Let's Get Our Obamacare Story Straight, Folks

| Wed Feb. 5, 2014 12:22 PM EST

Having just berated the nation's news media for credulously reporting that Obamacare would result in the "loss" of 2 million jobs, I want to push back a bit in the other direction too. Here is Paul Krugman explaining that Obamacare doesn't destroy jobs, but it does give people more freedom to work fewer hours without fear of losing access to the health care system:

The basic point here is that we started with a system in which incentives were already strongly distorted by the deductibility of employer-paid health insurance premiums. This was a significant benefit, but one in general available only to full-time workers....What we had here was [] a system in which subsidies were available only if you worked more than a certain amount, surely leading some people to work more than they would have wanted to otherwise.

And that’s not a hypothetical — I know a fair number of people in just that situation. I also know some people in “job lock” — feeling trapped in their current job because they aren’t sure they could get implicitly subsidized health insurance if they moved.

Plenty of other liberals have made similar points, and there's no question that there's a kernel of truth to it. Someone who's 62 might retire early because they know they can buy health insurance while they wait for Medicare to kick in. A young worker who wants to start up her own company might be more likely to do it knowing that she can still get coverage for a pre-existing condition. People who lose their jobs might hold out longer for good replacements if they know they can continue to get affordable health coverage while they look.

But the CBO report was pretty clear that this is not really the main channel by which Obamacare reduces employment. It mostly reduces total hours of employment among the poor, which is why it estimates that employment will go down 2 percent but total compensation will only go down 1 percent. And the channel for this reduction is straightforward: workers lose Obamacare subsidies as their incomes go up, which makes it less attractive to work more hours. For instance, if you go from 135 percent of the poverty line to 140 percent of the poverty line—something that could happen by the addition of a mere two or three hours of work a week—you might lose access to Medicaid.

More generally, the problem is that Obamacare subsidies decline smoothly as your income goes up. Here's an example. If you and your partner earn $10 per hour and your family income is $30,000, you'll pay about $1,250 out of pocket for health insurance. Subsidies cover the rest. But if you work an extra six hours a week and increase your income to $33,000, your premium cost goes up to about $1,600. That's not a huge difference, but it means that effectively you're only making $8.80 for each of those extra hours you work. At the margins, there will always be a few people who decide that's not worth it, and will decide to keep their old hours. That's especially true since their family now has health coverage and doesn't have to worry quite so much about catastrophic expenses.

You can decide for yourself whether this is good or bad. In any case, it's not something unique to Obamacare. It's a feature of every means-tested welfare program ever. And it's the main reason that employment will decline. Not because of early retirees or folks who are now free to tell their bosses to take this job and shove it. It's mainly because it will cause a certain number of poor people to decide that working extra hours doesn't pay enough to be worth it.