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Obamacare and Labor Markets

e21 | June 8, 2010

Douglas Holtz-Eakin and Cameron Smith have an interesting new paper on the impacts of new healthcare legislation on employer-provided coverage and marginal tax rates.

As has been previously discussed on this blog, the structure of federal subsidies implicit in new exchanges generates strong incentives for firms to drop health coverage for their employees. Holtz-Eakin and Smith emphasize that health benefits are merely one part of an overall compensation package. Employers provide health coverage not only out of the goodness of their hearts, but as a tool for attracting and keeping employees.

Concerns over employee-dumping stem from the fact that healthcare reform is extremely generous in the amount of subsidies offered to workers in exchanges whose employers do not offer healthcare. By 2018, a family earning as much as $64,000 could expect to receive a subsidy of over $10,000 on the exchanges. Employers thus have strong incentives to substitute wage benefits for health coverage and dump their employees onto exchanges. Even taking into consideration the fees for not offering health coverage, Holtz-Eakin and Smith find that eliminating coverage makes sense for workers up to 250% of the poverty level, or some 43 million workers. This is a far greater number than the CBO has projected to join exchanges in its cost projections.

Health Care Reform and Employer-Sponsored Insurance in 2014 (Employer Health Plan = $11,941)

One reason to be cautious about these figures is the recent evidence from Massachusetts. Employer dumping does not appear to have happened in large numbers after the passage of RomneyCare, even with an employer mandate that charges lower fees than the national bill. However, there are good reasons to think that a sudden shift in employer incentives will have long-run effects. It may take time for the logic embedded in this table to play out in terms of corporate decisions. But it seems a poor decision to stake the fiscal health of the country on the notion that corporations will systematically act against their own interests.

The authors also discuss another aspect of the new legislation that has received limited attention so far (Greg Mankiw is a notable exception). The phase-out of federal subsidies at higher levels of income results in higher effective marginal tax rates for low-income workers. This will have potentially large consequences on the willingness of low-income workers to stay employed or work more.

PPAC Raises Effective Marginal Tax Rates on Low-Income Workers

Both of the effects of PPAC on labor market outcomes—employer dumping and higher marginal tax rates—are not well accounted for in the CBO score of the bill, and may result in higher costs than expected. In its analysis, the CBO estimated that employers losing group coverage would be roughly balanced by workers gaining coverage as a result of employer mandates. The CBO also, by convention, did not take into account the effects of subsidies that act as work disincentives.

As more analyses like this study are published, negative consequences from the new health care law continue to be uncovered. e21 is dedicated to highlighting those stories, and has just launched a new project, ObamaCareWatch, to serve as a one-stop-shop for news, research and commentary on the flaws, as they continue to be uncovered, in this new top-down, government-run health care system.

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