Is President Obama’s Law Keeping Unemployment High?

Published April 27, 2012

Two years after President Obama signed it into law, there is evidence the slow economic recovery could be partly due to his namesake health care law.

According to analyses conducted by the Heritage Foundation and others, the passage of President Obama’s law correlates with a dramatic slowdown in the economic recovery and in private sector hiring. Prior to the law’s passage in April 2010, private sector job creation had improved by 67,600 jobs per month since Obama’s inauguration. But in May 2010, private employers created only 48,000 net jobs, and private sector hiring became stagnant, averaging only 6,700 more jobs created per month into the early months of 2012.

Although Obama’s law has not yet gone into effect, it could dramatically raise the costs of hiring employees thanks to its employer mandate to provide a specified level of health insurance. The high cost could lead firms to consider dropping health coverage entirely, paying a fine in order to move their employees onto taxpayer-funded programs.

According to Rea Hederman, a research fellow at the Heritage Foundation, the connection is hard to ignore.

“Obamacare has negatively impacted employment, and I think it has been one of the reasons why the labor market recovery has been so slow. The simple fact is that a lot of employers are deciding not to hire new workers because they know they are going to have higher labor costs due to Obamacare,” Hederman said.

Businesses Waiting to Hire

Hederman says the uncertain employee-cost increases created by Obama’s law are a concern for employers looking to keep a tight rein on costs in a tough economy.

“Employers are generally not able to adjust the amount of spending on research and development, shareholder returns, or fixed costs, because their business is already getting the most out of its resources that it thinks possible,” Hederman explained. “For businesses that are constrained at the low end by the minimum wage, where they can’t lower their wages, they’re going to cut job hours. Because what you’re doing is adding costs to these workers, and as a consequence they’ll lose job opportunities.”

Hederman related the story of a Federal Reserve Bank president who spoke to business and community leaders.

“He said, ‘I had a business leader say he was not going to hire an additional worker until he figured out what the impact of the health care was law going to be,'” Hederman said. “Businesses don’t know how much their costs are going to go up, because bureaucrats in Washington are going to be determining what is an acceptable [insurance] plan. And any type of uncertainty like this is going to discourage businesses from hiring.”

Low-Skilled Hit Hardest

According to Diana Furchtgott-Roth, a senior fellow at the Manhattan Institute for Policy Research, those on the low end of the salary scale are hit hardest by Obama’s measure.

“This law disadvantages low-skilled, low-salaried workers. Say you’re paying the average household income, which is around $50,000 per year. You just pay them $48,000,” she said, as a way to adjust for the cost of health insurance.

“But what if you’re paying somebody the minimum wage?” Furchtgott-Roth said. “You can’t take it out. There is not enough room for the employer to adjust the total compensation to account for the new insurance expense. So, basically the law disadvantages low-skilled workers. And coincidentally, those are the ones with the highest unemployment [rate] right now.

“It stops them getting their run on the first rung of the career ladder,” Furchtgott-Roth continued, “which is going to feed through to their [future] employment prospects.”

That’s the same effect as raising the minimum wage, said Furchtgott-Roth.

“Basically, you’re raising the cost of employment. The fewer people you employ, and if you have more part-time people, the better off you are,” Furchtgott-Roth noted, “because if you hire part-time people you don’t pay the penalty.”

“I’ve even spoken to restaurant owners who have talked about splitting their workforce with another restaurant owner. If they each hire people less than 30 hours a week, they don’t have to pay the penalty,” she added. “I’ve spoken to restaurant owners who think this is a perfectly viable option.”

Distorting the Marketplace

Merrill Matthews, a health policy analyst at the Institute for Policy Innovation, notes health care insurance is a great expense when compared to a low-end salary.

“If an average employer-provided policy costs around $15,000, that’s half of what a $30,000-a-year worker makes. It’s a 50 percent raise. Of course, the employer would likely force the worker to pay part of the cost, but that’s a burden to the worker,” Matthews said. “Those lower- to middle-income workers are the ones most likely to be uninsured. Thanks to the Affordable Care Act they will also be the ones most likely to be unemployed.”

By raising the cost of employing people and distorting the marketplace in fundamental ways, the health care law will continue to damage the economy if allowed to go into full effect, Matthews says.

“Nearly every study of the impact of the minimum wage shows that it increases the cost of the least-skilled workers and drives up unemployment among that group. Mandating employers provide health insurance would have exactly the same effect—only much bigger because the cost is so much higher,” Matthews said.

Loren Heal ([email protected]) is a research programmer at University of Illinois at Urbana-Champaign.