Unbiased Analysis of Today's Healthcare Issues

How did the Affordable Care Act affect the U.S. labor supply?

Written By: Jason Shafrin - Jan• 01•18

The Affordable Care Act (ACA) aimed to increase health insurance coverage largely through two pathways: (i) raising the income limits for individuals to qualify for Medicaid, (ii) creating new health insurance exchanges and health insurance subsidies to encourage the purchase of private health insurance among individuals that were not eligible for Medicaid.  Other provisions, such as the health insurance mandate, clearly also had an impact on coverage.  One study found that 19.2 million non-elderly individuals gained health insurance coverage as a result of ACA between 2010 to 2015.

A separate question is whether the increased insurance generosity increased or decreased individual labor supply.  On the one hand, the ACA may reduce the labor supply.  Reducing one’s income increases the likelihood of qualifying for Medicaid.  Also, within the exchanges, the subsidies are decline with income and thus additional income is in essence taxed at a higher rate (through subsidy reduction), thus discouraging work.  Additionally, the Medicaid expansion and subsidies are transfers and in essence increase individual wealth.  Since leisure is desirable, people may decide to work less if it is easier to purchase insurance after the ACA.  On the other hand, people may place more value on private health insurance relative to Medicaid.  If the private health insurance becomes more affordable with the subsidies, people may want to work more to be able to afford to purchase private insurance.

An NBER working paper by Mark Duggan, Gopi Shah Goda, Emilie Jackson (2017) aim to determine how the ACA affected labor supply. They use variation in whether states expanded Medicaid to conduct a difference-in-difference analysis using data from the American Community Survey (ACS). They find that:

…the average labor supply effects of the ACA were close to zero but that this average masks important heterogeneity in its effects. More specifically, we find that in areas with a high share uninsured and eligible for private insurance subsidies, labor force participation fell significantly. In contrast, in areas with a high share uninsured but with incomes too low to qualify for private insurance subsidies, labor force participation increased significantly. These changes suggest that middle-income individuals reduced their labor supply due to the additional tax on earnings while lower income individuals worked more in order to qualify for private insurance. In the aggregate, these countervailing effects approximately balance.

An important question since although expanding health insurance likely increases utility for those who now gain coverage, when measuring the societal benefit we must not only take into account the deadweight loss from the additional taxation needed to fund the system, but also how labor supply response to the changing health insurance market.

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