Awkward: CBO More Than Doubles Estimate of ObamaCare Impact on Employment

Awkward: CBO More Than Doubles Estimate of ObamaCare Impact on Employment
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In its new report, the Congressional Budget Office (CBO) provided good news and bad news for the Obama Administration. On the one hand, the fiscal outlook is a lot better now than, say, two years ago. (Of course, if and when the economy crashes again, those projections will go out the window.)CBO

Yet it was extremely awkward for Team Obama that the CBO report also revised its estimates way upward of how many “full-time equivalent” jobs the Affordable Care Act (ACA, also known as “ObamaCare”) would eliminate: The old number was 800,000, but now the CBO guesses 2 million by 2017, and 2.5 million by 2024. It would have been nice had the CBO given this much scarier number earlier, before the legislation passed. (As Jerry Seinfeld would say: “Sadly, that information could have helped me.”) But it’s worth walking through the reasoning behind it, as various groups are arguing about it.

Although the CBO report is awkward to say the least, we should clarify exactly what it’s saying. It’s misleading to state–as some anti-Obama outlets immediately did–that the CBO estimates ObamaCare will “destroy 2 million jobs,” and there are two reasons such a claim is misleading:

(1) The CBO is actually estimating a reduction in total hours of employment, and then quantifying it in terms of a typical “full time” job. (The BLS defines a “full-time equivalent” as equal to 35 hours per week, but the ACA legislation itself–when determining the mandates on employers–uses 30 hours as the threshold between part-time and full-time. I haven’t been able to determine what number the CBO uses for the conversion of aggregate hours into “full-time equivalent jobs.”)

(2) The CBO explains that the majority of the estimated reduction in hours worked is coming from the labor supply side, not the demand side. In other words, the effect is primarily due to the ACA (“ObamaCare”)  changing the incentives facing workers, who now will choose to work fewer hours (or who might not seek a job at all).

Here are the bullet points of the CBO’s own explanation of the various factors driving its estimate, in order of importance (in the eyes of CBO):

 The subsidies for health insurance purchased through
 The expansion of eligibility for Medicaid;
 The penalties on employers that decline to offer
insurance; and
 The new taxes imposed on labor income.

The White House apologists are trying to spin the CBO number as being good news for workers, showing how people no longer “have to” work in order to get health coverage. But actually, that’s not the main part of the story, by any stretch. A big part is due to the fact that the ObamaCare subsidies for low-income people get phased out as their income rises, thus reducing the attractiveness of work on the margin. Here’s how the CBO itself describes it:

For some people, the availability of exchange subsidies
under the ACA will reduce incentives to work both
through a substitution effect and through an income
effect. The former arises because subsidies decline with
rising income (and increase as income falls), thus making
work less attractive. As a result, some people will choose
not to work or will work less—thus substituting other
activities for work. The income effect arises because
subsidies increase available resources—similar to giving
people greater income—thereby allowing some people to
maintain the same standard of living while working less.

True policy wonk geeks are encouraged to skim the CBO’s discussion, which takes up several pages in its Appendix C of the report.

In conclusion, all I can say is: better late than never. The CBO recognizes that people respond to marginal incentives, and that the ACA has some major implications for the marginal return to earning income. The irony is that as ObamaCare wreaks havoc on the US economy, its defenders will be outraged at the critics and will say, “This has nothing to do with health care! These problems are due to the economy going back into a double dip recession! If only we had listened to Krugman and postponed austerity. Well, at least these people have health insurance, if not jobs.”

  • dkuehn

    I'm a little confused by this line, Bob, but maybe I'm not understanding what you're trying to say:

    "In conclusion, all I can say is: better late than never. The CBO recognizes that people respond to marginal incentives, and that the ACA has some major implications for the marginal return to earning income."

    You are not claiming – I hope – that there were no behavioral responses to increasing marginal tax rates in earlier estimates. Because that is simply not true (and they say as much in Appendix C – they say they've increased their labor supply elasticities from earlier studies, not that they started using them).

    My understanding is that the number is higher because the MTR estimates went up and for some reason they are using higher labor supply elasticities. I don't know whether those changes are justified or not (presumably the CBO thinks they are).

Profile photo of Robert P. Murphy

Robert P. Murphy is the Senior Economist at the Institute for Energy Research, and a Senior Fellow with the Fraser Institute. He holds a PhD in economics from New York University. Murphy is the author of Choice: Cooperation, Enterprise, and Human Action (Independent Institute, 2015) as well as numerous other books and hundreds of articles.

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