http://mises.org/daily/3855
Mises Daily: Thursday, November 12, 2009 by Eric M. Staib

Given the recent announcement that the government's measure of unemployment has hit 10.2 percent, and given that the official House version of Obama's healthcare plan, HR 3962, has now passed, a close examination of the effects of "Obamacare" on the labor market is important. It will be no surprise to readers of this site to learn that the Democrats' bill will seriously harm precisely those poor and uninsured citizens it is ostensibly designed to help. The harm will come by compounding mass unemployment and depriving these citizens of consumption choices.
Obamacare as Labor Tax

According to pages 269–273 of the gargantuan bill,Download PDF employers of full-time workers will be required to cover at least 72.5 percent of the premium of the least expensive health-insurance plan available that fulfills the bill's minimum criteria of "acceptable coverage." In cases in which family coverage is provided, 62.5 percent of the premium is to be borne by the employer. Depending on the specific plan and other variables such as location, this amounts to a direct labor tax of approximately $300 per month for an individual, or nearly $700 for family coverage.Download PDF

The implication of this increased cost is that workers whose revenue productivity is less than $300 per month higher than their wages will be laid off, or have their hours cut to the level that will classify them as part-time. Ignoring established labor law, the bill leaves the definition of part-time and full-time to the discretion of the Commissioner of Obama's massive new health bureaucracy. The lower the new "Health Choices Commissioner" sets the threshold in an attempt to maximize the number of people receiving the employer contribution, the more hours of production employers will have to shave off to push their employees under the threshold, and the less those workers will take home in wages each week.

Unfortunately, the bill also requires employers to cover a (smaller) percentage of the premium of the same minimum plan for part-time workers. The effects here are even worse than above, because they weaken the ability of an employer to escape the labor tax by employing his workers for fewer hours. Instead, with a labor tax on part-time workers as well, some low-productivity workers who are currently only working a few hours per week will be forced out of work entirely.
The Burden of Obamacare

We can say, as a mathematical certainty, that this labor tax is a regressive tax. Because the tax is defined as 72.5 percent of the same premium for all workers, that absolute tax will fall more heavily on workers for whom the tax represents a higher percentage of their wages or salary.

To understand this better, we will apply a $300 monthly labor tax to the differences between wages and revenue production for two different workers. If we make the simplifying assumption that a laborer is paid 99 percent of his revenue productivity, we can see that the absolute difference between productivity and wages is larger for high-income workers.

For example, a worker producing $50,000 of revenue per month will be paid $49,500 over the same period, delivering $500 in profit to his employer. A worker producing $10,000 in revenue monthly, meanwhile, will receive $9900, for a difference of only $100. Despite the differences in their absolute return, in a free economy, both laborers are profitable hires and thus employed.

In a post-Obama America, however, only the high-wage worker will be employed, leaving the low-productivity worker out of employment. When a $300 per month charge is added to the cost of employing either worker, it is plain to see that only the high-wage worker's absolute profit will remain positive.

The firm will continue to make $200 by employing the high-productivity worker, while it will be forced to lay off the low-productivity worker rather than lose $200 by employing him. The Obamacare health tax thus will fall directly on the same employees who are hurt by minimum wage increases: teenagers, the disabled, and disadvantaged minorities.

If they do not wish to be laid off or cut to part-time, these low-productivity workers will accept a lower salary to keep their position and work schedule. Thus, the worker who produces $10,000 monthly will offer to accept a salary of $9700 or less to save himself from a complete loss of employment or cut to part-time. These workers will offer to shift the cost directly onto themselves rather than burdening the employer with it, which would result in their unemployment.

Predictably, though, the Democrats fully intend to "protect" workers from the choice to save their jobs by working for less. Page 273 of the bill stipulates that any amount pledged for the minimum-health-insurance plan that corresponds to a fall in salary or wage will not be considered a contribution at all. Page 310 establishes a $100 per day, per case fine for any privately negotiated fall in wages. Thus, salaries will be locked in at current rates, with any cuts being considered an attempt to subvert the labor tax, and thus being subject to financial penalties.

In reality, this clause is no favor to workers, and instead acts as a wage floor to ensure that the unemployment effect will be immitigable and widespread. Because any drop in wages during the months following the bill's enactment would be considered a violation of the employer-contribution mandate and therefore would carry heavy fines, literally all wages will be prevented from falling below their current levels.

Implementing these indirect wage floors in literally every industry during a recession is downright ludicrous. During a recession, wages rise and fall in different lines of production to align producers' demand for laborers with consumers' demand for the goods each type of labor produces.

In a dynamic market — that is, any market in which people are free to change their minds — different workers' wages must rise and fall every day to accommodate changing consumer preferences. To prevent this process from taking place is to prevent the structure of production from being corrected.

These wage floors will also hasten the decline of industries that are less valuable to consumers than they were at an earlier time, but that may still be a productive use of resources at a lower price. Businesses in these industries will be unable to legally cut their labor costs to lower their prices and satisfy consumers who are less eager to buy their goods. Without this option, such firms will need to either lay off part of their labor force, or simply go out of business entirely.
Destroying Real Production

It is equally important to consider the other end of the production chain, which is to say the actual output of goods and services. By destroying the demand for marginally productive labor, Obamacare's labor tax will necessarily destroy that labor's end product, which is of course marginally-valued goods and services. Thus, it is rational to expect fewer late-night fast food options, less-cleanly hotel rooms, fewer sales associates at retail outlets, and the like.

While these effects may not be as easily visible as a plant closure, they are real losses of consumable utility. Free-market firms produce convenience and extra quality until the point at which it is no longer profitable to do so. Destroying the production of these goods and services would destroy the niceties that capital accumulation and progress allow Americans to take for granted.

The effect of Obamacare on the prices of produced goods is obviously inflationary. Increasing the cost of employing every single laborer by $300 a piece is certain to increase the price of all produced goods. Combining price increases with rising unemployment is hardly a laudable strategy for improving the lives of poor citizens.

Conclusion

The historic passage of HR 3962 by the House of Representatives is not an event to be celebrated. Obamacare will exacerbate the nation's rising unemployment and will prevent wages from fluctuating according to market demand. Just as with other sectors, a supposedly beneficial social policy hurts the poorest and least-able citizens the most.

Dammit! How many times do I have to tell you that you cannot post anything involving economics and actual logic around here!?! You know it just confuses the living daylights out of everyone lol.

It's really very simple, actually, and exactly what is wrong with the plan. I just wish mire people had taken economics 101 so they could understand why.

Great article

Except that if Economics 101 were the science many made it out to be, it could accurately predict economic trends and explain the irrationality of human behaviour that precipitates most of the downturns.

Conservative economists' constituencies in particular are like the opportunistic sappers that come out of hiding after the battle is over to kill the wounded and claim the spoils. Poverty is and always will be the panacea of the 'free market' because it lowers labor costs.

But just as trees never grow into heaven just because the faithful think they ought to, so it is with what eventually happens.

-Kerry O.

it's still too early to draw conclusions over what the bill will or won't do.

They still have to get the Senate version which is quite a bit different and then take it to comittee to reconcile the differences and then they will all try to add their own earmarks and riders to it

it'll prolly bear no resemblance to the bill they are working on right now when it comes out

but it'll still prolly be a mess when it does. anything government touches they screw up. so that is what I'm expecting to see

We dont need to look far to find what the results of this bill will be! It will be the same results as any other entitlement program! 100% complete disaster and Obama is a one term President worse than jimmy Carter! The election of this man will take a president the next round that better be of substance and actually make the hard choices. I am certainly sick of the choice of liberal or socialist! We need a true conservative that will shut down government and slice it in half! When i say half i mean it literally, because it's that bad!

I recall, Bushes decision for war was approved by and agreed to by MANY politicians, thus averting the accusation that the decision was not investigated or that it was his alone. ..Why not the same assumption with this bill people are deeming to be 'Obamacare'?

I think that there are MANY MANY well educated professionals and experts involved in the creation of this bill who know much more than any independent website or casual chatter. One could probably search through 2000 pages of information and numbers to make whatever case they wanted, numbers can be manipulated that way. I already pay nearly 300 per month for my insurance and its not even full family. I can hang with the numbers if americans are all receiving healthcare...as far as the unemployment,,,only time will tell.

Well the problem with your argument is history shows it to be incorrect! entitlements don't work and never had, obabma is stumping for the bill and pushing hard so he takes responsability! MANY MANY well educated people created our school system, social security, medicare and they all failed so your logic while thoughtful it's just not realistic or results oriented. The last thing is anything the government and i mean anything it becomes more exspensive! this is not about cost its about government taking more of the pie and using rhetoric to get it. a 10% tax was just levy'd on me which will be more than my healthcare costs so go figure???

Respectfully, my argument is actually an opinion as I think your is too. Your opinion of what a failure is is different than mine. Medicare, though it struggles, is not a failure in my opinion. social security failed not on its own merit but because of human greed that can seep into any program, no matter how social, from banking to carmaking. The educational system, in my opinion, has not always been a failure and will bounce back. It goes through trends like the economy. This bill will afford many ill people access to healthcare that doesnt bankrupt them or destroy their credit. If it costs me a little more, I dont mind. For my values, it is a success if it manages to provide for americans going without. I think where people stand on this bill just comes down to their personal values and priorities as does their opinion of what 'failur' is.

Well i agree with what you say in a lot of ways. this gets to the core of differences. Government cant solve problems because of corruption on both sides! So even though the idea is nobel it will end in failure because men can not handle the power and will abuse it like they have any other entitlement progam. In my state over 50% of the budget goes to education and by any measure it's a failure. The idea of taxing and then government consolidating those taxes then distributing them is flawed! It has never worked and never will! By completely eliminating a huge portion of government would leave people with plenty of their own money! So would i give to a system that was honest ofcourse but that system will never exsist so i would rather keep my money!

You've got something of a point. This is where the study of Austrian school economics comes in. They take into account human action and other factors that Keynesian (mainstream) economists don't understand. This is how Ron Paul and other Austrian economists were able to predict the failure of the government bailouts. Check out econ books in the Mises Institute bookstore for more. (http://mises.org/store/)

Humpty Dumpty sat on a wall
Humpty Dumpty had a great fall
with socialized healthcare in the USA
poor Humpty Dumpty died that day

I wonder why he didn't die when FDR, Wilson, and every other president pushed him?

I'm not speaking of predicting trends, I'm just speaking of the fact that nothing is free and nobody seems to realize it.

And truthfully, economics can predict failures and everything that has happened. however, just like any science, your conclusinos are only as good as your inputs. If you do not know all the inner workings, your conclusions will never be perfect.

And if Economics 101 was what they claim we wouldn't be in the economic mess we are today.
If my major had anything to do with economics. It would scare the hell out of me to think, and realize, that everything I was taught was taught to me by the same idiots who caused the current economic downfall.

Heck it scares me now just thinking that these self-professed economic experts were taught by these methods and teachers.

are you guys serious! if you really want to spread fear at least get you sh..t right! If you do not understand the bill verbiage ask- please do not attempt to interpret. The plan will pass and we will see all of the nays in 2012- Talk is what the right seems to be good at- I like to demonstrate what I talk about- see you at the polls 2012- the tea baggers may have their 10, 000s, no- 5000- no 500 hundreds marching but we will vote in the millions!!! can you say repeat!!!

What's funny is the concept of economics is known, and predictible to a point.

You have the Austrian economists, who see the economy as an extension of nature. Nature, itself, is self regulating. This is much like the free market. Problem is, it doesn't make for a cushy life. It could be cushy, but it would require sacrifice, participation, and, gasp, the ability to think freely.

Currenty, governments and corporations (if you believe there is a difference) are pushing to make us "fat and happy" as Shakespear would put it. Basically creating the illusion that we have wealth, when we do not possess it. This is done through artificial expansion of credit. In the end, the money will fall where it would have, because nature itself follows the rules of science. Physics 101 - for every action there is an equal and opposite reaction. Economic 101, lesson number 1 - for every action taken to control the market, there is an equal and opposite reaction.

For every fake credit expansion, there is a credit crunch that occurs. This results in "recessions" and "depressions". What i question, is why they try to fight these credit crunches, caused by artificial credit expansions, by artificially expanding the credit.

I would like to discuss any mathematics, or any economic principles with anyone, even to the point where i am proven wrong.

Problem is, i will not take anyone's word for it. This point must be shown to me.

I believe in both Heinlein's TANSTAAFL (There Ain't No Such Thing As a Free Lunch) as well as the Extraordinary Madness Of Crowds. I also know that many times the 'Free Market' is an illusion meant to take in the Rubes and get them to extoll its virtues while it picks their pockets.

I've said this ad nausem: there's nothing wrong with paying taxes as long as you get Fair Dinkum back from the government in the form of services, et al that cut out the middle men whose profits are really exactly like the taxes conservatives are always complaining about.



Nature doesn't obfuscate, it needs no auditors to lie to the stockholders and employees on behalf of management, it runs no Ponzi schemes and sure doesn't care a whit about political power or marketing.

I would postulate that one of the things economics and science have in common is that both are often governed by the Heisenberg Uncertainty Principle-- just when an agent thinks he has figured out the Prime Equation and a way to beat the system, he finds that his own participation IN that equation dooms his best laid plans.

But hey-- if the Mises Institute has this all figured out, why are they all still working desk jobs? :)


-Kerry O.

Even without all that schoolin, I can tell you that it will straighten itself out. No proof needed, just watch.

How do I know it? Fo lack of a better way of putting it because if the poor stop spending the rich get poorer. The relationship is symbiotic. (is that the right term?)

I'll take that challenge.

While you won't see the following in a Physics 101 text, that doesn't mean that Newtonian systems can't themselves become extremely unpredictable extremely quickly.

For example, it's not all that difficult to calculate the future positions of a few billard balls. That is until you keep adding balls and then upping the number of collisions-- then it quickly gets out of hand after about 10 sets of collisions for a lot of balls. The rounding errors alone doom the enterprise, to say nothing of the measurement errors.

The economy is a LOT more like those billiard balls than it is figuring out how to make a rocket hit the moon.

You're better off looking at Newton's First Law as being diagnostic, not predictive. Because just because there are forces acting, that doesn't guarantee there will be motion.


-Kerry O.

Interesting analogy my friend....

I would have to say i agree.

When we add those billiard balls, we make our outcome less predictable.

Problem is, when you add too many, you make one hell of a mess of things, and will never quite be able to recover it...

That's what i see going on today. I see an inevitable collapse of our economy. "When" is the question that cannot be answered...