Obamacare Can Leave You Earning More by Working Less (And Why That’s Bad)
Is it possible that working more could actually cost you money? The notion seems impossible, but under the subsidies and penalties of the Affordable Care Act, up to 11 million Americans could find themselves in this situation,
concludes University of Chicago economist Casey Mulligan.
Mulligan’s latest paper, just out from the National Bureau of Economic Research, estimates the effective marginal taxes on work created by Obamacare. Entitled The ACA: Some Unpleasant Welfare Arithmetic, it extends the analysis of his book, The Redistribution Recession, which evaluates the effects of transfer payments on the effective tax rates of Americans choosing whether to work or stay home. Mulligan found that effective marginal tax rates for low-income Americans could reach 40 percent to 60 percent as they lost benefits such as unemployment insurance, food stamps, and Medicaid when they entered employment.
Two major provisions of the Affordable Care Act each encourage employers and employees to limit work hours to 29 hours per week. The most well-known provision is the penalty on employers with more than 49 full-time employees (defined as 30 hours or more per week) who do not offer health insurance.
The penalty for not complying with the employer mandate creates clear financial incentives against hiring full-time employees. If a firm that does not offer “affordable” healthcare hires a 50th full-time employee, it can face an additional $40,000 in “Employer Shared Responsibility Payment” penalties. (The penalty per worker is $2,000, but the first 30 employees are exempt.)
Mulligan shows that in practice this penalty is larger. Since the penalty is not tax-deductible, it comes out to the equivalent of over $3,000 per employee.
A lesser-known provision of the Act disallows full-time employees and their families from receiving subsidized health coverage if their employers offer affordable coverage. Because of this provision, employees are encouraged to work fewer than 30 hours per week so they can receive federal subsidies. The loss of these government benefits acts as an implicit tax on full-time employment.
Subsidies are reduced as household incomes rise. While subsides are available up to 400 percent of the federal poverty line ($47,000 for individuals and $95,000 for a family of 4 in 2014), the level of subsidy rapidly decreases as earnings increase.
According to data from the Kaiser Family Foundation, annual premiums for a 24-year-old male living in New York City who earns just over $47,000 a year will be $3,685 for a bronze plan on the Affordable Care Act’s exchanges. This is 7 times as high as the subsidized premium ($509) for the same plan if a similar individual earns $22,980, 200 percent of the poverty line. Those who earn below 150 percent of the poverty line are not charged any premiums.
According to Mulligan, between 6 and 11 million workers would increase their income if they cut their hours. This could be done by either making themselves eligible for federal subsidies, or relieving their employers of the employer mandate’s penalties. Mulligan estimates that a roughly equal number of workers would do each.
Young females are most likely to be hit by the effects of the employer mandate because they are the most likely to have weekly work hours just above 29—no mention of this from the White House on Equal Pay Day. The effect declines as workers get older because household earnings typically rise with age. Married households with dependents where one spouse works full-time and the other works part-time or full-time for an employer not offering coverage are most likely to drop below the 30-hour work week in order to receive federal subsidies. This is because one earner might decide to stay home with children.
While it may be a temporary benefit for some to receive more income by working less, in the long-term they are being hurt. Working less robs people of the skills they need to advance their careers. Additionally, full-time job status is a crucial signal to future employers of how involved a worker was in a company’s performance.
Policies enacted under the Affordable Care Act, no matter how well-intentioned, harm more than the individuals who have to pay to work. Making people pay to work is not a productive policy. A growing economy needs a robust workforce that is not held back by government-imposed disincentives to production.
Before the recession, in December 2007, 17 percent of workers were part-time and only 4.5 million people were working part-time for economic reasons—meaning they want, but cannot find, full-time work. Now there are 27.7 million part-time workers America, 19 percent of total employment. Of these people, 7.7 million are working in part-time jobs for economic reasons. As the labor market effects of the Affordable Care Act begin to take even greater effect, the number of part-time workers will likely rise.
Mulligan’s new paper sheds light on some of the many unintended consequences of the Affordable Care Act. The Act was not intended to cause such major disruptions to the labor market. Its focus was increasing access to healthcare. However, the law decreases work incentives for tens of millions of Americans and completely removes the financial reward to work for up to 11 million people. A policy that leaves you with more for working less is a recipe for economic stagnation.
Jared Meyer is a policy analyst and Jason Russell is a research associate at Economics21, a center of the Manhattan Institute for Policy Research. You can follow Jared on Twitter here and Jason on Twitter here.
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