What CBO Really Said About Health Reform and Work

My latest post for U.S. News & World Report’s Economic Intelligence blog explains what this week’s oft-cited Congressional Budget Office (CBO) report really said about health reform and work and gives a little context to this poorly understood issue.

CBO estimates that health reform will cut the total number of hours worked by an amount equivalent to 2.5 million full-time workers in 2024.  That’s not because CBO thinks employers will cut back on hiring.  It’s because CBO expects that when workers gain access to affordable health care that isn’t tied to a particular job, some will decide to work somewhat less.

As an example, I note that one member of a two-earner family could take time off from the workforce to address a family emergency or go back to school to improve his or her skills without worrying about losing access to health insurance.

But health reform (the Affordable Care Act or ACA) will also have other impacts on work, I add:

Wait a minute, say some more thoughtful conservatives; we should acknowledge that, along with making it more financially feasible to stay home with the kids, some ACA provisions can, for some people, reduce the financial rewards from taking a second job or working longer hours to earn extra income.  In effect, those provisions “tax” the earnings from labor and can discourage people from supplying as much labor as they would without the “tax.”

One group that the ACA would likely affect in this way, CBO says, are low-and moderate-income households that receive subsidies to help them purchase insurance through the ACA’s marketplaces (rather than from their employer).  As CBO notes, the phase-out of the subsidies affects net income similarly to a direct tax on earnings, and will likely have similar effects on labor supply.

All else being equal, policymakers should want to keep any adverse effects on labor supply from marginal tax rates as small as possible.  But all else is seldom equal and, in this case, policymakers face well-known and inherent trade-offs in designing income-based financial assistance programs.

To reduce the implicit tax on earnings from a phase-out, policymakers would have to extend it farther up the income scale — but that would add significantly to its costs. We could reduce those costs by reducing the base benefit for those with the greatest need, but that would defeat the main purpose of the subsidies in the first place.

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