Unpacking What CBO Actually Said re Work Incentives

There’s been an outpouring of commentary on the dustup around the CBOs estimates of labor supply effects of the Affordable Care Act.  Summarizing, supporters, myself included, tend to emphasize the release of job lock as a positive function of the law, while opponents stress the work disincentives that result from the loss of premium subsidies as incomes go up.

My position has consistently been that neither CBO nor anyone else can tell you the relative magnitudes of these different effects.  So, like Jon Gruber (supporter), I was struck by assertions made by Casey Mulligan (opponent) as to the dominance of the higher tax rate effects in CBOs estimates of diminished labor supply.  There’s certainly no support for that assertion in the CBO report, leading Gruber to correctly conclude that this is “…simply Mulligan’s editorializing with no substantive basis.”

But Jon also makes a point that is worth digging into a bit: “CBO dismisses [Casey’s] argument. According to the report, his suggested effect doesn’t impact labor supply, but rather health insurance offering…”  That’s confusing, so I thought it might be helpful to take a closer look at what the budget agency is saying, with my annotations in brackets.

First of all, to the extent that CBO dismisses Casey’s findings, it’s in relation to how the subsidies will affect the labor supply of full-time workers with coverage through their jobs (and thus ineligible for subsidies).  Because such workers are currently forgoing any ACA subsidies, they face an incentive to switch to a part-time job without coverage, thus working less and gaining subsidized coverage.  But that’s not what CBO thinks will happen (my comments added in brackets]:

“In CBO’s judgment, however, the cost of forgoing exchange subsidies operates primarily as an implicit tax on employment-based insurance [not, as Mulligan asserts, on workers’ earnings], which does not imply a change in hours worked [which does not, again in contradiction to Casey’s assertions, affect labor supply].”

“Instead, the tax can be avoided if a worker switches to a different full-time job without health insurance (or possibly two part-time jobs) or if the employer decides to stop offering that benefit.”

Two things to remember here: not every employer has to provide coverage to every worker, and the cost of coverage is assumed to largely come out of workers’ wages.  So, some workers might be better off avoiding the loss of subsidy dollars by switching to a job without health care, and thus presumably a higher wage, and getting subsidized care through the exchange.  Sounds a bit far-fetched, but there it is.  Re employers dropping coverage, Target recently announced that they’d be dropping health coverage for part-timers, while providing them with a $500 one-time payment, under the presumption that they’d get better and more affordable coverage in the exchanges.  Here again, note no assumptions about changes in their hours worked.

So, if that kind of job-shifting doesn’t lower labor supply, what is that CBO is saying will do so?  Well, first off, those who lack employer-based coverage and are in the subsidy range do face a negative work incentive as higher earnings lower their subsidy.  Also, those with employer coverage “whose income would make them eligible for subsidies through exchanges (or for Medicaid), and who work less than a full year (roughly 10 to 15 percent of workers in that income range in a typical year), would tend to work somewhat less because of the ACA’s subsidies. For those workers, the loss of subsidies upon returning to a job with health insurance is an implicit tax on working (and is equivalent to an average tax rate of roughly 15 percent, CBO estimates). That implicit tax will cause some of those workers to lengthen the time they are out of work…”

That “roughly 15 percent” marginal tax rate looks a lot lower than the 100% emphasized by Mulligan and deemphasized, as in “not mentioned,” by CBO.  As Gruber notes:

It is not surprising that, unlike Mulligan, CBO economists did not harp on examples of 100% tax rates. They are uninterested in calculations that highlight extreme cases. They are more interested in modeling the overall impact on the workforce.

End of the day, there are definitely legitimate critiques that opponents can levy against the ACA’s impact on labor supply.  But they are far less driven by the Mulligan-type arguments invoking very high implicit tax rates then Casey himself would have you believe.  Moreover, to evaluate to the ACA based solely on negative work incentives leaves out the unlocking of job lock, the now-affordable coverage of millions of the uninsured, the costs-savings from efficiency gains leading to lower premium costs and budgetary savings, the outlawing of discrimination based on pre-existing conditions, the fact that plausible alternatives have similar incentive effects, and so on.

via:http://jaredbernsteinblog.com/unpacking-what-cbo-actually-said-re-work-incentives/?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+JaredBernstein+%28Jared+Bernstein%29