University of Chicago economists Casey Mulligan and Trevor Gallen recently released a National Bureau of Economic Research working paper titled, “Wedges, Wages, and Productivity Under the Affordable Care Act.” Using a sophisticated and well-defined model based on changes in taxes, subsidies, and administrative costs, the economists analyze the labor market effects of the Affordable Care Act (ACA).
Their findings include a significant redistribution of wealth from high-wage workers to low-wage workers and non-workers. This contributes to a loss of total productivity of about one percent and a reduced per-capita output of about two percent. “At the expense of economic efficiency, employers trade workers with each other to reduce penalties and enhance subsidies,” the authors say. This leads to more part-time and temporary workers, creating economic waste from shuffling and under-utilizing workers. It also exacerbates the troubling increase in part-time employment for economic reasons. Currently, 7.7 million people work under 35 hours a week, but would prefer to work more. Before the recession, that number was 4.5 million.
The authors also predict a decrease in hours worked by about three percent, which will affect low-skill workers the most. A fully implemented ACA will create a tax “wedge” with effects similar to tripling employer payroll taxes. With the unemployment rate still at seven percent four years after the beginning of the recovery, policies increasing the cost of hiring workers are ill-advised. Low-skill workers such as teens and many young people are experiencing even higher unemployment rates of 20.8 and 11.6 percent, respectively.
These findings are some of the many unintended consequences of the long and very complex ACA. While the law intended to reform the healthcare market, it was not meant to so drastically affect the labor market. However, the law clearly alters wage, hour, hiring, and work incentives for employers, employees, and the unemployed—leading to unanticipated negative effects. The government’s economic forecasts of the ACA held labor market outcomes constant, leading to an overly optimistic prediction of the law’s consequences. As Mulligan and Gallen state, “The ACA encourages workers to be insured, but not in a factor-neutral way.”
It is tempting for policy makers to only emphasize the positive, intended outcomes of a given piece of legislation. However, the negative, unintended consequences of the Act overshadow its positive aspects. The ACA will directly cost 1.4 trillion dollars over the next decade and, as research such as Mulligan and Gallen’s shows, the secondary costs through decreased productivity and labor market utilization will be even higher.
Jared Meyer is a policy analyst at the Manhattan Institute. You can follow him on Twitter here.