Frequently Asked Questions About CBO’s Estimates of the Labor Market Effects of the Affordable Care Act

Posted by
Doug Elmendorf
February 10, 2014

Last week CBO released its latest report on the outlook for the budget and the economy; we also released a companion report that takes a closer look at the slow recovery of the labor market. The budget and economic projections presented in those reports include an updated analysis of the effects of the Affordable Care Act (ACA) on labor markets, which we explain in Appendix C of the report on the outlook. That analysis has attracted a great deal of attention and raised several questions. In this blog posting, we try to answer a few of the questions we have been asked.

Q: Will 2.5 Million People Lose Their Jobs in 2024 Because of the ACA?

A: No, we would not describe our estimates in that way.

We wrote in the report: “CBO estimates that the ACA will reduce the total number of hours worked, on net, by about 1.5 percent to 2.0 percent during the period from 2017 to 2024, almost entirely because workers will choose to supply less labor.” The reason for the reduction in the supply of labor is that the provisions of the ACA reduce the incentive to work for certain subsets of the population.

For example, under the ACA, health insurance subsidies are provided to some people with low income and are phased out as their income rises; as a result, a portion of the added income from working more would be offset by a loss of some or all of the subsidies, which represents an implicit tax on earnings. Also, the ACA’s subsidies effectively boost the income of recipients, which will lead some of them to decide they can work less and still maintain or improve their standard of living. Therefore, some people will decide not to work or to work fewer hours than would otherwise be the case—including some people who will choose to retire earlier than they would have otherwise, and some people who will work less themselves and rely more on a spouse’s earnings. (Many other factors influence decisions about working, including, for example, income and payroll taxes and the cost of commuting and child care. Moreover, under current economic conditions, a substantial number of people who would like to work cannot find a job.)

Because the longer-term reduction in work is expected to come almost entirely from a decline in the amount of labor that workers choose to supply in response to the changes in their incentives, we do not think it is accurate to say that the reduction stems from people “losing” their jobs.

Here’s a useful way to think about the choice of wording: When firms do not have enough business and decide to lay people off, the people who are laid off are generally worse off and are therefore unhappy about what is happening. As a result, other people express their sympathy to those people for having “lost their jobs” due to forces beyond their control. In contrast, when the labor market is strong and people decide on their own to retire, to leave work to take care of their families, or to cut back on their hours to pursue other interests, those people presumably think they are better off (or they would not be making the voluntary choices they are making). As a result, other people are generally happy for them and do not describe them as having “lost their jobs.”

Thus, there is a critical difference between, on the one hand, people who leave a job for reasons beyond their control and, on the other hand, people who choose not to work or to work less. The wording that people use to describe those differing circumstances reflects the different reactions of the people involved. In our report, we indicated that “the estimated reduction [in employment] stems almost entirely from a net decline in the amount of labor that workers choose to supply,” so we think the language of “losing a job” does not fit.

Ultimately, we project that the number of jobs in the economy will be smaller than it would be in the absence of the ACA because some people will choose not to work at all, but CBO did not estimate the size of that change separately from the effect of people choosing to work fewer hours. We wrote in the report: “The reduction in CBO’s projections of hours worked represents a decline in the number of full-time-equivalent workers of about 2.0 million in 2017, rising to about 2.5 million in 2024 … The decline in full-time-equivalent employment stemming from the ACA will consist of some people not being employed at all and other people working fewer hours; however, CBO has not tried to quantify those two components of the overall effect.” To be clear, total employment and hours worked will increase over the coming decade, but by less than they would have in the absence of the ACA. In the next few years, as we wrote in the report, the ACA “also will affect employers’ demand for workers, … both by increasing labor costs through the employer penalty (which will reduce labor demand) and by boosting overall demand for goods and services (which will increase labor demand).”

There is a broader question as to whether the society and the economy will be better off as a result of those choices being made available. Even though the individuals making decisions to work less presumably feel that they will be happier as a result of those decisions, total employment, investment, output, and tax revenue will be smaller. (Those effects are included in CBO’s budget and economic projections under current law.) To be sure, the health insurance system in place prior to the ACA generated its own distortions to people’s work decisions, but many of the decisions to work less under the ACA will be made possible by government-funded subsidies, the burden of which will be borne largely by other people. Moreover, people’s decisions about work are also affected by taxes and benefit programs apart from those related to health insurance. Hence, whether voluntary reductions in hours worked owing to the ACA are good or bad for the country as a whole is a matter of judgment.

A tradeoff of this sort—although not necessarily of the same magnitude—is intrinsic in any effort to significantly increase health insurance coverage or to provide other types of benefits that are aimed at low-income people. As we wrote in the report: “Subsidies that help lower-income people purchase an expensive product like health insurance must be relatively large to encourage a significant proportion of eligible people to enroll. If those subsidies are phased out with rising income …, the phaseout effectively … discourage[es] work.” Again, the best way to address that tradeoff is a matter of judgment.

Q: Why Did CBO Revise its Estimates of the Labor Market Effects of the ACA?

A: The baseline economic and budgetary projections developed by CBO incorporate our estimates of the future effects of fiscal policies under current law. We update our budget and economic projections regularly to account for new information and analysis regarding federal fiscal policies and many other influences on the economy and the budget. In producing this year’s projections, one area on which we focused was the labor market, in light of both its importance and the slow growth of employment during the past several years. One aspect of that intensive examination of the labor market was a review of our previous analysis of the effects of the ACA. (Other findings from that examination are summarized in our report on the budget and economic outlook and are discussed at much greater length in the accompanying report on the labor market.)

In the summer of 2009, as health reform legislation was being debated in the Congress, we published a report titled Effects of Changes to the Health Insurance System on Labor Markets. That report did not present quantitative estimates of the effects of particular changes in health insurance, because such proposals were still in the process of being developed, but instead discussed in a qualitative manner the channels through which different sorts of health insurance changes might affect the supply of labor and demand for labor.

The ACA was enacted in March 2010, and our first quantitative analysis of the labor market effects of the legislation was conducted in the summer of 2010 as part of our regular update to our baseline economic and budgetary projections. When we published those projections in August 2010, our report included a description of our estimates of the effects of the ACA.

When we decided to focus on the labor market more intensively for this year’s projections, we undertook a more comprehensive analysis of the labor market effects of the ACA. As a result of that new analysis, we concluded that our earlier estimate had been too small. In the report, we explained that the revision to the estimate arose for several reasons: “CBO has now incorporated into its analysis additional channels through which the ACA will affect labor supply, reviewed new research about those effects, and revised upward its estimates of the responsiveness of labor supply to changes in tax rates.”

We appreciate the fact that the Congress relies on our estimates in assessing budgetary and economic policies, and we recognize that changes in those estimates can be confusing or disruptive. Therefore, we work very hard to ensure that each estimate we prepare is the best that can be provided at the time. However, sometimes new information and analysis suggests a revision to a previous estimate. In those cases, we have a responsibility to the Congress to provide an updated estimate.

Sometimes the incorporation of new information does not change our estimates very much. At other times, though, the incorporation of new information changes our estimates in significant ways. When that happens, we explain the change in our estimates publicly—for example, regarding the effectiveness of malpractice reform in reducing health care costs and the budgetary implications of raising the eligibility age for Medicare. In the case of the ACA’s effects on labor markets, new information and new analysis led to a significant change in our earlier estimate.

Q: Are You Sure That CBO’s Current Estimates of the Labor Market Effects of the ACA Are Accurate?

A: No, we are not sure that our current estimates are accurate, because our estimates are always uncertain. As we emphasized in the report: “CBO’s estimate of the ACA’s impact on labor markets is subject to substantial uncertainty, which arises in part because many of the ACA’s provisions have never been implemented on such a broad scale and in part because available estimates of many key responses vary considerably. CBO seeks to provide estimates that lie in the middle of the distribution of possible outcomes, but the actual effects could differ notably from those estimates.”

For example, if fewer people obtain subsidized insurance coverage through exchanges than we expect, then the effects of the ACA on the labor market would probably be smaller than we estimate, whereas if more people obtain subsidized coverage through exchanges, the effects on the labor market would be larger. In addition, we noted in the report that our estimates did not incorporate several potential effects of the ACA on labor markets, including possible changes in workers’ productivity and in the cost of employment-based health insurance. We did not include those effects because, given the existing evidence, we were uncertain about their direction or thought that other effects would probably operate in an offsetting way. Altogether, we view the risks that our current estimates are too large or too small as substantial—but roughly equal.