The Affordable Care Act, Labor Supply, and Welfare

 Much attention is being paid to the effects of individual provisions of the Affordable Care Act (ACA), as well as the net effect of the law, on labor supply (e.g., job creation, workweek adjustments, other labor responses) and economic growth. This paper argues the ACA should be evaluated using the criterion of aggregate welfare, or the effects of health care reform on inefficiencies or deadweight losses throughout the economy, and not labor supply or economic growth. This paper presents estimates of the ACA’s labor supply effects previously reported in a Congressional Budget Office (CBO) working paper and converts them into welfare effects for each of the major individual provisions (encompassing health insurance coverage expansions and tax penalties). Previous estimates have found that the ACA has a small, negative effect on labor supply and this paper’s conversions of those estimates indicate that the welfare effect is even smaller, but still negative. Premium tax credits and cost-sharing subsidies for individual coverage in insurance exchanges comprise the largest single share of the labor supply and welfare effects. This paper then discusses how alternative assumptions about the general responsiveness of labor supplied by workers to compensation levels and the saliency of changes in marginal tax rates to workers could reduce, if not eliminate, the labor supply and welfare effects of certain provisions (particularly the exchange subsidies). Furthermore, this paper concludes by evaluating the ACA’s ability to address sources of welfare-reducing inefficiencies that were present in the market for health insurance before implementation of the ACA. These welfare-enhancing aspects of the ACA–to reduce job lock, provide coverage regardless of health or employment status, and redistribute income to lower-income households who might not otherwise be able to afford adequate insurance coverage–would likely outweigh the small, negative (and possibly negligible) welfare losses caused by the law’s labor supply distortions.