Unpacking What CBO Actually Said re Work Incentives

February 14th, 2014 at 4:07 pm

There’s been an outpouring of commentary on the dustup around the CBOs estimates of labor supply effects of the Affordable Care Act.  Summarizing, supporters, myself included, tend to emphasize the release of job lock as a positive function of the law, while opponents stress the work disincentives that result from the loss of premium subsidies as incomes go up.

My position has consistently been that neither CBO nor anyone else can tell you the relative magnitudes of these different effects.  So, like Jon Gruber (supporter), I was struck by assertions made by Casey Mulligan (opponent) as to the dominance of the higher tax rate effects in CBOs estimates of diminished labor supply.  There’s certainly no support for that assertion in the CBO report, leading Gruber to correctly conclude that this is “…simply Mulligan’s editorializing with no substantive basis.”

But Jon also makes a point that is worth digging into a bit: “CBO dismisses [Casey’s] argument. According to the report, his suggested effect doesn’t impact labor supply, but rather health insurance offering…”  That’s confusing, so I thought it might be helpful to take a closer look at what the budget agency is saying, with my annotations in brackets.

First of all, to the extent that CBO dismisses Casey’s findings, it’s in relation to how the subsidies will affect the labor supply of full-time workers with coverage through their jobs (and thus ineligible for subsidies).  Because such workers are currently forgoing any ACA subsidies, they face an incentive to switch to a part-time job without coverage, thus working less and gaining subsidized coverage.  But that’s not what CBO thinks will happen (my comments added in brackets]:

“In CBO’s judgment, however, the cost of forgoing exchange subsidies operates primarily as an implicit tax on employment-based insurance [not, as Mulligan asserts, on workers’ earnings], which does not imply a change in hours worked [which does not, again in contradiction to Casey’s assertions, affect labor supply].”

“Instead, the tax can be avoided if a worker switches to a different full-time job without health insurance (or possibly two part-time jobs) or if the employer decides to stop offering that benefit.”

Two things to remember here: not every employer has to provide coverage to every worker, and the cost of coverage is assumed to largely come out of workers’ wages.  So, some workers might be better off avoiding the loss of subsidy dollars by switching to a job without health care, and thus presumably a higher wage, and getting subsidized care through the exchange.  Sounds a bit far-fetched, but there it is.  Re employers dropping coverage, Target recently announced that they’d be dropping health coverage for part-timers, while providing them with a $500 one-time payment, under the presumption that they’d get better and more affordable coverage in the exchanges.  Here again, note no assumptions about changes in their hours worked.

So, if that kind of job-shifting doesn’t lower labor supply, what is that CBO is saying will do so?  Well, first off, those who lack employer-based coverage and are in the subsidy range do face a negative work incentive as higher earnings lower their subsidy.  Also, those with employer coverage “whose income would make them eligible for subsidies through exchanges (or for Medicaid), and who work less than a full year (roughly 10 to 15 percent of workers in that income range in a typical year), would tend to work somewhat less because of the ACA’s subsidies. For those workers, the loss of subsidies upon returning to a job with health insurance is an implicit tax on working (and is equivalent to an average tax rate of roughly 15 percent, CBO estimates). That implicit tax will cause some of those workers to lengthen the time they are out of work…”

That “roughly 15 percent” marginal tax rate looks a lot lower than the 100% emphasized by Mulligan and deemphasized, as in “not mentioned,” by CBO.  As Gruber notes:

It is not surprising that, unlike Mulligan, CBO economists did not harp on examples of 100% tax rates. They are uninterested in calculations that highlight extreme cases. They are more interested in modeling the overall impact on the workforce.

End of the day, there are definitely legitimate critiques that opponents can levy against the ACA’s impact on labor supply.  But they are far less driven by the Mulligan-type arguments invoking very high implicit tax rates then Casey himself would have you believe.  Moreover, to evaluate to the ACA based solely on negative work incentives leaves out the unlocking of job lock, the now-affordable coverage of millions of the uninsured, the costs-savings from efficiency gains leading to lower premium costs and budgetary savings, the outlawing of discrimination based on pre-existing conditions, the fact that plausible alternatives have similar incentive effects, and so on.

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5 comments in reply to "Unpacking What CBO Actually Said re Work Incentives"

  1. Jill SH says:

    Real life example of How It Used to Be:
    Young couple: Husband has own business doing handyman/yard-lawn/snowplowing jobs, makes a decent living, but health insurance is steep and unaffordable. Wife has job, as admin associate, with local corporate business that has great health benefits, as long as you work full time, though pay is kinda not-so.

    Along comes baby. Only six weeks maternity leave. Dad can’t stay home with baby ‘cuz he’s his only employee. Going back to work for Mom now means child care costs. Leaves her with less than half her paycheck, great health benefits, and missing her newborn* all day. If only she could work part-time, grandma can take care of baby 3-4 days a week for about 4-5 hrs each day. Alas, she’d lose the health benefits.

    How it is now:
    Along comes the ACA. Aha! She can work part-time. Now she and dad can afford health insurance even if only on his income. Maybe her corporation really does love how she works and can let her go part-time. They may even give her a per-hour raise because they want to hold on to her. (Although they may instead have a lot of bored, frustrated employees who start leaving, and find they have to pay more to keep a steady work force.)

    She gets to stay home with the kids, working part-time while they’re little, more as they grow and get into school. She keeps her work skills and gets to be a somewhat stay at home mom. When kids are in their teens, she starts her own business services company.

    Dad builds his business, can take on new employees who have their own insurance through the ACA, and doesn’t have to worry if there are down times and each of them may not always have full time work. (Actually a couple of them are musicians who get out-of-town gigs and like the fluidity of working intermittently.)

    See? More people get to work the way they want, making reasonable trade-offs for kind of work, time spent working, income attainment, and spending time with family.

    Isn’t it grand, the end of job lock! The end of health insurance slavery! I bet a lot of businesses are going to find they have to raise a bunch of wages, too. Looks like an interesting future.

    *I found as a new mom that when I was away from my baby, I actually PINED for him. It was an almost physical sensation, certainly a strong emotional pull. I witnessed any number of other new moms who I think were feeling the same. Corporate business that demands work first is really cruel.

  2. Perplexed says:

    So why is it again the work goes undone? I admittedly haven’t read the CBO report but I have see a lot of the blog posts and article about it and can’t recall any discussion of the fact that when these people choose to work less that the work doesn’t done (unless they really weren’t accomplishing anything at work anyway). So does the CBO report suggest that these people just leave the workforce and the work just goes undone? If these people can’t be coerced into doing the work as a condition of health insurance that no one else will do it?

    Is there really no discussion or estimation of the likely consequences of these people working fewer hours? Do economists really believe that intelligent people will just except their assumptions that we live in a zero-sum, full-employment economy where this work just goes undone because a few choose to work less hours? Are we really to believe that under-employed and unemployed might not choose to do this work and might face different marginal tax rates that incent them to do so? That the additional taxes and reduced subsidies from others choosing to do the work might offset most of the costs that those choosing more leisure might impose? Where are the calculations of these offsetting impacts and the resulting discussions by our great economic thinkers? Does the CBO report already reflect these likely outcomes?

  3. save_the_rustbelt says:

    End of the day, no one really knows what will happen.

    Given the complexity and the myriad incentives and disincentives the only thing we are certain is some level of chaos.

    • Jared Bernstein says:

      Certainly true. In fact, I thought it was unfortunate that the CBO didn’t provide a confidence interval around that estimate. I presume it didn’t cross zero or they wouldn’t have made such a big deal about it but I’d like to see it.

  4. PeonInChief says:

    The workers who might decide not to work are not the highly-paid productive workers the powers-what-be are so fond of, but the allegedly less-productive workers who should just be happy to have a job. Were that, in fact, true, perhaps it’s a good thing that they leave the labor force. Or perhaps it’s just that they are underpaid for the productive work that they do and the whole problem could be solved for those who don’t just hate their jobs by paying higher wages and providing health insurance.