What Obama Is Doing to the Labor Market
A version of this originally appeared at Forbes.
President Obama’s proposal to increase the minimum wage and the health insurance employer mandate will combine to destroy job opportunities for young, unskilled workers in cities and towns across the country.
The minimum wage, currently set at $7.25 an hour, will jump to $9 an hour and be indexed going forward if the president gets his way. The Affordable Care Act (ObamaCare) is already the law of the land and its effects are being felt right now, even though the employer mandate doesn’t go into effect until next January.
With respect to the new health law, the Congressional Budget Office estimates the cost of the minimum benefit package that everyone will be required to have will be $4,750 for individuals and $12,250 for families. That translates into a minimum health benefit of $2.28 an hour for full time single workers and about $3 an hour for someone working 30 hour a week. For family coverage, the cost is $5.89 an hour for a 40-hour-a week employee and $7.85 an hour for a 30-hour-a-week employee.
These are not small changes. They can double the cost of labor in some cases.
Heigh ho, heigh ho
It’s off to work we go.
The law does not specify how much of the premium must be paid by the employer versus the employee — other than a government requirement that the employee’s share cannot exceed 9.5% of wages for low- and moderate-income workers and an industry rule of thumb that employers must pick up at least 50 percent of the tab. But the economic effects are the same, regardless of who writes the checks.
Employers have four ways to reduce this burden: (1) the mandate doesn’t apply to firms with fewer than 50 workers, (2) the mandate doesn’t apply to employees who work fewer than 30 hours, (3) the employer doesn’t have to offer or subsidize family coverage and (4) rather than provide health insurance, the employer can pay a $2,000 per (full-time) worker fine.
There are going to be lots of firms that fail to grow beyond 49 employees. But be warned: If an individual owns, say, two or three fast food franchises, the IRS has signaled that it will treat their combined operations as a single business. Also, in calculating the number of full time workers, the IRS is going to count “full-time equivalents.” That means that two workers, each working 15 hours a week, will count as the equivalent of one full-time (30 hour) worker.
As noted, employers are already reacting to ObamaCare. In fact, there was a huge shift to part-time employment in the fast food industry beginning in January. The reason: ObamaCare will employ a 12 month “look back.” That is, in deciding whether a worker is full-time or part-time next January (when the mandate becomes effective) the government will look at the average weekly hours worked in the previous year.
One fast food restaurant owner I talked with (owning 100 franchises) told me that the average work week for their employees has been reduced to 25 hours this year — compared to 38 hours last year.
Employees may be able to work part-time at two different restaurants — both of which avoid the mandate by switching to part-time labor. On the other hand, they may just choose to work fewer hours. The reason: When the effects of the tax law are added to the effects of ObamaCare, a moderate income family will face a 41 percent marginal tax rate.
As a Wall Street Journal editorial calculated the other day, letting part-time workers work more hours can be expensive. If a 29 hour-a-week employee works one more hour for 50 weeks that will trigger a $2,000 fine. Dividing the fine by the additional hours of work, that works out to a $40 an hour penalty.
Bottom line: employment opportunities are being curtailed by the imposition of ObamaCare. Things will be even worse if a 24 percent increase in the cash minimum wage is heaped on top of it.
Economists have traditionally believed that an increase in the minimum wage (as well as mandated benefits) causes unemployment. However, a study by David Card and Alan Krueger found very little employment effect in the fast food industry in Pennsylvania and New Jersey.
You wonder if economists ever talk to employers when they do these studies, however. Because of labor law and tax law, employment in the fast food industry has already been pared to the bone. When I was young, every restaurant had waiters and waitresses who brought food to your table. This service has been priced out of the market in fast food by past increases in the minimum wage, however. Fast food restaurants are getting by with the absolute minimum amount of labor they need to supply their products.
If government imposes higher labor costs on this industry, the restaurants will try to make it up by raising their prices. However, if the customers won’t pay the higher price — as may be the case in poorer neighborhoods — the restaurant will have to close.
Moreover, in order for prices to rise in one market there must be a corresponding decline in other markets. For the economy as a whole, employers can’t raise prices on the average with no change in the money supply.
Like the dwarfs.
John,
Thank you for doing the math. Your insights are greatly appreciated!
I have three part-time jobs at the moment: 26 hours, 11 hours, and 8 hours per week.
I have a graduate degree. Is this what I’m to expect from life?
Very insightful post.
Since most developed countries do have a national minimum wage law, and since most first world nations have a higher minimum wage than the United States, and since a reliable number economist have been incorrectly prophesying the ‘End of Capitalism’ with each and every minimum wage increase that has come along … I think we can be fairly comfortable that life will continue if Congress sees fit to raise the minimum wage to at least poverty level.
With respect to your sensationalized, yet irrelevant, ‘marginal’ tax rate, I think you will find that under current tax law, most families of four making $50,000 per year have a ‘O%’ effective (actual) federal tax liability.
You also are remiss in mentioning that with Obamacare’s cost sharing and credit programs, the amount of out of pocket health care costs for the majority of middle income families will go down or remain relatively unchanged from what they currently pay in the open market.
Finally, as far as Obamacare’s effect on the national budget, the last CBO report that I reviewed still reduced the deficit by nearly $200 billion. If we are to embrace responsible federal spending … and more responsible health care providers and services … then we need to get on board with Obamacare.
John,
Your terrific post on ObamaCare’s changes to the labor market gives the Card/Krueger fast food study more deference than I believe it deserves.
While it was a creative approach, they just asked managers whether they had hired additional people. They didn’t look at whether the minimum wage increase changed hours worked. Subsequent studies looked at hours worked and found that they fell, supporting the theory. The oversight was understandable as people in salaried positions often don’t understand that people in hourly positions frequently have to struggle for enough hours.
For reference, here is a backgrounder that I wrote in 2006 for the political debate over putting minimum wages increases into the Colorado Constitution. It has a brief literature survey that specifically covers the responses to the Card/Kreuger study (middle of page 2).
The employment effect from more than a decade worth of detrimental policies are and will still be felt. Seems like the new health care law isn’t going to help in this regard either. Hopefully things change.
I’ve read conflicting reports backing up polar opposite views on the economic effects that raising the minimun wage has on the labor market. I don’t think that a slight raise will be all that detrimental and I think there are bigger concerns in our current policies and politics at the moment than this debate.
John, I think there is one factual error in your piece. Large employers do have to offer coverage to an employee’s dependents — or face the $2K fine/FT employee (minus 30). [If I’m wrong, someone please correct me. Thanks]
John, thank you for your continued advocacy. I urge you to also examine how the service industry businesses (restaurants, retail, hotels,etc)are disproportionally harmed by these mandates. A profit per employee metric really illustrates this–Exxon Mobil, Microsoft, Google, are have a PPE over $300,000 whereas, McDonalds, Burger King, Chiilis,and others are all under $5,000! I chair the PPE Coalition, http://www.profitperemployee.org. I would be happy to discuss further.
Im appalled by the inability of President Obama to adequitely put together policies that benefit young people, and the job market.
The mandate to cover dependents applies only to dependent children (up to age 26!), not to spouses.
Dependent coverage is not subject to affordability requirements. It must be offered, but it doesn’t have to be affordable.
Al Baun your theories would have merit, but for the fact that they prevent those with the least skills from getting a job and learning a skill. At the same time you are protecting those that are already better off in society relieving them of the competition they would otherwise face when applying for a job. Finally you are raising prices and that same deprived group is the least likely to be able to afford the increased price.
What do you have against those low skilled people?
And they will discourage marriage and family formation.
To Linda Gorman, thanks for clarifying the law! Do you know why spouses, for this ‘tax purpose,’ are not considered dependents? Or why, in terms of legislative history, dependent coverage was not subject to the affordability test? Thanks, Harry Cain
Al, (Great name) consider this.
[Point 1] If a business requires 1000 labor hours per week to operate, and the minimum wage increases to $9/hr., the business still requires 1000 labor hours to operate. Meaning, that unless there is a decrease in demand (which is speculation on your behalf)then, through attrition, job availability would be unaffected.
[Point 2] Your second assertion is predicated on the same speculation that the ‘low skill’ jobs would be negatively affected. I also don’t think that those “better off” in society are in the same labor pool as the “low skill” pool, therefore, no competition.
[Point 3] If the “low skill” pool gets their wage increase, it will be more than enough to offset the costs of goods they consume. Your using the Carnege psychology that ‘If I give you more money, you’ll just spend it on foolish things’.
You are aware that several states already have higher minimum wages than the Feds and many, many employers see fit start their “low skill” employees at higher wages also. Check into the Costco story.
Al Baun, competition occurs at all levels even the lower skilled levels especially amongst the young whether going on to higher education or not. We have very high young minority unemployment and the policy you so desire only makes it worse for the unskilled minorities so they may never have a chance to enter the job market and learn a skill. Your policies are not raising their incomes to afford higher priced goods which if were the case would at best be a wash. Your policies are depriving these young disadvantaged people the ability to enter mainstream society.
I am not sure what you are referring to with regard to Costco, but of the three Costco’s I go to I note that those coming from areas that have the least skills are poorly represented.
Your calculations leave out one important factor. Because the tax penalty for having a “Golden ” healthcare plan is based on any plan exceeding $8000 (?amt) the base family plan that costs $12,250 is automatically a “Golden” plan because Obamacare does not differntiate between lone coverage by the employee and family coverage for the rest of the employee’s family.
To Al Baun;
“If we are to embrace responsible federal spending … and more responsible health care providers and services”
I resent your insinuation that by reining in spending by health care providers the country can see a siginificant reduction in healthcare costs. Physician reimbursement from Medicare/Medicaid consitutes 8% of the total. That leaves 92% to admin, hospitals, pharma, medical equipment producers, etc. All of which have been granted a 5 year extension from financial controls by Obamacare beginning in 2014.
That leaves we physicians (the 8%ers) to be totally responsible for reining in the costs.
In addition, the general patient population could care less about healthcare. They want to live their lives the way they want to live them and have the medical community be responsible to control their disease; as evidenced by the soaring obesity rate in this country.
Until the general population accepts responsibility for a healthy lifestyle and works to live a healthier life no amount of chastising by the lay experts will have any effect on reducing the cost of healthcare in the USA.
Dr. Tom, I apologize for using the incorrect term ‘providers’ when i meant insurers. I would expect that providers (hospitals and doctors) would be pleased that their customers will all be insured now under Obamacare. Congratulations and thank you.
Next, I resent your implications that all people (patients) are fat, lazy, and dependant on the medical industry. Yes, you may now apologize and restate your characterization.
Finally, There is an Excise tax on ‘Cadillac’ insurance programs for policies starting at $11,850 for single and $30,950 for families. No impact from Obamacare required policies, sorry.
Al: We seem to be at an impasse as to whether entry level “low skill” laborers should keep pace with the national poverty level. We will have to see if Congress will peel that extra dime, for your Quarter Pounder, from you warm greasy fingers.
Ok now, let’s do a little math: anticipated new insured (30 million) with Obamacare at 4,750 each. This is about $140 billion annually, not to mention the cost of the exchanges. Considering that there is nothing in the ACA 2010 to improve the efficiency of our healthcare industry, its time to prepare for severe austerity.
Al Baum writes: “Al: We seem to be at an impasse as to whether entry level “low skill” laborers should keep pace with the national poverty level. We will have to see if Congress will peel that extra dime, for your Quarter Pounder, from you warm greasy fingers.”
Al Baum, we are not at an impasse. It is the “low skill” laborer that is at the impasse. The textile workers of the northeast wanted protection from the lower wage black worker of the south. A little grease to the palms and that was done in the form of the minimum wage. Now we hear the same call to make sure the “low skill” worker never gets the chance to develop skills by seeing to it that his skills are never worth the minimum wage.
The law does not specify how much of the premium must be paid by the employer versus the employee — other than a government requirement that the employee’s share cannot exceed 9.5% of wages for low-
Tax incidence. Every economist that I have read on the subject says that the employee pays the matching FICA in lower wages so I would expect that the employee will in the long run end up paying the full amount of the health insurance.
That implies that this the administration attempting to deceive, and quite successfully I might add.
@Al Baun I respect your point of view and it makes some logical sense but considering Tax Incidence why would ACA requite that the employee’s share of insurance costs not exceed 9.5% of wages and why exempt the employers with fewer than 50 employees and why exempt employees working less that 30 hours?
To me such rules make me feel like I am being scammed. If the employee will pay in the long run why try to hide that by making the employer no show it in the wage stub? If it is important enough to require employers to pay for health insurance why exempt some employers?
And why should the costs of providing for healthcare fall in the short run on employers of low wage employees and in the long run consumers who buy products produced by low wage employees rather than on all taxpayers.
Floccina, I’ll try to answer questions from both of your posts.
* Currently, each state sets it’s own requirements as to how much an employer with group coverage must match. Obamacare will not impact existing policies, other than to make them meet minimum benefits and preventive care requirements.
* Small companies with fewer than 50 employees can qualify for Federal credits if they do pay 100% of their employee’s premium costs.
* If someone is not in an employer’s group plan, is not on Medicaid, Medicare, or other group plan … then they can apply for group coverage under the new State Exchanges, of which, and depending on their income, their premiums will not exceed 9.5% of their income. The rest of the premium, if any, will be supplied to the insurer by the treasury dept. under Obamacare.
Since FICA (SS & Medicare) has nothing to do with health care insurance premiums, an economist’s supposition that employers would pass savings on, dollar for dollar, to the employees if they didn’t have to match it … is delusional.
Employers with fewer than 50 employees are exempt from the federal penalty if they do not provide insurance for their employees. This, in conjunction with credits, is designed to mitigate stress on small operations.
Employers with more than 50 employees are subject to a $2000 penalty per FTE if they do not provide minimal coverage to those employees. Dropping employees to, or below, 30 hours per week will not preclude the employer from paying this penalty. It is computed on total employee hours divided by 40. This, along with other tax benefits, provides encouragement for large employers to provide health care benefits to their employees.
I suppose the message is that participation in the health care system is commensurate with the size and success of the employer. This is a progressive approach … much like our tax system.
Please feel free to contact me to receive accurate information. First of all the article was completely based on information that was rudimentary at best and just ignorant in general.
I have to wonder if you have a mental handicap referencing information published four years ago in substantiating your argument.
Second of all there are several techniques for qualifying FTE’s. The look-back period is one method, the other is calculated by looking at the aggregate hours of all employees(except for seasonal, most short term staffing arrangement’s, and “leased” employees). So if a business employees three shifts of separate part time employees just to do the work of the business from 9-5 Monday-Friday if the combined hours of these part time workers was more then 1,200 (not a precise number because a full time position is technically recorded as 30 hours a week, but any further specifics email me) hours a week then they would be considered a large business with 50 or more full time equivalents.
Also businesses can not be split up, that owner of those franchises would be most defiantly classified as a large business.
and I quote the Federal Register. vol 78, #1 01/02/2013-
“regulations clarify that for a calendar year during which an employer is an applicable large employer, the section 4980H standards generally are applied separately to each person that is a member of the controlled group comprising the employer (with each such person referred to as an applicable large employer member) in determining liability for, and the amount of, any assessable payment. For example, if an applicable large employer is comprised of a parent corporation and 10 wholly owned subsidiary corporations, each of the 11 corporations, regardless of the number of employees, is an applicable large employer member. For a discussion of the related information reporting requirements for applicable large employer members under section 6056, see section VII of this preamble…”
and yes employers must health plans must cover dependents, a individual’s spouse may elect to enroll in their employer’s health plan instead-which would bring neither employer any penalties. That is assuming that both employers were offering plans with MEC (minimum essential coverage) as to “qualify” them and that any dependent children were covered by either of the employers.
You lack such a fundamental understanding that I could go on about health care market pricing and the macro and micro economic factors that have driven healthcare prices and the logic behind how PPACA attempts to address those issues, but I have a feeling it would be a exercise in futility.
-Christopher J. Lawrence
Email- Christopher@Lawrence-Financial-Consulting.com
@Christopher
Thanks for the information. Please correct any mistake, misinterpretation, or misleading this post does.
Most of the readers of this post do not realize that the core concepts of the PPACA have been in the works for over a decade. Members of Congress had access to the various proposals for two years prior to final passage, and had much input into the final law. I noticed something as i grew up, that bashing the current President was a sport for Americans. So too is bashing legislation under their watch. “Forgive them, for they know not what they do” and will eventually realize that this program is in the best interest of the Nation
.
The implementation of such a major correction in the health care market is always going to be controversial, and will inherently fall short in correcting the majority of goals it incorporates into the scope.
I remain politically neutral, such heated discussions could very easily damage possible client relations. However I will say that the best thing that the PPACA legislature has done is force employers to reevaluate their systems by which they deliver their employees compensation through.
Employers are taking far more proactive measures in seeking out the solutions that will fit their organizational structure and optimize the structuring. I have seem a significant change in how benefits, and wages,are prioritized by business owners/ corporate officers today. There is always a equilibrium in the economics of minimizing employer expense and maximizing employee value. However such intricacies in such a technical profession require professional consulting to find that balance.
If you just factor that benefit along with a more ideal environment of risk pooling and we are on our way to economic improvement.