Labor market slack and the Affordable Care Act

The latest jobs numbers released today by the U.S. Bureau of Labor Statistics indicate further steps are necessary to boost employment demand, which is still not close to the level that will generate healthy wage growth. Although the U.S. economy added 295,000 jobs in February, wages grew by only 2.0 percent over the past year according to the new BLS data. At an employment-to-population ratio of 77.3 percent for prime-age workers, the steady but incremental jobs gains mean policymakers should weigh the importance of policies that can eliminate slack and raise wages by reducing labor supply.

One such policy: the Affordable Care Act. The new law subsidizes health insurance purchases and increases access to health insurance outside of one’s job. Preliminary evidence suggests that because of the Affordable Care Act, there are now more individuals voluntarily working part-time, and other research finds that public health insurance access can have large effects on the labor supply.

There are two ways this reduction in labor supply will increase wages. First, because many employees will be less “locked” to their job for health insurance, employers will need to raise wages in order to recruit and retain workers. Second, if lower paid workers eligible for subsidies work less, then on average wages will rise.

Economists do not have a solid handle on how large these wage gains will be due to the Affordable Care Act, but the U.S. Congressional Budget Office analysis of the law implies economically meaningful increases. CBO found that because the law would reduce total hours worked by more than the reductions in total labor compensation, it will increase average hourly compensation by about 0.5 to 1.0 percent.

This kind of boost to paychecks could be telling given current employment trends. The jobs numbers in February indicate that African American unemployment rates seem poised to drop below 10 percent sometime in the near future, the lowest rate since the middle of 2008. At the peak of the last business cycle, in 2007, the black unemployment rate was about 8 percent. The black unemployment rate fell to 7 percent in 2000, when the overall unemployment rate was below 4 percent.

The strengthening labor market also is improving the employment situation for teens. In particular, the teen employment rate was 31.4 percent in February compared to 25.9 percent a year ago. Black teen employment also is picking up, although employment rates are much lower for black teens than are rates for white teens. The black teen employment rate last month was 20.4 percent, up about 12 percent over its 2014 average. In contrast the white teen employment rate of 31.4 percent last month grew by only 5 percent over the same time period.

Nevertheless, the latest progress in youth employment obscures how far it has fallen in recent years. The teen employment rate peaked at 45.9 percent during the economic boom in 2000, but then it plummeted and remained roughly in the 36-to-37 percent range during the last business cycle expansion ending in December 2007. After no substantial improvements, the Great Recession of 2007-2009 effectively decimated teen employment, bringing the share of working teens to a low of 25.1 percent by the middle of 2010. Teen employment has never been so low in the post-World War II period as it has been since the Great Recession.

For teens and the overall workforce alike, the Great Recession continues to exact a heavy price despite recent improvements in the labor market. Sub-par employment rates help to ensure that most wage gains will be limited and will not meaningfully reverse harmful trends in wage stagnation and income inequality. The anticipated boost in demand for employment generated by the Affordable Care Act is one factor policymakers should pay attention to.