Why Obamacare Incentivizes Part-Time Jobs

Since the election, several large employers – ranging from restaurants and fast-food establishments to colleges that rely on part-time instructors – with lots of part-time employees have announced plans to limit their employees to 25 hours per week in response to Obamacare. While they've taken a lot of criticism for doing this, it's worth looking at why Obamacare incentivizes employers to do exactly what they've edone. In short, they are not taking advantage of a "loophole" -- they are simply responding to the law's requirements and its definition of a "full-time" employee.

The “Affordable Care Act” requires “large” employers – those with 50 or more full-time-equivalent employees – to either provide “qualified” health coverage for all of their full-time employees, or pay an annual penalty of $2,000 per full-time employee (after the first 30) if they don't provide such coverage. If they do provide coverage but it's not “affordable,” the penalty is $3,000 per employee who finds it “unaffordable” (with a cap at the penalty they'd pay for not offering coverage at all).

“Full-time” is defined as 30 hours or more per week, or 120 hours or more per month. (“Affordable” is defined as less than 9.5% of the employee's family income.)

The penalty is assessed on a monthly basis. In other words, if an employee works 121 hours in a given calendar month, that 121st hour costs the employer $166.67 (one-twelfth of $2,000), in addition to the employee's pay for that hour and the payroll tax on that amount. That's a hefty charge, and it's much more than the hourly rate typical for part-time employment in most industries.

If the employer decided to let the employees work more than 30 hours (and pay the penalty), the money to pay the penalty would have to come from somewhere. It could come from reduced profits, higher prices – or lower pay for workers. Many business run at very slim profit margins, so it's unlikely that they could take the entire hit to their profit and stay in business. Business' ability to raise prices is limited by customers' willingness to pay. Chances are, employees would have to absorb some of the penalty – perhaps most of it – in the form of lower wages.

To get an idea of the effect on workers, consider that for an employee who works 30 hours a week, a business would have to cuts wages by $1.30 per hour to make up for the entire penalty. At 40 hours a week, the penalty would be a bit less – $0.97 per hour. These are not trivial amounts for workers in low-wage industries like food service, retail, and low-skilled labor.

For workers making at or near the minimum wage, there is even less flexibility. The wage cannot be reduced, so the employer's only option is the reduce work hours to avoid having to pay the penalty.

Ironically, if enough businesses hire, say, two 20-hour workers instead of one 40-hour worker, there could be an apparent improvement in the unemployment figures. The unemployment data counts a person as “employed” if they worked at least ONE hour in the reporting period. By switching from full-time workers to a larger number of part-time workers, it would make it appear that unemployment dropped -- even though the total amount paid to workers remained unchanged.

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