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In case you hadn’t heard, the Congressional Budget Office projects that the Affordable Care Act – aka, Obamacare – will reduce the number of working Americans by over 2 million in coming years. That can’t be a fun number for the ACA’s defenders to defend.
So far, they’re focusing on the positive: say, the worker in poor health who would like to retire, but who prior to the ACA had to work to secure health coverage; or, the new mother who would prefer to stay home with her child and, thanks to the ACA, can now do so. Economists refer to this as an “income effect” – you’ve got more income, and so there’s less need to work.
These examples aren’t illegitimate, though since some people will be leaving the workforce on other people’s dime, we should think carefully about how much we want to subsidize early retirement, stay-at-home moms, and so forth. We also want to consider that not working today might prevent lower-income Americans from gaining the skills that lead to a more prosperous and fulfilling life in the future. So even the outcomes that progressives highlight are a mixed blessing.
But there’s an entirely different effect that progressives downplay, and from my reading of CBO’s report it seems to play a larger role in reducing employment. As the CBO points out, “the health insurance subsidies that the Act provides to some people will be phased out as their income rises—creating an implicit tax on additional earnings.” According to the University of Chicago’s Casey Mulligan, the ACA will add about 10 percentage points to marginal tax rates for low-income workers and 5 percentage points for middle-income employees. As a result of this “substitution effect” – that is, of substituting leisure for labor as the rewards to work decline – Americans will work less.
Perhaps this is inevitable: any time you give something to low-income people and phase it out for high-income people, you’re going to get both income and substitution effects that reduce the rewards to work. But if we consider the non-financial aspects of work to be important, maybe that’s the more essential thing to understand.
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