Econ 101 is Wrong!

At least according to Matthew Yglesias of Slate Magazine.

The myriad rules and regulations of Obamacare include one rule in particular that's caused a stir among some employers - that employers with 50 or more workers must offer health insurance to those working full-time. Common sense tells us that this will increase costs for employers - covering a larger number of workers necessarily costs more than covering a smaller number.

And some employers have been more vocal about the impact than others - Papa John's CEO John Schnatter riled against the healthcare law, claiming that it would raise costs between 11 and 14 cents per pizza. More recently, a Denny's franchise owner announced that he would be adding a 5 percent surcharge to customers' bills. Other businesses have taken more creative approaches, like that of Darden restaurants, which is shifting many of its workers to part-time to avoid the mandate.

To make a long-story short, the impact of the law is very real. Companies will face higher operating expenses under Obamacare, and will react by passing on the costs to customers when possible, or by creatively changing their hiring policies (indirectly shifting costs to employees in the form of fewer hours, and therefore lower wages).

Yglesias seems to think that this is all being blown out of proportion, arguing that

[I]f there was ever a time when firms were prepared to eat higher costs because of reduced profits that time is today.  

Yglesias is correct that corporate after-tax profits are at a record high, but this only tells part of the story. Though Yglesias makes a valiant attempt to show that businesses are in good shape while workers are suffering from low-wages, his point falls a little flat. (Yglesias uses the variable "Labor's Share of Income in the Nonfarm Business Sector," which has been critiqued in a 2004 paper published by the Cleveland Fed.)


Note: Red Line is Labor Share; Green Line is Real Compensation Per Hour, Blue Line is Unit Labor Cost

Graph and data available at:

For starters, real hourly labor compensation as well as unit labor costs (which themselves are strong proxies of labor compensation) have increasing as well and are both close to all-time highs. More importantly, compensation includes employer contribution to pension plans, health insurance etc.

Yglesias' solution to the problem of increasing business' labor cost? Deny, deny, deny. Arguing that there is no "problem," he instead claims that businesses are merely politicizing their decisions to make more money, likening it to a business facing price shocks throughout the year.

The problem with this analogy? Price shocks are temporary, and often are accompanied by a market correction of the prices. Obamacare represents a permanent increase in the cost of hiring full-time employees for employers with 50 or more workers.

To be fair, he makes a good point that "legislative fiat" will likely not increase workers' compensation, and gains in compensation will be tied to productivity. Unfortunately, Yglesias doesn't take this idea any further.

The likely impact of trying to improve workers' livelihood through Obamacare will either be: costs being passed onto the customers; fewer hours for workers resulting in lower wages; fewer workers resulting in higher unemployment than otherwise; stagnant wages as a result of compensation being more tied in with health insurance; or some combination.

Indeed, in a paper published earlier this year, David Gamage of UC Berkeley, noted some of the perverse impacts the healthcare law would have, including that

The ACA will deter low- and moderate-income taxpayers from accepting jobs with employers that offer affordable health insurance.


The ACA will discourage many low- and moderate-income taxpayers from attempting to increase their household incomes.

These are impacts that Yglesias is oddly sanguine about, despite his concern for the plight of the worker.

Ultimately, businesses respond to increases in cost, and businesses are now telling us how they will respond to Obamacare's increases. We can ignore them or we can listen, but the reality is that the mandate will comes with a slew of undesirable effects. 

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Rhetoric and Reality—The Obamacare Evaluation Project: Cost
by Paul Howard, Yevgeniy Feyman, March 2013

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