The Affordable Care Act (ACA) (P.L. 111-148) will make the labor supply, measured as the total compensation paid to workers, 0.86 percent smaller in 2025 than it would have been without that law, according to a Congressional Budget Office (CBO) report. This will result in about a two million reduction in full-time equivalent (FTE) workers from current levels.
During the 2016–2018 period, the CBO believes that the effects of the ACA on the supply of labor will be smaller, mostly because of delays in responses to changes in law. By 2019, however, the CBO predicts that the ACA will reduce the labor supply by 0.80 percent, increasing to 0.86 percent by 2025.
The CBO’s estimate of the ACA’s effect on the labor supply by 2025 is based on following factors:
- Health insurance coverage expansions are together expected to reduce the labor supply by 0.65 percentage points. To reach the 0.65 percent reduction, the CBO estimate included the following valuations: (1) exchange subsidies, such as premium assistance credits and cost-sharing subsidies (-0.43 percent reduction); (2) rules governing health insurance, such as provisions prohibiting preexisting health conditions and restricting premiums on the basis of age (-0.17 percent reduction); and (3) an expansion of the Medicaid program (-0.05 percent reduction).
- The Medicare Hospital Insurance (HI) surtax on high income workers is expected to reduce the labor supply by 0.12 percentage points. The HI surtax raises the Medicare payroll tax by 0.9 percentage points for workers who earn more than $200,000 per year (or $250,000 for those filing a joint return).
- Other factors expected to collectively reduce the labor market by 0.10 percent include: (1) the penalty on larger employers (50 or more FTE employees) that do not offer insurance coverage (-0.06 percent); (2) the 40 percent excise tax on certain employment-based high-premium insurance plans (-0.03 percent); and (3) the penalty on certain individuals who do not obtain coverage (-0.01 percent). In 2016, for example, the individual penalty is $695 per person in a household or 2.5 percent of household income in excess of the general tax-filing threshold.
To determine the ACA’s effect on FTE employment, the CBO took its 0.86 percent reduction estimate, valued at $120 billion, and divided that number by $61,000, the estimated amount that workers affected by the ACA would earn if they worked full time for all of 2025. The result was an estimated reduction in FTE workers of about 2 million.
The CBO concedes that its estimates of the ACA’s effects on the labor supply are uncertain. This is because they are based in large part on projections of the ACA’s effects on health insurance coverage and on the federal budget, which are highly uncertain and could deviate from the agency’s estimates.