For the past few years, U.S. job growth has been anemic even as the unemployment rate has steadily dropped, mainly because large numbers of workers are dropping out of the workforce altogether. The unemployment rate doesn’t fully capture the weakness of our labor market because the rate is calculated only as a percentage of those actively looking for work. Unfortunately, the percentage of Americans who are even attempting to work has dropped to its lowest level in more than thirty years.
A recent Washington Post column discussed some of the factors contributing to this costly exodus from the workforce. One factor—the Baby Boomers entering their retirement years—is something other analysts and I have long warned about. Other factors that may be contributing to workforce shrinkage include the recent increase in Social Security disability benefit awards, as well as the general discouragement of workers amid a historically weak economic recovery.
But now a new Congressional Budget Office report identifies another culprit driving workers out of the workforce: the Affordable Care Act (ACA, often referred to as “Obamacare.”) CBO finds that the ACA is deterring Americans from holding jobs—and will do so much more in the future. An already frequently-cited statistic from the CBO report is that the ACA will reduce the effective number of workers by 2.0 million by 2017, and by 2.5 million by 2024.
Driving millions of additional workers out of the workforce in the current economic environment is a disastrous effect that renders nearly all of our economic policy challenges even more difficult to solve. Even before the ACA was passed, we were looking at sobering projections of the slowest net workforce growth in decades as the baby boomers entered retirement. Pushing more Americans out of the workforce slows economic growth, lowers government revenues, worsens deficits, and results in greater burdens on the workers that remain.
CBO’s report notes three key phenomena resulting from the ACA: 1) high marginal tax rates on work by low-income Americans; 2) penalties on employers, which reduce their demand for workers, and 3) higher direct taxes to finance ACA spending. All of these reduce the numbers of Americans with jobs.
The first and most important effect is the ACA’s imposition of high marginal tax rates on work by low-income Americans. The ACA causes this by providing the most generous subsidies to the lowest-income individuals, gradually diminishing those subsidies as incomes rise. Americans who choose to work and earn more will lose a great deal of the subsidies they will receive by working less.
CBO provides numerical examples and then connects the dots to explain explicitly why this thins the ranks of workers:
Subsidies decline with rising income (and increase as income falls), thus making work less attractive. As a result, some people will choose not to work or will work less.
CBO similarly finds that “expanded Medicaid eligibility under the ACA will, on balance, reduce incentives to work.” The report has become newsworthy largely because it conflicts with repeated assertions by the White House and its political allies that the ACA will result in “higher employment.”
The second factor cited by CBO is the ACA’s penalties on employers, which reduce their demand for workers (and later, worker supply as well). Again, CBO explains:
Beginning in 2015, employers of 50 or more full-time equivalent workers that do not offer health insurance. . . will generally pay a penalty. That penalty will initially reduce employers’ demand for labor and thereby tend to lower employment. Over time, CBO expects, the penalty will be borne primarily by workers in the form of reduced wages or other compensation, at which point the penalty will have little effect on labor demand but will reduce labor supply and will lower employment slightly through that channel.
Third and finally, the ACA’s new spending is financed in part by new taxes that further reduce job growth. CBO lists the ACA’s Medicare payroll tax increase, its so-called “Cadillac plan tax” on high-cost health insurance plans, and its penalty tax assessed on individuals without health insurance, as among the taxes that will reduce employment.
CBO warns that these problems are only going to get worse; that is, the ACA’s effects in reducing employment will become more severe. One of the reasons is that “the number of people who will receive exchange subsidies—and who thus will face an implicit tax from the phase-out of those subsidies that discourages them from working—will be smaller initially than it will be in later years.”
From any reasonable vantage point, the CBO findings are a disaster for the ACA’s advocates. This has produced some bizarre efforts at counter-spin. The White House has even argued that CBO’s report substantiates that the ACA will cause fewer people to be “trapped in a job” by the need to maintain health insurance. But when the ACA was first promoted it was as a means of avoiding “job lock” in the sense of enabling Americans to move to different jobs—not to drop out of the workforce altogether.
In the end, there is no avoiding that the ACA is exposing low-income workers to high marginal tax rates and reducing the numbers of Americans with jobs. In our current economic environment, with millions of baby boomers heading into retirement and unsustainable deficits on the horizon, that is a huge self-inflicted problem. Responsible leadership requires addressing the problem, not evading it.
Charles Blahous is a senior research fellow for the Mercatus Center, a research fellow for the Hoover Institution, a public trustee for Social Security and Medicare, and a contributor to e21.