Affordable Care Act
1. Your task in this question is to evaluate the effects of the Affordable Care Act, designed to increase coverage to 32 million Americans, on the labor market. Specifically, your task is to evaluate each component below and identify, first, what effect the policy will have on employment and wages, and second, whether those effects are efficient or not, using our usual definition of efficiency. This question is about efficiency, not redistribution. What this means is that you do not have to decide if the subsidies are a good idea or not.
In order to evaluate the effects of the Affordable Care Act on the labor market, it is important to evaluate each individual component and determine whether those effects are efficient or not. The Individual Mandate, requires that everyone must purchase insurance or face a $325 per person annual fine (or 2% of income). However, there are some exceptions for low-income people. While it’s called a mandate, the federal government cannot force anyone to purchase insurance, instead the government relies on a tax penalty at the end of the year for not having coverage. It is possible that the costs of insurance might be higher than the penalty; but in doing so, health insurance would be forgone which provides financial benefits. The effect that the individual mandate will have on employment and wages will depended on the individual. If the person is a low-income individual, with no pre-existing medical condition, he/she might be better off opting out of medical coverage. However, if the individual has a pre-existing condition he/she might value more the low-income exceptions than being employed. These loops holes create inefficiencies that affect employment and wages directly. On one hand, the supply of workforce for the low-income segment will drop. In order to bring the supply of low-income workers back up, wages will have to rise as the employees demand higher wages to pay for health insurance premiums, thus reducing the number of additional employees firms are able to hire.
Employer Mandate, requires that every company with more than 50 employees must provide health insurance or pay a $2,000 fine per worker. The implications of mandating a small company to provide insurance for having 50 or more employees directly affects employment. Under this mandate a company with 49 employees must decide whether to hire an additional employee, and provide all employees health insurance or not to hire that additional employee, and avoid the health insurance requirement. Most often than not, the company will choose the latter. This affects the growth of employment and creates inefficiencies in the labor market as qualified individuals are denied the opportunity to contribute to society. As for wages, if small companies are forced to provide health insurance, wages will drop as the company will use the benefit as a form of compensation.
Insurance Reforms, forbids insurance companies from denying insurance coverage to anyone with pre-existing conditions. Under the Affordable Care Act individuals with chronic conditions can receive the care needed at lower premiums than before. Not having to work and still receive health coverage directly affects the labor market efficiency. However, given the individual’s condition, one could potentially assume that person is not able to contribute to the labor market even if insurance is not provided by the government. On the other hand, this benefit could be seen as adding efficiency to the labor market. By providing health insurance to the individual, he/she can eventually get healthy and contribute to the labor market. As the able workers return to the labor market, wages will decrease as workforce supply increases.
Health Insurance Exchange, uninsured and self-employed workers are able to purchase insurance through state base exchanges with subsidies available to individuals and families with income between the 133 percent and 400 percent of poverty level. The Affordable Care Act has made self-employment and entrepreneurship easier to pursue thanks to guaranteed-issue coverage, premium subsidies and Medicaid. The Affordable Care Act adds efficiencies to the labor market as it helps to create new jobs that could potentially flourish to create additional jobs. The addition of new jobs to the labor market will demand more workers; if the supply of workforce is low, wages will increase.
Paying for the Plan, the Medicare Payroll Tax was expanded to include unearned income. That is a 3.8 percent tax on investment income for families making more than $250,000 per year. Insurance companies pay a 40 percent excise tax on the so-called “Cadillac” high-end insurance plans worth over $27,500 for families ($10,200 for individuals). Dental and vision plans are exempt and are not counted in the total cost of a family’s plan. For the families making over $250,000, the Medicare Payroll Tax makes it more susceptible that one of the two head of households stops working or takes a part-time job to avoid the tax, thus adding inefficiency to the labor market. For many employers, the excise tax has forced them to reassess and adjust health care plans offered to employees. The tax reduces health care spending, but it also reduces the value of health care plans for certain employers. The low value offered by these health insurances could potentially push employees to stop working and seek a better alternative through the state-based exchanges. Thus, the potential exit of employees from the workforce adds inefficiency to the labor market. Wages will decrease for the companies offering high-end insurance; the benefit will be scarce and more valuable for employees than cash.