Affordable Care Act and the Labor Market

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Affordable Care Act and the Labor MarketPresident Obama signed the Affordable Care Act, commonly referred to as the ACA, into law in March 2010. It represents the most significant reform to the U.S. health insurance and health care market since the establishment of Medicare in 1965. Important components in the ACA include: i) mandates that all individuals must have health insurance or face a penalty (individual mandate); ii) employers with more than 50 full-time employees will be required to provide health insurance or pay a fine (employer mandate); iii) the establishment of regulated state-based health insurance exchanges where the unemployed, the self-employed and workers who are not covered by employer-sponsored health insurance can purchase health insurance with income-based subsidies available to individuals in households whose income is below 400 percent of the federal poverty line. Such a sweeping reform to the U.S. health insurance system is likely to have important equilibrium effects on the labor market in many dimensions, two of which are the focus of the two projects described in this research proposal. In Project 1, titled "Joint Household Labor Supply and Health Insurance Reform", the PIs study the likely effect of the ACA on firms' decisions to offer spousal health insurance benefits in an equilibrium model of joint household labor supply and endogenous firm decisions on the health insurance offerings, including whether to include spousal health insurance. The research aims to advance the literature in developing and empirically implementing an equilibrium joint household labor search model with health and health insurance. The PIs provide a quantitative assessment of the impact of the ACA on firms' insurance offerings and on household outcomes. In Project 2, titled "Equilibrium Labor Market Search with Endogenous Technology Choice and Health Insurance", is a study of how the ACA may impact firms' technology choices, recognizing that the regulations in the ACA, particularly the employer mandate, may lead firms to switch to new technology (e.g., any technology that increases automation), that require substantial up-front investment but can reduce the demand for low skill labor. The PIs propose an equilibrium labor market model in which heterogeneous firms and workers are matched in a frictional environment, and firms choose both technology and compensation packages (including wage and health insurance offering). They use the estimated model to simulate how firms will respond to the ACA, with a focus on their technology choices and on the subsequent effect on the unemployment rate and welfare of unskilled workers. The research proposal will methodologically advance the modeling and empirical implementation of equilibrium models of the labor market that features joint household labor search (Project 1) and endogenous technology choice (Project 2). The empirical results can provide an ex ante evaluation of the labor market responses to the Affordable Care Act, and these can play an important role in not only obtaining a broader understanding the effects of the ACA, but also possibly affect how to improve the health insurance system in the future.