ACA Subsidies and Labor Market Participation

Since the passage of the Affordable Care Act (ACA) in 2010, many economists have predicted that the Act will cause a reduction in labor market participation and a recent New York Times article seemingly vindicates these expectations. The article recounts how the rapid increase in insurance premiums have led Anne Cornwell to cut her working hours, and thus her yearly income, by 30 percent in order to be eligible for health insurance subsidies. The $24,000 reduction in income allowed Ms. Cornwell and her husband to qualify for $27,000 in subsidies.

Ms. Cornwell’s reduced labor market participation supports economists’ predictions based on how the ACA determines eligibility for subsidies. Subsidies are available for people who purchase coverage from health insurance exchanges created by the ACA and whose household income is between 100 and 400 percent of the Federal Poverty Level. Economists predicted that because the subsidies are based on household income instead of individual income, second earners in many households would reduce their hours in order to qualify.

In 2014, for example, the Congressional Budget Office projected that the ACA would reduce the total number of hours worked by 1.5 to 2 percent between 2017 and 2024. In terms of full-time-equivalent workers, this represents a decline of 2.5 million workers in 2024.

It is not yet clear whether Ms. Cornwell’s decision is representative of a larger population of American workers, but her situation does coincide with economists’ findings. A recent working paper by Stanford economists Mark Duggan, Gopi Shah Goda, and Emilie Jackson—which I review in the upcoming issue of Regulation—looks at how the ACA has affected labor market participation in different regions of the United States since its implementation in 2014.

While they found no change in participation in the aggregate, this result stemmed from two offsetting trends. They found an increase in labor market participation in regions where the share of uninsured and under the poverty line was larger and a reduction in participation in areas where there was a larger number of people who were uninsured and between 139 percent and 399 percent of the poverty line. “These changes suggest that middle-income individuals reduced their labor supply due to the additional tax on earnings while lower income individuals worked more in order to qualify for private insurance.”

Ms. Cornwell’s individual reduction in labor market participation is in line with these results. While the aggregate level of labor market participation may remain the same, the reduction of participation by middle-class individuals could indicate significant losses in tax revenues and employer surplus.

Written with research assistance from David Kemp.