Is Obamacare Standing In The Way Of Full Employment?

For years, Republicans have criticized the Affordable Care Act for holding back economic growth and contributing to the slow recovery.

After the mediocre jobs report last Friday, Republican National Committee Chairman Reince Priebus continued to make that accusation.

"This week the Congressional Budget Office (CBO) said that fewer Americans will be working because of ObamaCare." Priebus said in a statement. "Today's jobs report shows us exactly why that's so devastating.

"America needs a larger, stronger, fully employed workforce, but there's one thing standing in the way. It's ObamaCare, and we can't afford it any longer."

Is Priebus right? Is Obamacare "standing in the way" of full employment?

To begin with: Obamacare is certainly not the main reason the economy hasn't reached full employment. The law's main provisions just took effect last month while the recovery has been slow for years now. A lack of demand for goods and services has been the true cause of the slow recovery, much of it brought on by unnecessary austerity that Republicans have championed.

However, that doesn't mean that Obamacare won't make it more difficult to return to full employment in the coming months and years. There are a few reasons to expect it might and a few to think otherwise. Let's break it down.

Last week, CBO released a widely talked about report on the budget outlook, including an update on the labor market effects of Obamacare. The budget office found that the law will affect the supply and demand for labor in a variety of ways.

Effect on Labor Demand

There are two main ways that the law will affect employers' demand for labor:

1. New regulations will increase compliance costs and can cause firms to adjust their hiring decisions. The two features of Obamacare that will significantly increase costs for firms are the employer mandate and the excise tax on high cost health insurance plans. The Obama administration has already delayed the mandate until 2015 and it is unclear if it will ever take effect. The excise tax doesn't kick in until 2018.
   
   CBO projects that firms will eventually pass on the costs of both of those regulations to their workers in the form of lower real wages. But that is unlikely to happen in the first few years, because employers often do not cut their employees' nominal wages (a phenomenon known as sticky wages) and instead allow inflation to slowly eat away at them. Thus, in the first few years, firms may pay the costs of the mandate and excise taxes themselves and adjust their hiring decisions accordingly. Of course, neither of those provisions has taken effect yet so they should have very little impact on labor demand so far.
   
   CBO also suggests that uncertainty over different provisions in the law "probably has encouraged some employers to delay hiring," but has not quantified that effect. In addition, other regulations will increase costs for employers, but CBO did not mention them.
2. The Medicaid expansion and exchange subsidies will increase demand for goods and services. CBO reports that during the next few years, Obamacare will stimulate demand in the economy and cause firms to increase their hiring. This will be partially offset by new taxes in the law on high-income households, but the net effect is still positive.
   
   Here's CBO:
   
   "On balance, CBO estimates that the ACA will boost overall demand for goods and services over the next few years because the people who will benefit from the expansion of Medicaid and from access to the exchange subsidies are predominantly in lower-income households and thus are likely to spend a considerable fraction of their additional resources on goods and services - whereas people who pay the higher taxes are likely to change their spending to a lesser degree."

The budget office does not make any attempt to quantify which effect is stronger. However, it does note that the stimulative effect on demand for goods and services is "especially strong under conditions such as those now prevailing in the United States."

Effect on Labor Supply

The Affordable Care Act will also affect the supply of labor, although less so in the next few years. The main way it does so is through the Medicaid expansion and exchange subsidies, which will disincentivize work and cause a reduction in total hours worked. However, these disincentives will be smaller in the first few years as fewer Americans will receive subsidies or coverage through the Medicaid expansion.

This is where it gets complicated. Obamacare's new disincentives to work will affect the economy's path to full employment in two ways:

1. Workers who reduce their hours or drop out of the labor force may open up jobs for the unemployed. CBO explicitly points this out as a reason that the law will have a smaller effect on employment in the next few years. In fact, this would actually move the economy closer to full employment if other unemployed people fill their positions.
2. Some unemployed people may pass up jobs they otherwise would have taken if not for Obamacare. This is the classic conservative argument against unemployment insurance (UI). The work disincentives cause unemployed Americans to forgo jobs and hold back the economy. However, a number of studies have found that UI has had only a slight negative effect on employment since the financial crisis. Since Obamacare is so new, similar studies do not exist for the law.

It's unclear which of those effects dominates the other. Once the economy returns to full employment, the first effect will dissipate. That's why CBO projects that in 2024, Obamacare will lead to a reduction of 2.5 million full-time equivalent jobs in the workforce.

So, what's the final answer?

Unfortunately, it's not clear.

CBO reports that there will be a small drop in employment in the 2014-2016 period, but that does not necessarily indicate that the law will stand in the way of full employment since it will also create a smaller labor force. For instance, if five workers exit the labor force, but four unemployed ones take their place, that would be both a drop in employment and bring us closer to full employment. On the other hand, if other unemployed Americans forgo jobs because of the law, then that would reduce employment and make it harder to reach full employment.

Nevertheless, the law is brand new and unlikely to severely distort the labor market in the upcoming months. To blame the January job's report on the law is absurd. At most, Obamacare may be marginally holding back the economy from reaching full employment. But it's also just as likely that it is helping the economy return to full employment right now.

Finally, while we should be aware of how Obamacare affects the economy, we also must remember that the goal of the law is to bring affordable health insurance to millions of Americans. It's not supposed to bring us closer to full employment and some distortions in the labor market are acceptable along the way. There are plenty of other things Congress can do to spur on hiring - from policies targeted at the long-term unemployed to smart infrastructure spending.

Guess who is standing in the way of those?