Obamacare, Plus Minimum Wage Hikes, Equals Higher Unemployment
By Don Susswein
Forbes.com
The Congressional Budget Office has generated
huge controversy with its conclusion that the
Affordable Care Act will tend to discourage work
among lower wage workers. An even bigger
controversy may be buried in their analysis of the
effect on the demand for low-wage workers. According
to the CBO, the new penalties on employers who fail
to offer health benefits “will initially reduce
employers’ demand for labor and thereby tend to
lower employment.” That sounds like a clear
warning of job losses to come. But note their
cautious use of the term “initially.” What
happens next?
The CBO explains that generalized job loss is only a
temporary problem. Why? Over time,
employer demand will stop declining because
employers will shift these new health care costs to
workers in the form of reduced cash wages. As
the CBO puts it, employers “can restrain wage growth
until workers have absorbed the cost of the
penalty.” In other words, the good news is
that the hit to lower income jobs is only temporary.
The bad news is that it will be replaced over time
over time with a hit to cash wages for lower income
workers.
But even that is not their most startling
conclusion. CBO points out that there is a
floor on cash wages—the minimum wage. By
increasing the cost of employing the lowest wage
workers—those at or near the minimum wage—the CBO
concludes that the ACA has the same negative effects
on job creation as an increase to the minimum wage.
As they put it, “Some employers will respond to the
penalty by hiring fewer people at or just above the
minimum wage—an effect that would be similar to the
impact of raising the minimum wage for those
companies’ employees.”
In addition, even with inflation gradually reducing
the real value of the minimum wage, the CBO explains
that this effect will not completely disappear over
the next 10 years. What, if anything, does
this tell us about the other huge debate going on in
Washington over income inequality, and whether
we should address it by enacting an increase to the
minimum wage?
According to the CBO analysis, we apparently just
did. By requiring all large employers to
provide a minimum amount of health care benefits the
ACA operates like a minimum wage hike. The
only difference is that it is paid in the form of
health insurance benefits rather than cash. In
fact, if you figure the cost of the employer’s share
of the mandatory health care premiums for a
full-time (2,000 hour) minimum wage worker to be
somewhere near $3,000 that will cost the employer
the same as a minimum wage increase of around $1.50
per hour. And if health care costs increase,
that cost may increase as well.
Even that small a minimum wage hike will kill at
least some jobs, according to the CBO. So if you
want more jobs, some will argue that increasing the
minimum wage may not be the best prescription,
particularly right after increasing low-wage labor
costs (in 2015 and beyond) through the ACA.
Reductions in the real value of a fixed minimum
wage, caused by inflation, may actually be a good
thing if one focuses on the impact on jobs.
Again, according to the CBO, “As inflation erodes
the value of the minimum wage [the negative effect
on job creation] is projected to decline because
fewer jobs will be constrained by the minimum wage.”
In other words, we can overcome the job-eliminating
effects of a minimum wage (or minimum benefit)
increase—but only over time as inflation reduces the
real value of the minimum wage. That may add
fuel to the fire of those who oppose a minimum wage
increase as harmful to the very people it is
intended to help—or those who argue that the ACA may
be hurting the people it was intended to help.
Whether you think it is good or bad for lower wage
workers to have a new disincentive to work, the ACA
will apparently have other clearly adverse
consequences for lower-wage workers, at least
according to the CBO. For the majority who
keep their jobs it will apparently come at a cost of
reduced cash wages. For some others – who are
currently employed at or near the current minimum
wage — it will cause their jobs to be eliminated.
Whichever side you are on, these non-partisan
conclusions of the government’s top economists
cannot be ignored.
Don Susswein served as the tax counsel to the Senate
Finance Committee, and is now a Principal in
McGladrey’s Washington National Tax practice.