Does Obamacare ‘distort’ the labor market -- or undistort it?

A fascinating debate has broken out among economists and economic pundits concerning the Congressional Budget Office’s projections that the Affordable Care Act will allow -- or induce -- some workers to leave the job market.

The debate is over whether, or how much, this is a “distortion� of the labor market caused by the healthcare law. Tyler Cowen of the free-market Mercatus Center takes a shorthand look at the issue here.

But the real question should be whether Obamacare is distorting the labor market or removing a distortion that previously existed. The evidence points to the latter.

In case you’ve missed the reporting on this projection, the CBO said the act would reduce the number of hours worked by the equivalent of 2.5 million full-time workers by 2025. The CBO also said that at least some of this reduction would come because workers would choose to work less or not at all -- staying home as family caregivers, taking early retirement, etc. The new figure of the decline in hours is double the CBO’s original estimate, made in 2010.

We discussed this new finding here, and wrote more here about the phenomenon of job-lock, which conservatives have always said they dislike and which the Affordable Care Act reduces. Job-lock is what happens when you have to take a job, or hang on to a job, simply because it’s the only way to get health insurance.

The conservatives’ take on the CBO’s latest number is that it proves their assertion that Obamacare is distorting the labor market. Ross Douthat wrote that the figure suggests “that the costs of Obamacare’s workforce effects might exceed the benefits.�

Sez he; someone sitting elsewhere on the work or income scale might see the cost/benefit balance rather differently.

Economists, especially conservative economists, hate market distortions. But the question that always needs to be asked is: What’s being distorted? The term is almost always used to attack policies that interfere with the “free market� -- policies such as taxation, for example. In the 1930s, it was a popular conservative notion advanced by Milton Friedman, among others, that the National Labor Relations Act, which removed obstacles to labor organizing, “distorted� the labor market; some even blamed the act for the recession of 1937-1938 (a notion that has been widely debunked).

Yet such policies are typically designed to correct imbalances and inequities that make the “free market� anything but free. As Notre Dame political scientist Benjamin Radcliffe observed, the conservative view that “the market consists of free individuals making free choices about what’s best for them ... ignores the reality that people don’t face each other in the market as equals.�

In other words, is a market truly free when large employers, often acting as industries, face workers who can only bargain as individuals? Isn’t collective bargaining then a way to create a genuinely free labor market? By the same token, is an increase in the minimum wage a distortion of the wage market, or a rebalancing of a distorted market in which the wage has failed to keep up with productivity growth since 1968?

The free market that the Affordable Care Act supposedly distorts is one in which health insurance is inextricably linked to employment. But that’s the distortion; we know that because the U.S. has been the only industrialized country in which the loss of a job means the loss of medical coverage ... until now.

Seen in that light, at least some of the 2.5 million full-time equivalents that will be reduced by the healthcare law were themselves artifacts of a distorted market -- workers forced to stay in jobs long after they should have been in retirement, or forced to hold otherwise low-value jobs even though they might have been more productive for society by staying home and raising their kids.

The curious thing about the most common definitions of “distortions� is that they presuppose that the dominance of capital over labor is normal, and that its increasing dominance, as represented by increasing income inequality, is even more normal.

So it’s unsurprising that a market in which the provision of healthcare gives employers one more weapon for dominating their employees is seen in some quarters as normal, and a policy that takes that weapon from their hands is treated as abnormal. But for anyone suffering job-lock, this aspect of Obamacare is a good thing, undistorted.