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Obamacare Is Dampening The Job Market In 3 Principal Ways

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For most Americans, Labor Day is an opportunity to take an extra day off of work and enjoy a long weekend with family and friends. But for more than 100 million Americans, Labor Day isn’t a day off from work. That's because two-fifths of the population is either unemployed, or out of the workforce altogether. The U.S. economy is still not back on its feet, six years after the financial crisis of 2008. One big reason is Obamacare, a law that is hampering job growth in three principal ways.

Last month, the Federal Reserve Bank of New York published two surveys of regional employers—one focused on manufacturing businesses, one on service companies—and asked them how Obamacare was affecting their businesses. For 2015, 33.3 percent of service firms said Obamacare was increasing their costs “a lot,” whereas 51.2 percent of manufacturing firms said the same.

While almost no firms said they would be dropping health coverage for their workers, 16.9 percent of service firms and 21.6 percent of manufacturers said they would be reducing their workforce due to Obamacare. 21.8 and 20.5 percent, respectively, said they would be reducing wage and salary compensation. 25 and 36.4 percent, respectively, said they would be raising prices for their customers.

1. Obamacare is one of the largest tax increases in U.S. history

Over the next decade, Obamacare increases taxes by more than $1.2 trillion: one of the largest tax increases in U.S. history, and the largest in nominal dollars. The largest of these tax increases are on high-value health insurance plans (the “Cadillac” tax); a 3.8 percent surtax on investment income for high earners and businesses filing as individuals; a 0.9 percentage-point increase in the Medicare payroll tax for high earners; the individual mandate; the employer mandate; and the excise taxes on health insurance premiums, medical devices, and pharmaceuticals.

The tax on investment income is especially significant, because it affects all businesses that file their taxes as individuals. According to Ernst & Young, 54 percent of the private-sector workforce is employed in “flow-through” businesses whose income is subject to the individual income tax rate. While not all of those businesses earn enough income to be affected by the Obamacare tax, affected businesses will have to make up the difference by either hiring fewer workers, or charging higher prices for their goods and services, or both.

2. Obamacare increases the cost of employing workers

Obamacare increases the cost of labor in two ways. The first is the law’s notorious employer mandate, requiring all businesses with more than 50 full-time-equivalent employees to offer federally-certified health coverage, or pay steep fines. (For a detailed look at how the employer mandate works, go here.)

Obviously, the employer mandate is a strong incentive for small businesses to keep their workforce under 50 full-time-equivalent employees, and also to move workers from full-time to part-time jobs. In addition, some employers are increasing their investment in automation technology, like self-service checkout counters at the grocery store, in order to limit their human workforce.

Also, Obamacare includes several mandates on the type of health coverage that employers must offer. For businesses that offered cost-efficient health insurance to their workers, this will increase labor costs.

3. Obamacare’s exchange subsidies encourage many workers to drop out

If you pay unemployed people more, it becomes less economically attractive for them to seek work. Casey Mulligan of the University of Chicago has done a considerable amount of research on Obamacare’s impact on the disincentive to work, calling it “startling.” He finds that Obamacare’s subsidies are “roughly equivalent to doubling both employer and employee payroll tax rates for half of the population”; i.e., the half of the working population that is eligible for Obamacare subsidies.

Some pro-Obamacare economists have pointed to the experience of Massachusetts under Romneycare—where labor force participation was not substantially affected—as proof that Obamacare will do fine on this score. But Mulligan estimates that “the ACA will increase the national average marginal labor income tax rate about fourteen times more than the 2006 ‘Romneycare’ health reform law increased the Massachusetts average rate.”

Part of the reason for the difference is that Romneycare achieved near-universal coverage while subsidizing premiums for people with incomes up to 300 percent of the Federal Poverty Level, whereas Obamacare subsidizes those up to 400 percent of FPL.

For job growth, repeal Obamacare’s mandates and taxes

A modest effect on labor force participation due to health insurance subsidies is worth putting up with, in my opinion. Switzerland has universal coverage using a sliding scale of exchange-based subsidies, and the unemployment rate in Switzerland is merely 2.9 percent. In other words, it’s important to look at the totality of how welfare programs and tax rates disincentivize work, instead of focusing solely on health coverage.

For these reasons, in Transcending Obamacare: A Patient-Centered Plan for Near-Universal Coverage and Permanent Fiscal Solvency, I tackle the labor market problem by preserving premium subsidies for low-income individuals, while reducing the cost of hiring these workers. The plan repeals Obamacare’s individual and employer mandates; liberalizes federal insurance regulations; and repeals most of Obamacare’s tax hikes save the Cadillac tax. It would also bring the income threshold for exchange subsidies down to 317 percent of FPL, nearer to the Romneycare level, because most people above that threshold qualify for employer-sponsored coverage.

The Congressional Budget Office has estimated that by 2024, Obamacare will reduce the size of the labor force by 2.5 million full-time-equivalent workers. Then-White House press secretary Jay Carney celebrated the findings, arguing that they mean that Americans would no longer be "trapped in a job." Oh?

If Republicans take control of the Senate in 2014, this is exactly what they should focus on: making the labor market a springboard, rather than a "trap." They should chip away at the parts of Obamacare that depress hiring and economic growth, while ensuring that as many Americans as possible can afford health coverage. The Obama economy has been toughest on those at the lowest end of the scale. It’s time for the GOP to demonstrate that they can do better.

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READ AVIK’S NEW HEALTH-REFORM PLAN, Transcending Obamacare: A Patient-Centered Plan for Near-Universal Coverage and Permanent Fiscal Solvency. Follow @Avik on Twitter, Google+, and YouTube, and The Apothecary on Facebook. Or, sign up to receive a weekly e-mail digest of articles from The Apothecary.