Healthcare's Impact On the Low-Skilled Worker

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Low-skilled workers have some of the highest unemployment rates in America. Adults without high school diplomas face an unemployment rate of 14.5%, almost three times as high as rates for college graduates, and well above the national average of 9.7%. The unemployment rate for teens, another low-skill group, is 26%.

Reasonable people likely presume that Congress and the administration are doing everything possible to help low-skilled workers get jobs.

But, come 2014, the new health care bill will make it harder for employers to hire low-skill workers. And, as workplaces around the country prepare to implement the Patient Protection and Affordable Care Act, employers are considering how best to comply. For some companies, that means that low-wage and part-time jobs will start to go, not in 2014, but now.

Industries that have traditionally offered the most opportunities to low-skill workers - leisure and hospitality, and the retail trade - will be particularly hard-hit by the new law. Many employers do not provide their employees with health insurance, and both sectors have large percentages of part-time workers, whose cost of hiring will increase significantly.

Under the new law, every employer with more than 50 workers will either have to offer health insurance or pay an annual penalty. The penalty for full-time employees is $2,000 per worker. For part-timers, employers will pay $2,000 for each "full-time equivalent worker," a block of 30 weekly hours of part-time work by the same or different employees.

Small enterprises with 50 employees or fewer will be the big winners. If they don't hire too many workers - another government-induced disincentive for hiring in this weak labor market - and stay within the 50-person limit, these firms won't have to provide health insurance and will have a cost advantage over the others.

The new law will make it harder for large enterprises to compete with small ones. Franchisees, who often own groups of stores or restaurants, may consider spinning some off to avoid incurring higher cost structures than smaller rivals.

The $2,000 penalty will amount to 15% of average wages in the food and beverage industry and 9% of wages in the retail trade. This is in addition to the employer's share of Social Security and Medicare taxes (7.65%, equal to what the employee pays), as well as workers' compensation and unemployment insurance.

This will be bad news for employees who work part-time, because the extra cost of their mandatory health insurance - or a $2,000 penalty - is a larger percentage of their wage. When government requires firms to offer benefits, employers will generally prefer to hire full-time workers and even pay them extra to work overtime, because the cost of benefits per hour of work is lower.

In 2009, 50% of restaurant employees and 36% of retail employees worked part-time, i.e. under 35 hours per week. A higher percentage of women, 58% in the restaurant industry and 44% in the retail industry, work part-time.

With higher-skill jobs, employers can offer the required benefits and pay for them by cutting the wage. But low-wage jobs in the restaurant and retail sectors leave little room for cuts in wages.

So firms will have an incentive to become more automated, or machinery-intensive - and hire fewer workers. Fast food restaurants could ship in more food and have it reheated, rather than cooking it on the premises. Department stores could have fewer sales clerks and more price-scanning stations, so that shoppers could scan labels for prices rather than asking sales assistants.

Restaurants and drugstores that are open 24 hours a day will be disadvantaged, because they need several shifts of workers to stay open.

Even those employers who do offer health insurance could be penalized, according to a study published last month by Mercer, a global consulting firm. Under the new law, health insurance premiums charged by employers to employees must not exceed 9.5% of their household income. As many as 38% of employers may be at risk of violating the unaffordable coverage provision, the study concluded. Regulations need to clarify whether the rule will apply to family coverage or just the employee's own coverage.

Mercer partner Tracy Watts said, "Lawmakers did not take into account that employers don't have access to information on employee household income. Employers question how they are going to get that information and what other administrative challenges might come along with this new requirement. For example, what happens if an employee's total family income changes during the course of a plan year?"

Employers are more likely to breach the premium cap for low-skill, low-wage workers because the premium is a higher percentage of their income.

The irony is that in the name of expanding health care coverage the administration is making it harder than ever for unskilled workers to get started in the workforce. Clearly, the new health care bill enacted in March will have negative effects on the employment of low-skill workers.

No employer, whether Wall Street or Walmart, should be required to offer health insurance to workers, just as they are not required to offer auto and home insurance - or is that next? But the employers of low-skill part-time workers in the restaurant and retail sectors will see the most distortions due to the new mandate.

With 15 million Americans out of work, and millions more discouraged job seekers withdrawn from the labor force, Congress and the administration should focus on getting people back to work. Instead, with the health care bill, Washington is condemning more unskilled Americans to the ranks of the unemployed.

Diana Furchtgott-Roth, former chief economist at the U.S. Department of Labor, is senior fellow and director of Economics21 at the Manhattan Institute. Follow her on Twitter: @FurchtgottRoth.   

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