The Affordable Care Act (ACA), while aiming to expand health insurance coverage, has inadvertently introduced significant disincentives to full-time employment in the United States. These disincentives, stemming from the very benefits the ACA provides, are reshaping the labor market and pushing a considerable portion of the workforce towards Care Work Part Time arrangements. A recent study by the Mercatus Center at George Mason University sheds light on the extent of this impact, revealing that the ACA’s influence on reducing overall employment is nearly double previous projections. This shift towards reduced weekly work hours could lead to approximately 4 million fewer full-time-equivalent workers, marking a profound change in the American work landscape.
This analysis indicates that the ACA’s tax effects bear a resemblance to unemployment insurance, as both can inadvertently encourage layoffs and deter individuals from returning to full-time positions. However, the ACA’s comprehensive impact on employment is arguably more substantial than any single piece of legislation since World War II, primarily due to the creation of strong financial incentives to opt for part-time work. The structure of health subsidies under the ACA places millions of workers in a position where working part time, defined as 29 hours or fewer per week according to ACA standards, can actually result in higher disposable income compared to maintaining a traditional full-time schedule.
The predicted reduction in weekly employment due to these ACA-induced disincentives is estimated to be around 3 percent, translating to roughly 4 million fewer full-time-equivalent workers. This aggregate effect is a direct consequence of the law’s employment disincentives and surpasses previous estimations by the Congressional Budget Office by nearly twofold. Alarmingly, almost half of American workers are projected to be directly affected by at least one of the ACA’s employment taxes, and this figure does not even account for the broader, indirect effects as the labor market adapts to these new realities. Notably, the ACA is expected to disproportionately push women into part-time work arrangements. This is because a larger proportion of women are employed just above the 30-hour threshold per week, making them more susceptible to reducing their hours to part-time to maximize benefits under the ACA.
The Distortion of the Workweek: ACA’s Tax-Like Disincentives
The core issue lies in the ACA subsidies creating disincentives that function effectively as taxes on employment. These provisions inadvertently penalize full-time work while incentivizing reduced hours, leading to significant distortions in the typical American workweek.
Key ACA Provisions Creating Disincentives to Work
Several specific provisions within the ACA contribute to these work disincentives:
- Employer Mandate Penalty: The ACA imposes a substantial $2,000 penalty per full-time employee on large employers (generally those with 50 or more workers) who fail to offer health insurance. Due to unfavorable tax treatment, this penalty effectively becomes a $3,000 employment tax, creating a significant financial pressure that can lead to a reduction in full-time employment offerings.
- Subsidy Denial for Full-Time Workers with “Affordable” Employer Coverage: The ACA denies health insurance subsidies to full-time workers and their families if their employer offers coverage deemed “affordable,” regardless of whether the employee chooses to enroll in it. However, these same workers would qualify for significant insurance subsidies by reducing their weekly work hours to part time. This creates an implicit tax, diminishing the financial advantage of full-time employment and making care work part time or other part-time roles more attractive financially.
- Phased-Out Subsidies with Increased Income: The ACA gradually phases out health insurance subsidies as workers’ income increases. This phasing out mechanism compounds the already complex federal and state tax liabilities workers face as they earn more income, further disincentivizing additional work hours and higher earnings.
The Incentive to Reduce Work Hours Below Full Time
The combined effect of these provisions is that the ACA can place millions of Americans in a situation where working part time actually yields a higher net disposable income than working full time. This counterintuitive outcome arises because the ACA’s substantial assistance for part-time workers, covering health insurance premiums and out-of-pocket expenses, can effectively offset a large portion of the income they forgo by working fewer hours. The absence of this equivalent insurance assistance for full-time workers essentially functions as a tax on full-time employment.
Consider two hypothetical workers, each representing the same hourly labor cost to their employer. One works full time (40 hours per week), while the other works part time (29 hours per week). The full-time worker receives a partial employer subsidy for health insurance in addition to their salary. The part-time worker, while having lower total compensation due to fewer hours and no employer-sponsored health insurance, becomes eligible for government-subsidized health insurance through the ACA’s exchange. After factoring in taxes, health expenses, and work-related expenses such as childcare and commuting, the part-time worker can surprisingly end up with a higher annual net income than their full-time counterpart. This scenario highlights the powerful financial incentive the ACA creates for individuals to reduce their work hours and potentially pursue care work part time opportunities or other flexible work arrangements.
The Prevalence and Magnitude of the ACA’s New Taxes
The impact of these ACA-induced taxes on work incentives is far-reaching, affecting a significant portion of the American workforce.
- Widespread Impact: Nearly half of the workforce is expected to experience significant shifts in their work incentives due to the ACA’s provisions.
- Subsidy Cliff Effect: For a substantial 20 percent of the labor force—approximately 33 million workers—their family’s eligibility for exchange subsidies is entirely dependent on their employment status. In any month they work part time or not at all, they can access subsidized coverage. Conversely, in any month they work full time, they lose eligibility for these subsidies. This group would need to work an average of 5.5 additional hours per week simply to compensate for the subsidies they forgo by working full time, making care work part time and other reduced-hour options financially appealing.
- Implicit Income Tax from Employer Penalty: Due to the penalty imposed on employers who do not offer health insurance, 5 percent of the workforce effectively faces a new implicit income tax. These workers, who are then left to obtain coverage from the ACA exchanges, would need to work at least four hours per week without pay just to compensate their employer for the $2,000-per-employee penalty imposed by the ACA.
- Reduced Employer Willingness to Pay: An additional 21 percent of workers employed by companies not offering coverage will find that their employers are less willing or able to offer competitive wages due to the ACA’s employer penalty. These employees would also need to work approximately four hours a week without compensation to offset the penalty burden on their employers.
Pushing Workers Towards Reduced Work Hours
The extent of the ACA’s effects is directly related to the magnitude of these newly created taxes on full-time work. The benefits offered to part-time workers under the ACA are expected to drive many individuals to reduce their weekly work hours to 29 or fewer. This effect can be summarized in the following key trends:
- Shift from Just Above Full-Time to Part-Time: Individuals who would otherwise work slightly above 30 hours per week are strongly incentivized to reduce their weekly hours to part time. This effect is particularly pronounced for those working 30–35 hours per week, as dropping to 29 hours represents a relatively small adjustment in their work schedule while unlocking significant ACA benefits. This can lead to a growth in sectors offering care work part time roles or similar flexible positions.
- Reduced Weeks Worked Per Year: Even those who continue to work full time despite the disincentives may reduce the number of weeks they work per year. By strategically reducing their work weeks, they can become eligible for subsidized coverage during their periods of reduced work, effectively leveraging the ACA system to their financial advantage. This could lead to increased seasonal or intermittent employment patterns.
- Income Tax Effects: The fundamental principle remains that income taxes, in general, tend to reduce both weekly hours worked and overall weekly employment rates. The ACA exacerbates this effect by introducing new layers of implicit and explicit taxes on full-time work.
Predictions for Work Schedules and Employment Under the ACA
Combining this analysis with historical insights from labor market behavior leads to an estimated reduction in employment and aggregate hours by slightly more than 3 percent due to the ACA, equating to approximately 4 million full-time-equivalent workers. This projection is nearly double the contraction indicated in previous studies, primarily because some earlier analyses underestimated the size and scope of the ACA’s employer penalty and did not fully account for the comprehensive range of tax effects.
- Increased Marginal Earnings Tax Rates: The ACA adds an average of 1.9 percentage points to marginal earnings tax rates. It also introduces a full-time-employment tax equivalent to 2.2 hours per week, or almost 6 percent of a standard full-time schedule. This is in addition to pre-existing non-ACA taxes and is comparable to doubling the employee Social Security payroll tax. This substantial increase in the effective tax rate on full-time work is the primary driver behind the projected 3 percent labor market contraction.
- Significant Increase in 26–29 Hour Work Weeks: It is estimated that roughly 3.6 percentage points more of the workforce will reduce their hours to 26–29 per week than would have in the absence of the ACA. This indicates a significant shift towards shorter work weeks and potentially a growth in demand for care work part time and other part-time opportunities.
- Limited Impact on Elderly Labor: The labor participation of the elderly is expected to be less affected by the ACA. This is because the Medicare program makes them ineligible for the new exchange subsidies, thereby shielding them from the implicit income and full-time-employment taxes associated with these subsidies.
- Disproportionate Impact on Women: Women, regardless of marital status, are particularly likely to reduce their hours to below 30 per week. This is because women constitute a larger percentage of the workforce currently working 30 to 35 hours, making it a less drastic adjustment for them to reduce their hours to 29 and access ACA benefits. This trend could have specific implications for female-dominated sectors and the availability of women for care work part time roles.
- Tax Sensitivity of Employment: This study’s conclusions are not based on an assumption that employment and work schedules are exceptionally sensitive to taxes in general. Instead, the results are a direct consequence of the sheer magnitude and structure of the taxes that the ACA has created, which significantly alter the financial incentives surrounding full-time versus part-time employment.
In conclusion, the Affordable Care Act, while aiming to improve healthcare access, has inadvertently created a complex web of disincentives that are reshaping the American labor market. The financial advantages it provides for care work part time and other part-time employment arrangements are driving a significant shift away from traditional full-time work, with potentially profound and long-lasting consequences for both individuals and the overall economy.
