How CBO Estimated the Effects of the 2025 Reconciliation Act on the Labor Supply: Working Paper 2026-06
Working Paper
CBO describes how it estimated the effects on the labor supply of provisions in the 2025 reconciliation act related to individual income taxes and the Medicaid program.
Fiscal policies can affect incentives to work by changing the resources available to people who are not working and the compensation for an additional hour of work (after accounting for taxes paid and benefits received) for people who are working. How much labor people supply in response to the work incentives under current law is reflected in the economic projections that underlie the Congressional Budget Office's baseline projections of revenues and outlays.
Provisions in Public Law 119-21, referred to here as the 2025 reconciliation act, affected the way individuals and businesses are taxed and modified federal programs. In this paper, CBO describes how the agency estimated the effects on the labor supply (or labor supply response) of provisions related to individual income taxes and the Medicaid program. To estimate the labor supply response to changes to taxes, CBO used its microsimulation tax model and estimates of labor supply elasticities from the research literature. To estimate the labor supply response to work requirements and other policies that would change enrollment in Medicaid, CBO assessed the research literature about previous Medicaid expansions and extrapolated the results to apply to people affected by the relevant policy changes in the reconciliation act. Those estimates are reflected in the agency's economic forecast that underlies its February 2026 baseline projections. In the final section of this paper, CBO outlines the types of research that could improve the way the agency models labor supply responses.
