A new report released by the Congressional Budget Office (CBO) estimates that the Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act of 2010 (“Affordable Care Act”) will result in a modest decline in labor market participation over the next 10 years. The report – The Budget and Economic Outlook: An Update (pdf) – presents the CBO's updated budget and economic projections for the 10-year period beginning in 2010, and is one of a series of budget and economic reports the CBO issues each year. On the whole, the report finds that the Affordable Care Act will reduce the federal budget deficit by about $179 billion from 2011-2020. With respect to the law’s impact on the labor market, however, the CBO anticipates that the law “will affect some individuals’ decisions about whether and how much to work and employers’ decisions about hiring workers.”

Generally, the CBO estimates that the net effect of the Affordable Care Act will be a modest reduction (roughly half a percent) in the amount of labor used in the economy. This small reduction will be due to the Act’s incentives for individuals to reduce their work hours or leave the workforce entirely, which will be somewhat offset by the Act’s provisions that encourage more people to work. According to the report, the reduction in labor supply will be primarily due to the expansion of Medicaid and the provision of subsidies that will offset the cost of obtaining insurance through the future health insurance exchanges. These benefits will increase certain individuals’ financial resources, which will enable them to reduce their work hours or withdraw from the labor market . Compounding these benefits is the phase-out of the subsidies as income increases, which will increase an individual’s marginal tax rate, thus discouraging additional work. However, since most workers who receive healthcare benefits through their employers will not be eligible for the health exchange subsidies and will likely make too much money to qualify for Medicaid, the tax incentives to reduce work will apply to only a small subset of the population.

Another factor that has the potential of discouraging work is the Affordable Care Act’s ban on denying health care coverage to those with preexisting conditions and charging different prices to people of differing age and/or health status. These provisions may result in older workers choosing to retire earlier than anticipated. However, the Affordable Care Act’s provisions increasing the income threshold for parents to qualify for Medicaid will encourage work for these individuals.

The CBO estimates that other provisions may impact labor market participation, albeit negligibly. The increased excise (“Cadillac”) tax on high-cost health insurance plans that will be imposed in 2018 will, over time, reduce workers’ after-tax compensation, thus encouraging them to work more. This effect will be offset, however, by the fact that the increased tax will increase the effective price of healthcare coverage, reducing the relative price of other goods, including leisure. The CBO estimates that the net effect will be a slight decline in labor participation.

In addition, the Act’s imposition of a penalty on employers with 50 or more employees that do not offer healthcare coverage or if the coverage does not meet certain criteria may cause some to hire fewer low-wage or full-time workers.

Other effects the Affordable Care Act could have on the labor market are harder to quantify, according to the CBO. For example, the availability of health insurance outside the workplace could encourage workers to find jobs that better match their skills. However, some employers may invest less in their workers, for example by reducing training, if worker retention declines. CBO opines that economic productivity could increase to the extent the health status of workers improves.

Underlying these estimates is the fact that “[e]conomic forecasts are always subject to considerable uncertainty.” The CBO acknowledges that the uncertainty regarding its current forecast “is especially large, both because forecasting the path of the economy near turning points in the business cycle is always difficult and because the current business cycle has been unusual in a variety of ways. Many developments could lead to outcomes that differ substantially, in one direction or the other, from those CBO has projected.”

This entry was written by Ilyse Schuman.

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