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.