The Burning Platform

By Diana Furchtgott-Roth

WASHINGTON (MarketWatch) — Members of the House Energy and Commerce Committee gathered on Wednesday at a hearing of the health subcommittee to discuss the effects of the Affordable Care Act on jobs.

As a witness at the hearing, chaired by Pennsylvania Republican Joe Pitts, I testified that the new law will reduce employment in America, particularly for low-skill workers, because employers face a higher cost of labor.

Whenever possible, firms will substitute high-skill for low-skill labor, part-time for full-time workers, machinery for people, and refrain from hiring a 50th worker, which can make them liable for penalties.

The basic health insurance plan required by the law is generous — and expensive — with no lifetime maximum benefit, no copayments for routine care, mandatory mental health and drug abuse coverage, and free contraceptives. These plans are more comprehensive than those provided now by many employers.

Democratic members contended that ACA would not affect hiring.

(1) Rep. Henry Waxman (D-CA) asserted that the new law doesn’t interfere with job creation, because the economy has created 6 million jobs since the passage of the Affordable Care Act. Despite warnings, we’ve seen job growth, he said.

(3) The additional cost of health insurance to employers due to the new law will raise the cost of wages by only 0.0003%, according to Linda Blumberg, an economist at the left-of-center Urban Institute who also testified at the hearing.

These arguments are troubling because they appear to show a fundamental lack of understanding about the effects of the law and how firms make hiring decisions.

True, 5.6 million jobs have been created since ACA was signed in early 2010. That’s only 155,000 jobs a month, on average, barely enough to keep up with population growth.

Despite February’s strong job creation numbers, with 246,000 private-sector jobs created, the recovery has been weak. The economy has almost 3 million fewer nonfarm payroll jobs than at the start of the recession, in December 2007. The unemployment rate, 7.7%, is over two percentage points higher than the administration projected in January 2009, when President Obama proposed the stimulus.

The labor force participation rate, at 63.5%, is the same as September 1981, at the beginning of the decade when 11 million women moved into the labor force, before the start of the Reagan Revolution. This is the weakest jobs recovery since the Great Depression. It does not prove that ACA has no effect on hiring. If anything, it shows the opposite.

Then, consider Rep. Pallone’s point that under ACA everyone will be insured, lowering the cost of health care, benefitting firms.

First, not everyone will choose to be insured. Some, especially younger, healthy adults, will choose to pay the tax and skip the insurance. With a tax of $95 in 2014, $325 in 2015, and $695 in 2016 and thereafter, this makes a tempting alternative to CBO’s estimated $20,000 insurance premiums for a family plan in 2016. It’s especially attractive because under the ACA people can sign up for insurance during the open enrollment period. So why not skip insurance until you get sick, or until you get old and more likely to be sick?

These two groups of people will end up in emergency rooms and community centers for their care. CBO estimates that in 2014 there will be 44 million uninsured, and when ACA is fully phased in, in 2023, there will still be 30 million people uninsured.

Blumberg estimates that “the incremental costs to employers of increased employer-sponsored insurance coverage and employer penalties are very small relative to current compensation — with the 2.7% increase in employer-sponsored coverage coming at a cost equal to 0.0003% of total wages.”

One reason that covering a larger number of people with a more generous plan will have little effect, she said, is because employers will pay lower wages to make up for higher costs of benefits. What she didn’t say is that this will leave less cash to spend on other things.

Lowering wages to incorporate the cost of insurance or a fine is harder for firms that employ low-skill workers. The $2,000 penalty will amount to 11%t of average annual earnings in the food and beverage industry and 9% in retail trade, jobs with low-skill minimum wage employees.

Not to worry, said Blumberg, paying more for health care and insurance means that more jobs are created in the United States. Here’s why: health care jobs are local, but people’s consumption generally includes imports. So if people have to spend more on health care, that raises local employment — and the only losers are the Chinese manufacturers who don’t get as much business.

The primary issue is whether people are free to spend their money to buy the goods and services they prefer, or whether they are compelled to purchase a different package of services. Because of substantial regulation, the price of health care is much higher than it would be in a competitive market.

The fact that health care is built on American labor is hardly comforting. If firms had to provide their employees with food and housing, also made in America, they would clearly hire fewer of them. The same goes for the provision of health insurance.