Delay in Obamacare Penalties Won't Help Hiring
With economists forecasting that the Labor Department will announce 166,000 new jobs for June this Friday, Treasury Assistant Secretary Mark Mazur reported on Tuesday that the administration is delaying the implementation of the Affordable Care Act’s employer mandate for one year, until 2015.
This means that for the next 18 months, even if employers do not offer health insurance with minimum essential health coverage, they will not owe Uncle Sam penalties, estimated by the non-partisan Congressional Budget Office in a letter to House Speaker John Boehner to be $4 billion in 2014.
Oh, the things firms can do until 2015. They can employ more than 49 workers without fear that they will be charged a $2,000 penalty (in the law’s Orwellian language, “a shared responsibility payment”) for lacking minimum essential health coverage. They can hire workers without being afraid that some will purchase subsidized insurance on the exchanges, costing the firm $3,000 per worker receiving the subsidy. They can employ workers for 30 or more hours weekly without incurring penalties.
Sound familiar? That’s what it used to be like in America, back when unemployment rates were around between 4% and 6%, when an unemployment rate of 7.6% was simply unacceptable and a rate of 10% was unimaginable.
When the law is fully implemented, now in 2015, firms without adequate health insurance can potentially incur penalties of $40,000 by hiring a 50th worker. That’s $2,000 per worker per year (the first 30 are exempt). Forty thousand dollars is enough to hire another employee.
Hiring without penalties is what firms used to do before the Affordable Care Act was signed into law in 2010. Gallons of ink have been spilled publishing articles debating the effects of Obamacare on employment.
Perhaps the president’s advisors think that the 2014 election year is not the right time to hit employers with hiring penalties, especially since Obama’s goal is to recapture the House in the next elections. Full implementation of Obamacare in 2014 made sense when Congress thought it would be a success. Now that the law’s regulations are behind schedule, exchanges are not ready, insurance companies are dropping coverage, and premiums are rising rapidly, the 2014 rollout makes little sense and could cost Democrats seats in the election.
This decision to postpone is unlikely to lead to an increase in hiring, because employers are rational. They know that in 18 months they will face this punishing tax and they are adjusting their labor force accordingly.
What would make more sense would be to eliminate the employer penalty altogether, and take $106 billion in penalties over 10 years out of general revenues. That permanent change would encourage hiring.
For some employees, firms will take the extra health insurance cost or penalty out of the cash wage. But for low-skill and entry-level workers close to minimum wage, firms have to bear the cost. That means some people will not get hired.
That is one reason why the youth (ages 20 to 24) unemployment rate was 13.2% in May, barely changed from a year earlier. The teen unemployment rate was 24.5%, and the African American teen unemployment rate was 42.6%. These young people campaigned for Obama in record numbers, yet are suffering disproportionately from the new mandates on employers.
In the same way, if Congress passed a law that employers had to supply food, clothing, or housing to workers — all arguably more important to welfare than health insurance — hiring would also decline.
Obamacare is expected to dampen employment in America. Job creation is about 150,000 a month, barely above the 120,000 monthly natural rate of growth of the labor force as high school and college graduates move into the workforce. The number of nonfarm payroll jobs in America is 2.4 million lower than in December 2007, at the start of the recession.
The share of Americans who in May said they are employed or looking for work, 63.4%, was the same as 1980 levels, before the Reagan revolution when women moved into the labor force in record numbers. The share of Americans employed, 58.6%, was the same as in 1983.
The regulations as to what kinds of health insurance employers have to offer to avoid penalties are murky. Only in May, in response to inquiries by The Wall Street Journal, did the administration confirm that employers can comply with the law by offering “bare bones,” or “skinny” health insurance plans that provide “minimum essential coverage” rather than the “essential health benefits” required for plans sold to individuals in the exchanges.
Now the administration hopes that a year’s delay of the mandate will make employers happier. But the only way that businesses will start hiring more labor is if the mandate permanently disappears. As any student of public finance knows, permanent tax changes have substantial effects on economic behavior, but temporary tax changes have little long-run effect.
Delaying the employer mandate will not alleviate another major problem with Obamacare, the increase in health insurance premiums. The Internal Revenue Service calculates that a family health insurance plan will cost $20,000 in 2016, up from an average of $12,000 now. This leaves individuals with less to spend on other goods and services.
It wasn’t supposed to be that way — President Obama said that the Affordable Care Act would lower the costs of health care. In December 2009 he declared, “We agree on reforms that will finally reduce the costs of health care. Families will save on their premiums; businesses that will see their costs rise if we do nothing will save money now and in the future.”
But the new law mandates that only overly generous plans can be sold on the new state exchanges. The lowest type of plan, the bronze plan, must include free preventive care, mental and drug abuse coverage, free contraceptives, and no limits on lifetime coverage. Plus, plans have to take anyone during any open enrollment period.
Since the tax for not having health insurance is relatively low — $95 or 1% of adjusted gross income in 2014, $325 per person or 2% of AGI in 2015, and $695 or 2.5 percent of AGI in 2016 and thereafter, many people will be tempted to skip the insurance and pay the tax — then sign up when they get sick. As the pool of insured becomes sicker, this raises rates for the insured.
Based on a survey of 17 major insurance companies, a study by the Republican House Energy and Commerce Committee reported that the Affordable Care Act would lead to a 180% premium increase for young, healthy males.
The president might be able to save his administration from embarrassment by delaying implementing the employer requirement to offer affordable health insurance. But firms are not stupid, they plan ahead, and 2015 is not so far away. Unless Obama repeals the mandate permanently, it is unlikely that hiring will recover.
This piece originally appeared in WSJ's MarketWatch
This piece originally appeared in WSJ's MarketWatch