Before many of the major provisions of the Affordable Care Act took effect earlier this year, pundits and economists on both sides lined up their predictions of how the new health insurance law would affect wages. While it is still early, a new report from the Economic Policy Institute indicates that wages fell in 2014 despite an otherwise growing economy. Correlation does not prove causation, but the unexpected drop in wages scores a point for those who said that the ACA would lower wages.
So who said what?
Predictably, fans of the ACA claimed it would raise wages. David Cutler, Karen Davis and Kristof Stremikis projected that health care costs would fall and the savings would be passed on to workers in the form of higher wages. Dean Baker, Josh Barro, Polly Cleveland, and Donald Marron all argued that because the ACA lowers labor supply, it must raise wages.
In response, Greg Mankiw pointed out that this conclusion can be drawn only if all else remains equal, which is surely not the case under the ACA.
Skeptics and opponents of the ACA argued either that increasing labor costs would specifically lead to lower take-home pay for affected workers or more generally that the ACA would decrease efficiency in the economy. Michael Cannon and Paul Howard argued that in order to keep their existing health insurance plans, some employers would have to cut real wages. Henry Aaron and Gary Burtless wrote that higher costs for health insurance would lower non-health insurance compensation.
Casey Mulligan and Trevor Gallen modeled the ACA and predicted lower wages due both to lower productivity and the (still-looming) employer penalty. Reihan Salam and my colleagues James Sherk and Patrick Tyrrell argued that the ACA will encourage companies to shift from labor to capital, reducing payrolls. Another colleague, Curtis Dubay, predicted wage suppression due to the many taxes in the ACA. The Economist warned that the ACA subsidizes low-wage work, shifting the wage distribution downward.
And now we have wage data for the first half of 2014.
Elise Gould, the Economic Policy Institute (EPI) report’s author, highlighted in a blog post just how bad a year it has been for wages. There are some caveats: Her data describe the wage distribution, which combines changes in individuals’ wages with changes in the composition of the workforce. But, regardless of the cause, Table 1 shows that for 9 out of 10 percentiles measured, the past year was worse than the average wage change since 2007.
The initial evidence is thus firmly in favor of the ACA’s skeptics. Its proponents should at least be reconsidering their rosy predictions.
(Wonkish note: Ms. Gould’s report uses the Consumer Price Index, an upward-biased measure of inflation, to deflate wages over time. For a single year, it matters little. Over long horizons it should not be used.)
Originally appeared in the Wall Street Journal
