Some Unpleasant Welfare Arithmetic

By Casey B. Mulligan, University of Chicago

The Affordable Care Act (ACA) presents employers
and potential employees with a variety of
new rewards and penalties. These are, in part,
exactly what the law intended: by penalizing
potential employees for not purchasing health insurance,
and employers for not providing it, the law aims to increase
the fraction of the population with health insurance.
Yet these same rewards and penalties have additional
effects, including on the incentive to work; Mulligan
(2014), for example, suggests that the ACA may reduce
employment by 3 percent on average and have a range of
positive and negative effects on average hours worked.
In the work summarized here, I quantify the number
of people who will have essentially no short-term financial
reward from working more than 29 hours, since this
would either render them ineligible for the ACA’s assistance
or increase the penalties that may be owed by their
employer. This is the first paper to show that the ACA
will put millions of workers in the economically extreme
situation of having zero short-term financial reward (or
less) to working full-time rather than part-time.
In economics jargon, this means the ACA creates
marginal tax rates on labor income that exceed 100
percent. Even when helping people who are out of work
or who otherwise have low incomes is a primary policy
motivation, and even if labor supply does not respond
much to the after-tax wage, labor income tax rates that
equal or exceed 100 percent are bad policy because they
discourage work effort without raising any revenue.
From a strictly predictive perspective, economists expect
that full- time employment rates will be low, if not zero,
in groups of people who are aware that they receive no
financial reward from working full-time (defined here to
be working at least 30 hours per week).
Two separate ACA provisions can fully eliminate the
reward to full-time work. The first, which is scheduled to
be in full force in 2016, pertains to full-time employees
of firms that do not offer health insurance: by cutting
weekly work hours to 29, they save their employer the
annual salary equivalent of more than $3,000, or, they
save their employers the threat of even larger penalties.
Women workers, young workers, and persons already
working 30–35 hour schedules are especially likely to have
their short-term financial reward to full-time work erased
by the ACA. By my estimates, three to four million workers
overall will fall victim to this penalty provision.
The second provision pertains to full-time employees
at firms that do offer health insurance. Over 60 million
workers obtain health insurance from their employer, not
including workers who obtain health insurance from a family
member’s employer. About half of them (26 million) are
in families between 100 and 400 percent of the poverty line
and therefore satisfy the income criteria for exchange subsidies.
And 11 million of those are unmarried—so by definition
cannot be covered by a spouse’s plan—and another 8 million
of the married have a spouse that does not work or otherwise
cannot obtain coverage through a spouse.
In other words, almost 20 million workers are ineligible
for exchange subsidies solely because their employer offers
coverage to full-time employees: these are the workers
subject to the ACA’s implicit full-time employment tax
(FTET). A 29-hour work schedule, on the other hand,
would make them eligible for subsidies without creating
any penalty for the employer.
In about four million cases (of the 20 million facing an
implicit FTET of some magnitude), the dollar amount of
subsidy gain can exceed the after-tax income that is earned
for working beyond 29 hours per week. A distinguishing
feature of almost 90 percent of these workers is that
their family incomes are below 250 percent of the federal
poverty line. The four million disproportionately consist
of working unmarried household heads because, as noted,
unmarried heads are especially likely to be ineligible for
exchange subsidies solely because their employer is offering
coverage to full-time employees.
Older (but not elderly) workers are also disproportionately
represented among those facing an implicit FTET
rate of 100+ percent, since older workers are more likely
to have employer-sponsored insurance and are more
expensive to insure. The 100+ percent FTET from the
employer penalty has the opposite age pattern, which
means there may be little age pattern for the propensity
to face one of the 100+ percent FTETs.
The prevalence of 100+ percent FTETs is an important
indicator of its effects on incentives to work, but it is not
the only one. There are other ways to avoid the FTET, such
as working more hours per week for fewer weeks of the
year. If employers are unwilling or unable to adjust work
schedules, the FTET may affect the equilibrium relationship
between hours and earnings (i.e., compensating differences)
rather than changing the distribution of hours. At
the other extreme, employers may be able to substantially
adjust measured work hours without changing the actual
work that is done (e.g., require employees to “punch out”
during break periods, and then adjust their hourly wage so
that weekly earnings are the same), in which case the ACA
will reduce the measured hours for quite a large number of
In effect, millions of workers are becoming eligible
for fully federally funded paid days off, akin to the sick
leave policies in Western European countries. Because
the Western European data suggest that paid sick days
really do result in fewer days at work (Lusinyan 2007), we
should expect the act’s FTETs to reduce days worked as
well, at least for the segments of the workforce that do
not avoid the ACA’s taxes in other ways.
These effects of the ACA are only part of its impact;
people who believe government should provide health
insurance for everyone may regard these costs—the
disincentive effects discussed here and elsewhere—as
worth paying.
But everyone should recognize that the ACA’s costs
are likely to exceed the budgetary expenditure.

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