November 25, 2014

How the Affordable Care Act Will Reduce Small Business Employment

affordable care act will lower unemployment

The Congressional Budget Office (CBO) reported last week that the Affordable Care Act (ACA) will mean that two million fewer people will be employed full-time in 2017 than would be working in the absence of the law.

Unmentioned in the report, or the firestorm of commentary that followed, was how the reduction in employment would be distributed between big and small companies. The employment decline will occur almost completely in the small business sector.

In fact, the new health care law will accelerate a two-decade long erosion in the share of Americans employed in small companies. My back-of-the-envelope calculations suggest that the ACA’s effect will combine with the current trend to result in only 46.4 percent of private sector workers being employed in small businesses in 2017.

That’s a major shift from the 54.5 percent who worked in small companies back in 1988.

So How Will the ACA Reduce Small Business Employment?

The ACA will accelerate the decline in small business employment by reducing both the willingness of small business workers to supply labor – and the willingness of small business owners to demand it.

On the supply side, the income-based phase out of subsidies to buy insurance on the new health insurance exchanges will reduce the willingness of people to work. Starting this year, low-income Americans who buy insurance through the new exchanges are eligible for subsidies to offset the cost. Because those subsidies decline as income rises, they raise people’s marginal tax rates and reduce their willingness to work.

The ACA-induced decline in the labor supply will be concentrated in the small business sector because the subsidies apply only to workers who do not receive employer-sponsored health insurance.

The Kaiser Family Foundation reports that 99 percent of businesses with 200 or more workers provide employee health insurance, while only 57 percent of businesses with between 3 and 199 workers do. Therefore, the workers who will become unwilling to supply labor as they lose their health insurance subsidies will be those who work at businesses that don’t provide employee health coverage, almost all of which are small.

The penalty on employers with at least 50 full-time employees who fail to provide health insurance to their workers, scheduled to start in 2015, also will reduce the supply of labor to small businesses. The CBO, and many academic economists, believe that cost of this penalty ultimately will be passed on to workers through reduced compensation. Lower wages, in turn, will reduce workers supply of labor because people’s willingness to give up leisure time depends on what they earn.

Because only those businesses that do not offer employee health insurance will face the new penalty, and because almost all large businesses provide employee health coverage, the effect of the penalty on employee compensation and the subsequent willingness of workers to supply labor will be concentrated among those small businesses that do not provide employee health care coverage.

The penalty for not providing employee health insurance will also lower small business owners’ demand for labor, the CBO notes. Businesses can avoid triggering this penalty by keeping their labor force below 50 full-time workers. Therefore, the CBO expects some small businesses to restrain their hiring or to convert full-time positions into part time ones to remain below the threshold.

The CBO obliquely mentions that the negative employment effects of the ACA:

“. . .will be most evident in some segments of the workforce and will be small or negligible for most categories of workers.”

For those of us interested in small business, it’s unfortunate to see that the negative effects will be greatest for those people working in small companies.

ACA Photo via Shutterstock

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Scott Shane


Scott Shane Scott Shane is A. Malachi Mixon III, Professor of Entrepreneurial Studies at Case Western Reserve University. He is the author of nine books, including Fool's Gold: The Truth Behind Angel Investing in America ; Illusions of Entrepreneurship: and The Costly Myths that Entrepreneurs, Investors, and Policy Makers Live By.

7 Reactions

  1. I’m tired of all the one-sided reporting on the Affordable Care Act (ACA). It’s time for those of us who support it to speak up and at least provide some balance.

    Was the sign-up process flawed and more difficult than it should have been – yes. But, my wife and I own two small businesses and the only way we could get affordable insurance was through the Affordable Care Act. We have some pre-existing conditions and couldn’t even get coverage through many insurers.

    We are seeing the beginning of a new direct-to-consumer business model in healthcare insurance. Over time this new model may well help force prices down, as it has in other industries. Small employers that were not able to provide any healthcare coverage because of the high employer’s cost through the prior multi-tiered insurance model may find that they can, at least, make some contribution ($25, $50, $100 per month) to their employees’ personal coverage through the health insurance exchanges.

    Some have been hurt by the ACA, but many others have and will be helped. It’s time to get some balance in your reporting. That is, if your editorial policy is really supposed to reflect the full range of small businesses.

    • Hi BillAtlanta, Small business owners are always welcome to share opinions here.

      The piece is balanced. The author of this piece is an economics professor who has written a number of books on entrepreneurship. He is reporting numbers given by the Congressional Budget Office, and pointing out the disparate impact on small businesses as a group.

      No one disputes that some have been helped by Obamacare (and we’re THRILLED for them!).

      But this is a major study and needs to be reported on.

      – Anita

      • Anita,

        Thank you for responding. I certainly see that the information needed to be reported. I don’t happen to agree with you that the article is balanced.

        But, I’m talking about the total coverage on your website not one individual author or article.

        Here are the titles of the articles on ACA (on the Obamacare tab) from your publication along with a key sentence for some of them. If these represent balanced reporting, I guess you and I have very different ideas of what that means.

        Can you point to a similar number of positive articles regarding ACA on your site?

        * “Yet Another Delay for Obamacare, Until January 2016 – We’re at the point where we’ll soon need a spreadsheet to keep track of all the changes to Obamacare.”

        * “How the Affordable Care Act Will Reduce Small Business Employment – the Affordable Care Act (ACA) will mean that two million fewer people will be employed…”

        * “IT Lessons You Can Learn From The Healthcare.gov Experience – It was a frustrating situation for Americans. Healthcare.gov, the site launched in early October that was supposed to ease, educate and transition America into shopping for insurance plans. Good in theory. In application, a harshly criticized website burdened with bugs, errors and delays.”

        * “Another Obamacare Website Delay, Affecting Small Businesses – On the eve of Thanksgiving, the Department of Health and Human Services announced another delay in the Affordable Care Act.”

        * “Obamacare’s Impact on Small Business Finance – It should come as little surprise that following the “fumbled” launch of President Obama’s signature health care initiative, the Affordable Care Act (ACA), his ratings have sunk to a new low.”

        * “The Tale of Two Self-Employed Freelancers and Obamacare – First it was the website troubles. Healthcare.gov has crashed repeatedly — or perhaps “continuously” is a better word. The site seems to be unavailable more often than it is available to Americans trying to research coverage options, let alone sign up.”

        * “Obamacare Will Affect Some Small Businesses Early – (I’ll actually give you this one. This article is balanced.)

        * “The Obamacare Website is Broken and Slowing Healthcare Signup”

        * “Online Signup for Small Biz SHOP Exchanges Under Obamacare Delayed A Month”

        * “Healthier Employees May Lead to Bigger Increases Under Obamacare”

        * “Small Business Owners File Lawsuit Against IRS Over Obamacare “Power Grab”

        * “Affordable Care Act: Small Business Health Care Exchanges Delayed”

        * “Domino’s Pizza Founder Sues Over Healthcare Mandate”

        And, so on and so on…

        Please take a realistic look at the balance of your coverage of ACA. I think your publication could be a leader in developing a healthy discussion, but not if only one side is covered.

        Sincerely,

      • Hi BillAtlanta, I stand by my statement. Our coverage is balanced.

        Are you saying that delays did not happen? They did. Rather than questioning a headline because it mentions a delay, question the underlying delay. Please don’t shoot the messenger.

        We go out of our way to avoid citing political-hack sources on both sides whenever possible. We stick to issues. We show respect of the office to all politicians. When there’s positive news to report, we will report it.

        Now a question for you: are you really a small business owner? Most small business owners would not use a hotmail address and would be happy to publicly use their real name and their business name.

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