The Affordable Care Act and the New Economics of Part-Time Work Casey B. Mulligan.
"Starting this year, the United States’ working population
will face three major employment disincentives resulting from the very
benefits the Affordable Care Act (ACA) provides: (1) an explicit tax on
full-time work, (2) an implicit tax on full-time work for those who are
ineligible for the ACA’s health insurance subsidies, and (3) an implicit
tax that links the amount of available subsidies to workers’ incomes.
A
new study published by the Mercatus Center at George Mason University
advances the understanding of how much these ACA taxes will reduce
overall employment, and why. It concludes that the reduction will be
nearly double that projected by previous analyses. Labor markets
ultimately will reduce weekly employment per person by about 3
percent—translating to roughly 4 million fewer full-time-equivalent
workers.
_________ Key Findings____________
Much
of the ACA’s tax effect resembles unemployment insurance: both
encourage layoffs and discourage people from returning to work. The
ACA’s overall impact on employment, however, will arguably be larger
than that of any single piece of legislation since World War II.
- The
ACA’s employment taxes create strong incentives to work less. The
health subsidies’ structure will put millions in a position in which
working part time (29 hours or fewer, as defined by the ACA) will yield
more disposable income than working their normal full-time schedule.
- The
reduction in weekly employment due to these ACA disincentives is
estimated to be about 3 percent, or about 4 million fewer
full-time-equivalent workers. This is the aggregate result of the law’s
employment disincentives, and is nearly double the impact most recently
estimated by the Congressional Budget Office.
- Nearly
half of American workers will be affected by at least one of the ACA’s
employment taxes—and this does not account for the indirect effect on
others as the labor market adjusts.
- The ACA will
push more women than men into part-time work. Because a greater
percentage of women work just above 30 hours per week, it is women who
will be more likely to drop to part-time work as defined by the ACA.
____________ Summary ___________
DISTORTING THE WORKWEEK
The ACA’s subsidies create disincentives to work that act as taxes on employment.
ACA Provisions Creating the Largest Disincentives to Work
- The
ACA imposes a $2,000 penalty for each full-time employee imposed on
large employers (generally those with 50 or more workers) that do not
offer health insurance. Due to this penalty’s unfavorable tax treatment,
it is effectively a $3,000 employment tax and can be expected to reduce
full-time employment.
- The ACA denies health
insurance subsidies to full-time workers and their families unless their
employer fails to offer “affordable” coverage. Because these workers
would qualify for insurance subsidies by cutting their weekly work hours
to part time, this provision creates an implicit tax that reduces the
benefit of working full time.
- The ACA phases out
health insurance subsidies as workers’ income increases. This compounds
the escalated federal and state tax liabilities workers already face for
earning more income.
Incentives to Reduce Work Hours Below Full Time
- The
ACA may put millions of Americans in a position in which working part
time yields more disposable income than working full time.
- This
occurs when the ACA’s generous assistance to part-time workers for
health insurance premiums and out-of-pocket expenses offsets much of the
income they forgo by working fewer hours. The lack of this insurance
assistance for full-time workers amounts to a tax on full-time work.
- A
comparison of two hypothetical workers illustrates this effect. Each
worker represents the same hourly cost to the employer, but one works
full time (in this case, 40 hours per week) and one part time (29 hours
per week). In addition to salary, the full-time worker receives a
partial employer subsidy for health insurance. The part-time worker has
lower total compensation, mainly due to fewer hours worked, and no
employer-sponsored health insurance, but is eligible for
government-subsidized health insurance through the ACA’s exchange. After
accounting for taxes, health expenses, and work expenses (e.g., child
care and commuting), this part-time worker actually nets more per year
than the full-time worker.
Prevalence and Magnitude of the ACA’s New Taxes
- Nearly half of the workforce will experience significant changes in work incentives due to the ACA.
- For
20 percent of the labor force—some 33 million workers—their family’s
eligibility for exchange subsidies hinges entirely on their employment
status. In any month they work part time or not at all, they can obtain
subsidized coverage; in any month they work full time, they do not
qualify for these subsidies. Members of this group would, on average,
have to work an additional 5.5 hours per week to make up for the
subsidies they forgo by working full time.
- Because
of the penalty on employers who do not offer health insurance, 5 percent
of the workforce faces a new implicit income tax. These workers, who
are left to obtain coverage from the ACA exchanges, would have to work
at least four hours a week for free if they were to compensate their
employer for the $2,000-per-employee penalty the ACA imposes.
- An
additional 21 percent who work for employers not offering coverage will
find that their employers are less willing or able to pay their workers
because of the ACA’s employer penalty. These workers, on average, would
have to work four hours a week for free if they were to compensate
their employers for the non-coverage penalty.
PUSHING WORKERS TOWARD FEWER WORK HOURS
The
magnitude of the ACA effects will vary with the magnitude of the taxes.
Still, the ACA’s benefits to part-time workers will push many to reduce
their work hours to 29 per week or fewer. The effect can be summarized
as follows:
- Those who would
otherwise work just above 30 hours per week will be induced to cut their
weekly work hours to part-time. This effect will be especially
pronounced for those working 30–35 hours per week; for them, dropping to
29 hours a week is a relatively small adjustment.
- Those
who continue to work full-time despite the taxes will tend to reduce
the number of weeks they work per year (because in those periods they
can obtain subsidized coverage) by more than they will increase their
weekly work hours. In other words, some of those who continue to work
full time will work for fewer weeks per year, and be unemployed for more
weeks, than they otherwise would.
- Income taxes reduce weekly hours worked and weekly employment rates.
PREDICTIONS FOR WORK SCHEDULES AND EMPLOYMENT UNDER THE ACA
This
analysis, combined with lessons from labor market history, leads to an
estimate that the ACA will reduce employment and aggregate hours by
slightly more than 3 percent, or about 4 million full-time-equivalent
workers. This is nearly double the contraction indicated in prior
studies, mainly because some previous work underestimated the size of
the ACA’s employer penalty and did not consider the full range of tax
effects.
- The ACA adds an average of
1.9 percentage points to the marginal earnings tax rates. It also adds a
full-time-employment tax equivalent of 2.2 hours per week, or almost 6
percent of a full-time schedule. This is on top of non-ACA taxes, and is
akin to doubling the employee Social Security payroll tax. It is the
main driver of the 3 percent labor market contraction.
- Roughly
3.6 percentage points more of the workforce will drop to 26–29 hours
per week than would do so in the absence of the ACA.
- The
elderly’s labor is much less affected by the law, because the Medicare
program makes them ineligible for the new exchange subsidies, so that
they are not subject to the implicit income and full-time-employment
taxes that go with the subsidies.
- Women (regardless
of marital status) are especially likely to reduce their hours to below
30 per week because they represent a greater percentage of those
currently working 30 to 35 hours, and thus can drop to 29 hours with
comparatively little cost.
- The study does not
assume or predict that employment and work schedules are especially
sensitive to taxes. Rather, the study’s results derive from the sheer
size of the taxes that the ACA has created."
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