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The ACA Lowers Employment, and that's Terrible News

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The ACA Lowers Employment, and that's Terrible News

March 3, 2014

On February 4, the Congressional Budget Office (CBO) released a report that instantly became a focus of intense controversy. The report found that the Affordable Care Act (ACA or “Obamacare”) would reduce US employment by the equivalent of 2 million full

-time workers by 2017, 2.5 million by 2024. This news was received in the context of the polarizing politics surrounding the ACA, with commenters choosing sides over the report according to their attitudes toward the health law itself. 

When CBO’s findings are instead viewed from the standpoint of our larger economic policy challenges, it becomes clear that this consequence of the ACA is unequivocally bad, irrespective of one’s general attitude toward health care reform. To clarify this, let’s step back from the debate over the ACA for a moment and examine the current state of our economy. 

Our prosperity derives from two factors: the first being how much Americans work, the second being how productive we are while working. Perhaps America’s biggest current economic problem is that workers are leaving the labor force by the millions. Part of the worker drain is due to population aging and was a widely-anticipated problem. But other factors have also arisen to make the exodus much worse than foreseen. 

In 2007, we knew we had a significant problem coming when the baby boomers would begin to leave the workforce. The growth of our labor force would slow, and our economic growth would slow along with it (these data come from annual Social Security trustees’ reports). 

 

 

 

Unfortunately the labor force has shrunk much more than anticipated. The number of workers dropped through the floorboards, and economic growth fell alongside (see the 2009 plunge in the next two graphs). 

 

 

 

 

Part of the explanation is that the great recession arrived, causing unemployment to rise just as many boomers were starting to retire. But other phenomena also entered the picture. 

One is that Social Security disability benefit awards skyrocketed, as often happens (albeit usually to a lesser extent) during a recession. This means that many who otherwise would have continued to look for work are now extremely unlikely to ever return to the labor force.

 

 

Our sagging economy also caused net immigration to plummet, further depressing the ranks of workers. People are much less likely to join – whether legally or illegally –an economy in which it is tough to find work. Recently immigration has recovered, but not enough to replace the immigrants lost from 2007-11. 

 

 

On top of all that, there is a deeply concerning phenomenon of “discouraged workers” – those who have simply given up finding work. Put all these factors together, and we now have an economy with far too few workers. CBO’s latest projections for labor force participation are sobering indeed.

 

 

 

Inadequate labor force participation has long been a central concern of economists on both sides of the political aisle. The problem of individuals heading into permanent retirement undesirably early has prompted efforts by myself, Peter Orszag, Jeff Liebman, Jason Fichtner, and many other esteemed economists to correct flawed work incentives facing middle-aged Americans. 

Those who leave the workforce at younger ages constitute an even more serious problem. The left-leaning Center for American Progress encapsulated these widely-shared concerns:

According to our analysis, a young person who experiences a six-month period of unemployment can expect to miss out on at least $45,000 in wages—about $23,000 for the period of unemployment and an additional $22,000 in lagging wages over the next decade due to their time spent unemployed.

Until the recent CBO report, the Obama White House had also been a part of the bipartisan consensus that employment is the key to economic advancement. NEC Director Gene Sperling said this at a January 6 press conference: 

I think there’s no question over the last 50 years things have been done wrong, but I think we’ve learned from lessons. I think that both Democrats and Republicans have learned you have to look at -- to make sure about the incentives you’re creating and that policies are better if they are designed to reward work. One of the reasons the earned income tax credit has been so important is that it’s an incentive for work. 

The ACA did not by itself cause our declining labor force problem, though it is now understood to be making it worse. Importantly, this is not—as have some have claimed—a desirable, necessary side effect of ending “job lock.” Alternative reform proposals would have enhanced health insurance portability without having anti-employment effects; examples include proposals by President George W. Bush and Senator John McCain

Given the central role of the ACA in our national political dialogue, it’s inevitable that advocates would try to spin the recent CBO report according to how they want the ACA to be perceived. But when the spinning is put aside, there’s no avoiding reality: we simply cannot afford to be implementing policies that drag our sagging labor force participation even further downward. 

 

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.

For more on this topic, see the full research report Beyond the Spin: Why it’s Terrible News that the ACA Lowers Employment.

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