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Why Obamacare is Scary for the Folks Who Want Their Toilets Cleaned on the Cheap

Now that the talk of death panels and other craziness about Obamacare has faded away, people are looking more seriously at what the program actually will do. A major part of the story is that Obamacare will allow people to get health care outside of the workplace.


This has often been framed as an issue of insuring the uninsured. And this is an important part of the Affordable Care Act (ACA). However, it is even more important that the tens of millions of people who currently have insurance through their employers will now have the option to quit their job and get insurance through the exchanges.

This means that millions of people will no longer be tied to their jobs in the same way as they had been previously. As a result, millions of older workers and people with serious health conditions are likely to cut back their hours or quit work altogether since they will no longer need to work at a job that provides health care insurance. The same will be true of many parents of young children who would rather work less to spend time with their kids.

This was the basis for the Congressional Budget Office's (CBO) assessment that the ACA would reduce the supply of labor by 2 percent. CBO calculated that several million people would either cut back their work hours or leave the labor force altogether.

While CBO didn't explore this issue, other things equal, a reduction in the supply of labor would be expected to lead to a rise in its price. In other words, wages would rise. That would be good news for workers who have seen their wages stagnate for more than three decades.

We actually already have some evidence that Obamacare could lead to a rise in wages for this reason. In 2005, Tennessee essentially did Obamacare in reverse. Prior to that date, it had a generous supplement to its state Medicaid program that provided highly subsidized insurance for people below 200 percent of the poverty line.

Due to budgetary pressures, it cut back this program in 2005. It ended the subsidies for single adults. Immediately afterwards there was a sharp increase in labor force participation, as hundreds of thousands of people in Tennessee again had to seek insurance through their job. This meant a big increase in the supply of labor.

The textbook story is that a rise in the supply of labor would lower wages. It appears that this is exactly what happened. My colleagues Janelle Jones and John Schmitt compared wage trends in Tennessee with the rest of the South in the years since 2004. They found wages in Tennessee for workers with a high school degree or less (the group likely to be most affected) fell by 6.5 percentage points relative to wages in other southern states.

If the increase in the supply of labor resulting from Tennessee's cutback in its Medicaid program led to a drop in wages, the implication is that the reduction in the supply of labor from Obamacare will lead to an increase in wages. In other words, Obamacare might be the best news on the wage front that most workers have seen for some time.

This could help to explain the outrage coming from Republican quarters following the release of the CBO report. Many opponents of the ACA claimed that CBO had projected a loss of millions of jobs, implying that impact was on the demand side. This is clearly not the case and CBO was careful to clarify in subsequent writings that the impact was on supply of labor, not the number of jobs.

Other conservatives correctly recognized that Obamacare will allow millions the option of not working or working fewer hours and decried its impact on incentives. Undoubtedly it is painful for the rich and powerful to see ordinary workers have the opportunity to spend time with their kids or recuperating from an illness.

But if the Tennessee wage story proves right, then this is not just a case of resentment by the rich. This is also a bread and butter issue for them. After all, if there is a tighter labor market then the folks who clean their toilets, manicure their lawns, and provide other services will be in a position to ask for higher wages and better working conditions. Now that would be a real disaster.

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