Obamacare’s Effects on Wages

By James D. Agresti
February 13, 2014

Contrary to claims by certain prominent individuals, the Congressional Budget Office (CBO) is projecting that Obamacare will drive down workers’ wages.

A recent CBO analysis found that the equivalent of two million full-time workers will drop out of the workforce by 2017 as a result of Obamacare. This represents 1.5% of all hours Americans will work that year, and CBO projects that this will increase to 2.0% by 2024.

Based on those estimates, the following individuals are claiming that Obamacare will increase workers’ wages:

Glenn Kessler, the Washington Post‘s “Fact Checker”: “Fewer workers initially would lead to higher wages as employers competed to hire people.”

Paul Krugman, Nobel Prize-winning economist, Princeton University professor, and New York Times columnist: “Oh, and because labor supply will be reduced, wages will go up, not down.”

Dean Baker, Ph.D. economist and co-director of the Center for Economic and Policy Research:

[L]et’s go back to the CBO report … “According to CBO’s more detailed analysis, the 1 percent reduction in aggregate compensation that will occur as a result of the ACA [Affordable Care Act] corresponds to a reduction of about 1.5 percent to 2.0 percent in hours worked. (p 127)”

We checked with Mr. Arithmetic and he pointed out that if hours fall by 1.5 to 2.0 percent, but compensation only falls by 1.0 percent, then compensation per hour rises by 0.5-1.0 percent due to the ACA. In other words, CBO is telling us that for each hour worked, people will be seeing higher, not lower wages. That is the opposite of a pay cut.

All of these claims contradict what the CBO report explicitly states, which is that Obamacare will cause “reductions in wages or other compensation.” In more detail:

Under the ACA, employers with 50 or more full-time-equivalent employees will face a penalty if they do not offer insurance (or if the insurance they offer does not meet certain criteria) and if at least one of their full-time workers receives a subsidy through an exchange. … In CBO’s judgment, the costs of the penalty eventually will be borne primarily by workers in the form of reductions in wages or other compensation—just as the costs of a payroll tax levied on employers will generally be passed along to employees. Because the supply of labor is responsive to changes in compensation, the employer penalty will ultimately induce some workers to supply less labor.

In plain words, one of the reasons people will work less under Obamacare is that the law drives down their wages through regulations and fines, which reduces their incentive to work.

Kessler’s and Krugman’s (KK’s) points are grounded in basic laws of supply and demand. Less workers means more competition for labor, and thus, higher wages. However, KK neglect to mention that one of the reasons there will be less workers is because wages will be lower. By failing to report this, KK mislead their readers about the findings of the CBO report.

Baker’s arithmetic is fatally flawed, because it wrongly assumes that Obamacare will drive workers with different incomes out of the labor force at the same rate. CBO explains this is not the case:

Because the largest declines in labor supply will probably occur among lower-wage workers, the reduction in aggregate compensation (wages, salaries, and fringe benefits) and the impact on the overall economy will be proportionally smaller than the reduction in hours worked.

To simplify this, consider a hypothetical example of 10 workers, five who earn $40,000 per year and five who earn $20,000. If Obamacare drives down all of their wages and causes the lower-wage workers to quit working, the average wage for all workers will rise because the lower-wage workers are no longer a part of that average. However, nobody earns higher wages. In fact, everyone earns less.

In sum, contrary to KK and Dean, CBO is projecting that Obamacare will drive down wages. However, as is the case with all such analyses, CBO explains that these projections are “subject to substantial uncertainty.”

4 thoughts on “Obamacare’s Effects on Wages

    • Thanks for pointing this out. CBO sometimes changes the urls of its reports. I updated the link to reflect the new address.

  1. Pingback: WaPo’s Fact Checker gives Obama the kid gloves on spending for and against Obamacare « Hot Air

Leave a Reply

Your email address will not be published. Required fields are marked *

*

You may use these HTML tags and attributes: <a href="" title=""> <abbr title=""> <acronym title=""> <b> <blockquote cite=""> <cite> <code> <del datetime=""> <em> <i> <q cite=""> <strike> <strong>