by Casey Mulligan/University of Chicago

CASEY MULLIGAN, a professor of economics at the University of Chicago, received his Ph.D. in economics from the University of Chicago in 1993. He has been a visiting professor at Harvard University and Clemson University, and is affiliated with the National Bureau of Economic Research, the George J. Stigler Center for the Study of the Economy and the State, and the Population Research Center. He has written for the Chicago Tribune, the Chicago Sun-Times, the New York Times, and the Wall Street Journal, and is the author of three books, including Side Effects: The Economic Consequences of the Health Reform.

The following is adapted from a speech delivered on October 24, 2014, at a Hillsdale College Free Market Forum in Indianapolis, Indiana.

The topic of my talk today is the economic side effects of the Affordable Care Act (ACA), sometimes referred to as Obamacare. Since most of the economy has to do with labor and work, that’s where I’ll start. But, first a caveat. I’m an economist, and I’m going to talk about some parts of this complex law that have an impact on the labor market. Other parts of it relate to health and medicine, and because I’m not a doctor or a biologist, I’m not going to speak to those parts. From an economic or labor-market perspective, I’m going to explain how the costs of the ACA outweigh its benefits. But I can’t measure or estimate its effects on health care. I leave that to others.

The key economic concept required to understand the labor market effects of the ACA is what economists call “tax distortions.” Tax distortions are changes in behavior on the part of businesses or households for the purpose of reducing their taxes or increasing their subsidies. We call them distortions because they don’t occur for real business or real personal reasons. They occur because of the tax code. A prime example of a tax policy that creates distortions is the ethanol subsidy—technically it is a credit, not a subsidy—whereby gasoline refiners are subsidized on the basis of how many gallons of gas they produce with ethanol. Because of this subsidy, businesses change the type of gas they produce and deliver, people change the type of gas they use—which affects engines—and corn is used for ethanol instead of as feed or food. Nor do the distortions stop there. Arguably, food prices are increased due to the reallocation of corn to different uses—and when food prices are higher, restaurants and households do things differently. There are distortions economy-wide, all for the chasing of a subsidy.

To be clear, just because taxes cause distortions doesn’t mean that we should never have taxes. It just means that in order to get the full picture when it comes to policies like an ethanol subsidy or laws such as the ACA, we need to take into account the tax distortions in order to ensure that the benefits we are seeking exceed the costs.

The Employer Mandate/Penalty/Tax

So what are the tax distortions that emanate from the ACA? Here let me simply focus on two aspects of the law: the employer mandate or employer penalty—the requirement that employers of a certain size either provide health insurance for full-time employees or pay a penalty for not doing so; and the exchanges—sometimes they’re called marketplaces—where people can purchase health insurance separate from their employer. The mandate or penalty is intended, of course, to encourage employers to provide health insurance. And the exchanges are where the major government assistance is provided, since those who purchase insurance in an exchange typically receive a tax credit. As I’ll explain, taken together, the penalty on employers and the subsidies in the exchanges add up to a tax on full-time employment—a tax that you pay if you work full time but not if you work part time or don’t work at all. And the problem with that, of course, is that by taxing full-time work—which is the same as subsidizing part-time work and unemployment—you get less of the former and more of the latter two.

How does this full-time employment tax work with regard to the employer mandate? As I mentioned, the penalty applies only in the case of full-time employees and only to employers that don’t offer health coverage, and it applies only in those months during which those full-time employees are on the payroll. If an employee cuts back to part-time work, the employer no longer has to pay the penalty. The dollar amount of the penalty doesn’t depend on whether the employee is rich, poor, or middle class—if he works full time, the employer must either provide insurance or pay the penalty. And the penalty is indexed to health insurance costs, so every year those costs increase more than the economy and more than wages, the penalty will increase more than the economy and more than wages.

The current penalty is usually described as $2,000 per year per full-time employee. But it’s really more than that, because the penalty, unlike wages, is not deductible from business taxes. So in terms of a salary equivalent, the penalty is closer to $3,000 a head. Needless to say, this penalty reduces competition in the labor market: It discourages employers from competing for full-time employees—which, if you’re an employee, is a bad deal. Also there are a lot of employers who are not going to pay the penalty because they don’t meet the size threshold of 50 or more employees, and employees are going to suffer because these small employers won’t want to become large employers and therefore subject to the penalty.

Furthermore, this mandate or penalty—and by this time it should be clear that we can think of it as a tax on having a full-time employee—disproportionately harms low-skill workers. Think about it this way: How many hours does a worker have to work each week to produce the $3,000-per-year of value to justify keeping his job or being hired? For a minimum-wage worker, that comes to eight hours a week, all year round—one day of work a week for the government due to the ACA alone. Higher-skilled employees can obviously produce $3,000 worth of value in less time, so the penalty will have less of an impact on them.

“Reprinted by permission from Imprimis, a publication of Hillsdale College.”