The labor market effects of the ACAs employer mandate

Entry for The American Middle Class: An Economic Encyclopedia of Progress and Poverty
By Dr. Alice Louise Kassens, Roanoke College
President Barack Obama signed the Patient Protection and Affordable Care Act (HR 3590) into law
March 23, 2010. Coupled with the Health Care and Education Reconciliation Act (HR 4872) signed seven
days later, the legislation significantly changed the health care markets with the intent of reducing
health care costs and increasing access to health care services. The two bills and related amendments
are frequently referred to as the ACA or Obamacare.
Due to the high cost of many health care services, health insurance is often vital for access to these
services. Mandates are tools utilized to expand health insurance coverage. The ACA utilizes both
individual and employer mandates. The employer mandate is a pay or play mandate, requiring firms
with 50 or more full time equivalent (FTE) employees to offer full-time employees approved health
insurance or pay a penalty. This mandate presents economic questions, particularly for the firms at the
margins of the employee and hourly thresholds. The response of firms to the employer mandate could
impact labor markets as measured by employment, the unemployment rate, hours of work, and wages
in both the short- and long-term.
How does it work?
The details of employer responsibilities, including the employer mandate, are found in Sections 15111515 of HR 3590. Changes to the legislation have been made since its signing in 2010. The details
necessary for an economic analysis are discussed here and are based upon the most recent version of
the rules.
Large firms (based on prior years data) must provide affordable health insurance with minimum value
and essential health benefits to full-time workers and their dependents or potentially pay penalties.
Minimum value requires that the insurance must pay 60% of covered health care expenses. Insurance is
considered affordable if employees pay no more than 9.56% of their family income for the coverage.
Essential benefits are defined by ten specific health care services. The law considers 30 hours per week
full time work.
Failure to offer insurance meeting the ACA requirements can result in an assessment. If an employer
does not cover at least 70% of full time workers and their dependents (95% in 2016), the monthly
penalty is $2,084 divided by 12 times the number of full-time employees minus 80 (30 in 2016.) The
penalty amount will increase by the same rate as health insurance premiums in 2016. For example,
assume a firm with 200 full-time employees fails to cover 70% of them in 2015. The firms potential
monthly assessment is $2084/12 = $173.67 times 200-80 = 120 employees, or $20,840. Over 12 months
the firm would be assessed $250,080.
The assessment for firms who do not offer coverage that is affordable or provides minimum value
depends upon the number of full-time employees who receive either a premium tax credit or costsharing subsidy. For each employee receiving such government assistance, the employers monthly
penalty is $3,126 divided by 12, but is capped at the penalty described in the paragraph above. Using

our sample firm, suppose 50 workers receive either a tax credit or subsidy. The firms monthly
assessment is $3,126/12 = $260.50 times 50, which equals $13,025. Over 12 months the firm would be
assessed $156,300. A firms decision to offer health insurance will be based upon a comparison of the
direct and indirect costs and benefits. Small firms (fewer than 50 FTE) are not required to offer health
insurance, but the ACA does provide incentives for them to do so.
The initial timeline regarding the employer mandate authorized by the ACA in 2010 has changed. The
current timeline for employer assessments is outlined below.

Firms with 100 or more FTE must cover 70% of full time workforce to avoid penalties in 2015
Firms with 50-99 FTE have until 2016 to comply
Large firms must cover 95% of full time workforce to avoid penalties in 2016

Theoretical economic impact

The employer mandate theoretically will impact labor markets in a variety of ways in the short-term,
including reduced full-time employment and hours of work. The largest potential impact on the labor
markets will be near the two thresholds created by the mandate: 1) 30 hours per week and 2) 50
employees. If possible, firms will attempt to reduce hours/employees when just above the threshold
and not add hours/employees when just below. Added workers are more likely to be part-time. Workers
hired through temporary agencies or other intermediaries could become more attractive as they are
considered an employee of the intermediary and not the firm.
The minimum wage poses an additional constraint. In 2014, the average employer cost per hour for
health benefits was $2.751. For large firms employing workers within $2.75 of the minimum wage
($7.25-$10.00/hour), the full cost of offering health insurance cannot be offset through lower wages. In
the short-term, employers can reduce employment or hours of work to avoid the added costs of
production unless they are able to raise the price of the good or service being produced. According to
CPS data, 1.3% of workers earned between $7.25 and $10.00 per hour and worked at least thirty hours
per week in 2014 which amounts to 1.1 million workers2. These workers are at risk of losing hours of
work or their job due to the minimum wage binding constraint.
Long term, wages will not rise until the marginal revenue product of workers catches up to the increased
total compensation from the added health insurance benefit. Employees earning between $7.25 and
$10.00 per hour who work 40 hours per week (the most common schedule for all workers) make
between $14,500 and $20,000 annually, which is below 200% of the federal poverty line for a single
individual. Thus, the addition of the employer mandate could have disparate effects on poor workers
and be regressive.
Minimum wage workers or not, adjusting a workforce can be expensive and is not always possible for
firms. Thus, the reduction in hours and employment will not occur for all firms. For example,
manufacturing shifts may be at capacity and a reduction in labor inputs is not possible or optimal.
Additionally, contractual agreements may prohibit such adjustments.

1
2

Bureau of Labor Statistics, Employer Costs for Employee Compensation, December 2014, Table 1.
Authors calculations using CPS data.

The long-term effects of the employer mandate are reduced wage growth and employment and
increased prices of goods and services as firms attempt to re-coup outlays from the required increase in
worker compensation. Relatively cheaper capital (which do not require health insurance coverage) may
become more attractive. Additionally, the mandate serves as an added cost of starting a large business
and may deter some from entering various markets, particularly if production is labor intensive. Finally,
the employer mandate will increase the average variable cost of production and eliminate economies of
scale over certain quantities previously available.
What has happened so far?
The actual impact of the employer mandate on the labor markets are yet to be seen due to the delays in
enforcement of the law. We can look to states that have employer mandates in place, such as
Massachusetts and Hawaii, for clues. Such comparisons must appreciate differences between the states
and the nation and the proposed laws. In Massachusetts employers offering health insurance coverage
to full-time employees increased from 63.3% to 64.6% in 20113. This increase is modest, but the
employer penalties were smaller in Massachusetts than in the ACA and the national employer coverage
rate fell from 56.3% to 51.0% the same year, likely due to recession effects. Between 1979 and 2005
employment probability and wages did not fall in Hawaii with the imposition of an employer mandate,
although there was an increased reliance on part-time workers who do not fall under the mandate4.
If the employer mandate does not increase coverage of full-time employees but adds significant costs of
production for firms, should it be maintained? Would expanding Medicaid or some other method be a
more effective way of increasing health insurance coverage? If the mandate is replaced, how will the
national budget be affected? How will revenues from the penalties be replaced? The CBO predicts that
between 2014 and 2023 revenues from the assessments will be $140 billion5. These are questions that
will likely be discussed in the coming years as the impact of the mandate is observed.

Blumberg, L., Holahan, J., & Buettgens, M. (2014, May) Why not just eliminate the employer mandate? Retrieved
from http://www.urban.org/UploadedPDF/413117-Why-Not-Just-Eliminate-the-Employer-Mandate.pdf
4
Buchmueller, T.C., DiNardo, J., & Valletta, R.G. (2009). The Effect of an Employer Health Insurance Mandate on
Health Insurance Coverage and the Demand for Labor: Evidence from Hawaii. (Working Paper No. 2009-08).
Retrieved from Federal Reserve Bank of San Francisco webpage http://www.frbsf.org/economicresearch/papers/2009/wp09-08bk.pdf
5
Congressional Budget Office. (2013, May). Effects on Health Insurance and the Federal Budget for the Insurance
Coverage Provisions in the Affordable Care ActMay 2013 Baseline. Retrieved from
http://www.cbo.gov/sites/default/files/cbofiles/attachments/44190_EffectsAffordableCareActHealthInsuranceCov
erage_2.pdf