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Reading the CBO Report

Reading the CBO Report

Last updated on: February 5, 2014 at 10:45 pm by Jane the Actuary

Reading the CBO Report 2014-02-05T22:45:00-06:00 Jane the Actuary

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So I’ve been waiting all day to have the kids tucked in (OK, just the youngest gets tucked in; the older two are still working on homework but don’t need direct supervision) so I can get to this CBO report that everyone’s talking about.

And I mean everyone. You don’t know what CBO report? Are you living in a cave? Or maybe you happened on this page at some point in the future. Anyway, this is the report that predicts that labor force participation will drop measurably, to which ObamaCare defenders have jumped into defending this and opponents, well, oppose it.

Here it is: http://www.cbo.gov/sites/default/files/cbofiles/attachments/45010-breakout-AppendixC.pdf. This comes from buzzfeed, which was linked to by hotair.com, which was linked to by instapundit (somewhere . . . I can’t find it anywhere).

So what can I offer that a thousand pundits can’t? Maybe just that I want to read the report and break down the projected impacts. It’s only 12 pages, but there’s a lot there, including analysis of a number of different groups, though not a comprehensive set of numbers. Here goes!

The key line in the report is this: “CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor — given the new taxes and other incentives they will face and the financial benefits some will receive.” Because lower-paid workers are more motivated to decrease their work hours, this is forecasted to reduce total compensation by 1%.

In terms of actual numbers, this works out to a decrease in full-time-equivalent workers of 2.0 million in 2017, rising to 2.5 million in 2024, relative to what it would have been without the ACA. “The estimated reduction stems almost entirely from a net decline in the amount of labor that workers choose to supply, rather than from a net drop in businesses’ demand for labor, so it will appear almost entirely as a reduction in labor force participation and in hours workerd relative to what would have occurred otherwise, rather than as an increase in unemployment . . . or underemployment.”

Why will the ACA reduce unemployment? The subsidy phase-out raises effective marginal tax rates, discouraging work. In addition, the taxes which finance those subsidies further discourage work.

What about the short term? In the period from 2014 – 2016, CBO predicts smaller declines in employment because (1) fewer people will receive health insurance through the exchanges, with the accompanying subsidies and their effective high marginal tax rates, (2) unemployment will continue to be high in the near term, so that jobs abandoned by labor force drop-outs will be filled by the unemployed, and (3) “the ACA’s subsidies for health insurance will both stimulate demand for health care services and allow low-income households to redirect some of the funds that they would have spent on that care toward the purchase of other goods and services” – that is a stimulus that will itself increase hiring.

The causes of the reduction in the labor force: in order of importance,

Effects of insurance subsidies on the supply of labor. In certain situations, the availability of ACA exchange subsidies will reduce incentives to work (that is, to work at all, for a second income in the household, or to work more hours than otherwise), both because subsidies drop as income rises (and not with a gradual phase-out, either) so there’s a direct penalty for earning more, and because, when adding in the ACA subsidies, individuals will be able to maintain the same standard of living with fewer work hours. Further, even for workers working full-time at jobs where employer offer health insurance, the fact that such a worker forgoes exchange subsidies acts as a tax on working full- rather that part-time, which will in marginal cases move people to fewer hours worked.

To the extent that the cost of forgoing exchange subsidies acts as an implicit tax on employment-based insurance, the impact will be for employer to cease offering health insurance, and 4% of employers are predicted to do this.

Another group that will be expected to reduce their labor supply are those who work seasonally, who will be expected to work for a lower portion of the year due to the loss of subsidies upon returning to work.

Effects of the Medicaid Expansion on Labor Supply. Individuals at the margin will reduce their work hours (or decline opportunities to incease their work hours) as needed to stay eligible for Medicaid. On the other hand, some individuals who already were keeping their work hours, and incomes, low to ensure eligibility for Medicaid will benefit from being able to earn as much as 138% of poverty and still retain eligibility, so the effects are mixed. On the whole, though, the net effect is a decrease in work hours.

Effect of employer penalty on labor supply. The ultimate cost of the penalty will be borne primarily by workers through lost wages/benefit spend. These effective pay cuts will somewhat decrease labor supply.

What about employers hiring part-timers to avoid the mandate? Meh. This won’t reduce overall labor supply. But see later discussion. (We’re only on page 6.)

Effects of Higher Marginal Tax Rates on Labor Supply. Any tax on income will, at the margin, reduce hours worked. This includes both the increase in the “Medicare” payroll tax and the pay-related penalty tax, though the impact of the latter on aggregate labor supply is expected to be negligible.

Effects on Retirement Decisions and Disabled Workers. Some workers will retire earlier than they otherwise would have due to the availability of subsidized exchange plans. Some disabled workers may be more likely to stay in the workforce than otherwise, if they would have left to get Medicaid or Medicare due to inability to get private health insurance, but now benefit from “no preexisting condition exclusions” rules. Others who stayed in the workforce because, if on Social Security disability, they had to wait for two years to get Medicare, are now able to be immediately eligible for Medicaid, so will be better off leaving the workforce.

Possible Effects on Labor Supply through Productivity. These effects are much more speculative, so not included in the estimates. Perhaps increased health insurance coverage might mean healthier, and more productive, employees. Perhaps the availability of health insurance outside the workplace might mean that workers are better matched to jobs that are a good fit for their skills. But there might be increased turnover if employees are no longer tied to their jobs for health insurance. And productivity might decline if employers hire more part-time workers to avoid the penality.

Effects of the Employer Penalty on the Demand for Labor. Basically, not much. Will employers respond to the mandate by moving everyone to part-time employment? Maybe, but it wouldn’t effect total hours worked, and, for the most part, moving to a part-time workforce will be logistically difficult. “In CBO’s judgment, there is no compelling evidence that part-time employment has increased as a result of the ACA.” Basically, it’s not possible to tell what impact the ACA may have had against all the other factors feeding into the labor market.

So that’s the report. Note that none of this addresses the issue of whether people will leave soulless corporate jobs with health benefits for personally enriching do-what-you-love creative jobs without, which Nancy Pelosi labelled one of the great benefits of ObamaCare. The CBO report tries to quantify hours worked, not type of work.

The bigger question is what the impact of all this is. Economically, a 2% decrease in hours worked, relative to what otherwise would have been the case, is perhaps not a tremendous difference. We were supposed to have had labor shortages by now, after all, due to the baby boomers retiring, and this does fit into the bigger questions of what the “right” level of labor force participation is and by whom (early retirees vs. stay-at-home-parents vs. living in mom & dad’s basement and working part-time at the grocery store, when you’re not playing World of Warcraft).

The bigger question is one of philosophy. The right can claim that this supports their arguments against punitive marginal taxes or implicit taxes (though this is, after all, at this point just based on modelling rather than actual effects). There are also interesting assumptions about income — that is, given an increase in income via government benefits, some recipients will see that as an opportunity to decrease their income from paid work to gain more leisure time — but without all the numbers, I can’t assess what the magnitude is: what percentage of subsidy recipients drop their work hours vs. maintain them?

So I’ve complained before about the inequities of the whole system of subsidies — the cliffs and cut-offs, and the fact that employers who pay for their employees’ health insurance in some ways become suckers, relative to their competitors who offer higher wages and send their employees to the exchanges. I’m tempted to say, “I told you so” — that is, some of the implicit marginal tax impacts, and disparities between employers providing insurance and those not, support my “Vouchercare” concept that I wrote about when I first started blogging and occaisonally return to.

But what the CBO is saying is that some of this is inevitable with any kind of universal health insurance plan: the necessary tax increases will pull workers out of the workforce (and thus, a more universal plan may have greater impacts in this component), and any increase in government benefits, whether in cash or in kind, will, at the margin, move some workers out of the workforce, or to fewer hours.

And what the CBO also says is that there are potential productivity effects to a well-designed system, but that these are unpredictable. In other words, the model has limitations — because it’s a model. And even the real world impacts, a couple years hence, won’t be easily measurable, because of everything else going on in the economy.

So what’s the bottom line? I’m not sure. I suppose it’s now time to see what everyone else is saying, now that I’ve read it for myself.

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