Reduction in Employment in the US - Essay Example

Macro Economics Question 4 The United s Congressional Budget Office recently released a report estimating that the health care reform (called the Patient Protection and Affordable Care Act or colloquially\Obamacare") will reduce employment in the US by the equivalent of 2.5 million full time jobs by 2024. Based on the CBO report and the theory covered in ECO 344, why might an increase in access to health care in the individual insurance market lead to a reduction in employment in the US? In your opinion, is this a reason to oppose the law? Answer The Affordable Care Act (ACA) of Obama administration enacted in 2010 is likely to have some far reaching outcomes in the labor market in the years ahead. Before exploring its impact on labor market, it would be prudent to know some of the provisions of this new healthcare act. The prime objective of this act is to cover significant proportion of the population that do not have any health coverage by extending them subsidized insurance through various provisions. It is now mandatory for all citizens of the US to acquire health insurance or otherwise they will have to pay a penalty for avoiding health coverage. Even employers who decline offering minimum insurance cover are liable for penalties. For premium insurance coverage, excise tax is levied on such plans. Insurers are not allowed to charge higher insurance premium for the individuals in poor health conditions. It is estimated that the ACA will provide insurance coverage to 13 million individuals in 2014 alone. At least, 5 million new people will come in the ambit of insurance coverage each year until 2024. In spite of this, the congressional budget office (CBO) estimates that at least 31 million US citizens will remain out of insurance coverage for various reasons. The ACA also mandates that businesses with 50 or more employees need to provide coverage as per the government norms or else they would need to pay penalty of $2,000 to $3,000 per employee per year for its violations (Turner, 2013). The amount of federal subsidy depends on the federal poverty level (FPL) of an individual or family. Accordingly, if a family falls within a limit of 150 percent of the FPL, they will have to pay only 4 percent of their income for a health care plan and balance will come from the federal government as subsidy. As family income rises to 200 percent of the FPL, the household will have to pay 6.3 percent and so on. Subsidy will not be available to those who have income levels above 400 percent of the FPL or if they have been provided health insurance plan from their employers. Surprisingly, when the worker takes a part time job then he or she becomes eligible for exchange subsidies and precisely for this reason some people will have fewer incentives to work full time as can be explained through economic principles of the income effect and substitution effect. Subsidy works for them as an extra income that is sufficient to maintain the same standard of living sparing the time for other activities of their interests. The Act is likely to create impact on the labor market when all provisions of the Act come into force starting from2014 through 2024. The Act raises effective tax rates on earnings of the workers forcing them to reduce the supply of labor as Mulligan (2014) argues "the Affordable Care Act also contains a new implicit tax on employment that affects far more people than its implicit income tax does". Further, as per the provisions of the Act, the higher-income households would get lesser assistance in comparison to lower-income households. With rising house-hold income levels, the people will pay more for the same degree of coverage. It means that on additional earnings, they would pay implicit tax. So as to say, the Act makes workers with higher earnings to pay higher taxes. In other words, there would be lesser incentive to work for higher hours. The CBO estimates that labor supply in number of hours will get reduced by around 1.5% to 2% between the years 2017 and 2024. The CBO states, “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, 2014 p. 120). In view of the above discussed several provisions of the ACA and initial estimation made by the CBO office of having 2 to 2.5 million workers out of the labor market can be explained by basic economic concept of marginal tax rate and the law of labor elasticity as a deciding factor for a person whether to work more or not. McClelland and Mok (2012) suggest "low-income workers have higher elasticities of labor supply than other workers, especially in the component of their labor response that reflects movement in and out of the workforce". Economists argue that taxes influence the individuals significantly on their decisions for job activities. In this sense, the concept of marginal tax rate is important to any individual. Though the median marginal federal income tax rate is roughly 15 percent, but when state tax and payroll tax is included the marginal tax rate goes over 30 percent. When the impact of loss of subsidy (in the event when worker or household crosses subsidy threshold of 400% FPL) is added to it, the marginal tax rate reaches to above 65 percent. This simply means that for each additional dollar earned 0.65 dollar would go to taxes or in other words, for each additional hour of job, the per hour real earning of the worker becomes less than half. It is obvious that this would work as a deterrent for anyone to put additional hours on job. The worker would be inclined to become a part timer rather than working for a full time job. Thus, the ACA has increased marginal tax rate of an individual, especially for those who fall between 100 percent and 400 percent of FPL income. The following table provides federal poverty guidelines and that will help understand the impact of subsidy provided under the ACA for individuals falling under the different tax bracket. Federal Poverty Levels to calculate subsidy levels of coverage for Washington DC and 48 other states have been provided in the following table. House hold Size 100% 133% 138% 150% 200% 300% 400% 1 $11,490 $15,282 $15,856 $17,235 $22,980 $34,470 $45,960 2 15,510 20,628 21,404 23,265 31,020 46,530 62,040 3 19,530 25,975 26951 29,295 39,060 58,590 78,120 4 23,550 31,322 32,449 35,235 47,100 70,650 94,200 Source: http://obamacarefacts.com/federal-poverty-level.php Following is the premium limits that individual needs to pay based on income levels. Income levels Premium Limit Up to 133% FPL 2% of income 133%-150 FPL 3-4% of income 150%-200% FPL 4-6.3% of income 200%-250% FPL 6.3%-8.05% of income 350%-400% FPL 9.5% of Income Source:http://www.hemophilia.org/NHFWeb/Resource/StaticPages/menu0/menu4/menu306/SubsidiesInExchanges.pdf As an example, the marginal tax concept can be applied to find a real income of a person who falls within 350%-400% FPL range and raising her gross annual income from $36,000 to $46000. A typical average premium for a household is $15,745 per year (Health Insurance Cost Statistics, 2013). When covered under ACA, the person will have to spend only 9.5 % of the income for coverage. That means she will get subsidy of nearly $12,000. In the event her income further rises by $10,000 (total 46,000); she will lose this subsidy component due to surpassing threshold level as described in the federal poverty level table. These calculations can also be done for income levels as high as $66,000 where no federal subsidy is available. As calculation suggests, on raising income level from 36,000 to $66,000, she loses 40% of the additional income as subsidy loss. Adding marginal tax of 25% on this extra income, the worker tends to lose 65% of her additional income. That is certainly a huge sum for anyone to make any effort to raise his or her income level. Many of the people falling just above 400 % FPL income and working full time may switch to part time jobs precisely for this reason. The crux is that with higher marginal tax, income levels decline and person’s willingness or motivation to work diminishes. Moreover, the ACA also tends to increase marginal cost of the firms who attempt to hire 50th employee. Marginal cost is the additional cost incurred by the business while hiring 50th employee. The threshold limit for any firm to remain out of the realm of providing insurance coverage to their employees is 49 employees. It is just not the cost of wages incurred on employing 50th employee but the firm will be forced to provide employer sponsored insurance plans (ESI) for all the employees. In that sense, marginal cost of the firm crossing threshold limit of 49 employees is huge and most firms cannot afford it. Moreover, if the employer does not comply with the requirement, penalty per employee per month would be $192 in 2015 with the provision to grow at 1.6 percent each year. That means the marginal cost to the firm for employing 50th employee would be $115200 (192× 50×12) per year over and above the compensation paid to the 50th worker assuming all other things remain unchanged. It is quite likely that employer would also prefer to employ people on part time basis once they reach threshold of 49 employees in their establishment so that they have not to bear the huge burden of employing additional worker. It is not that ACA will impact only labor market but it is also likely to impact businesses too due to non-availability of sufficient laborers in the long-run. However, it will be difficult to forecast whether this will result into higher wages for the workers or not. Future labor demand-supply equilibrium will settle the labor rates in the US but it is not correct to state that the US will face significant shortage of labor supply. Only a small fraction of the total workforce, especially the lower-end will move out of the job market willingly but that is not likely to make much of the impact on the national economy. That means this is not a sufficient cause for opposing the Affordable Care Act with its new provisions. The objectives of Affordable Care Act are varied; the Act aims at providing coverage to millions of people whose income is below 400% of the FPL. Most of them are either not provided coverage by employers or cannot afford paying medical premium for self and family. Though the Act tends to create some kind of anomaly in the labor market yet in the broader sense, it will help increase health standards of the US citizens. References CBO (2014). The Budget and Economic Outlook: 2014 to 2024. Congress of the United States Congressional Budget Office. Health Insurance Cost Statistics (2013). Statistic Brain. Retrieved March 2, 2014 from http://www.statisticbrain.com/health-insurance-cost-statistics/ Mulligan, C.B. (2014).The Affordable Care Act’s Multiple Taxes. Retrieved March 1, 2014 from http://economix.blogs.nytimes.com/2014/02/26/the-affordable-care-acts multiple-taxes/?_php=true&_type=blogs&_r=0 McClelland, R.; Mok, S. (2012). A review of Recent Research on labor supply elasticities. Retrieved March 2, 2014 from http://www.cbo.gov/sites/default/files/cbofiles/attachments/10-25-2012-Recent_Research_on_Labor_Supply_Elasticities.pdf Read More