1. Your task in this question is to evaluate the effects of the recent Affordable Care Act, designed to increase coverage to 32 million Americans, on the labor market. Specifically, your task is to evaluate each component below and identify, first, what effect the policy will have on employment and wages, and second, whether those effects are efficient or not, using our usual definition of efficiency. You should make your evaluations based on what happens when all these provisions become law, i.e. by 2014. Details are on the next page. (3 pages)

Individual Mandate:
If people mandatorily need to purchase health insurance or face a $695 annual fine, and there are some exceptions for low-income people, people who are on the boundary between low-income and middle-income could decide to be included in the low-income class to be better off. If they can be beneficiaries of the Affordable Care Act, they don’t need to spend for health insurance purchase and could receive subsidies from the government. Therefore, the supply of relatively low-income and unskilled labor would go down. Considering the main purpose of the Affordable Care Act, providing better health insurance policies for workers to maximize their productivity and living standard, the individual mandate policy could work inefficiently because the productivity and living standard of low-income workers would be reduced simultaneously.

Employer Mandate:
Because employers with more than 50 employees must provide health insurance or pay a fine of $750 per worker, operating costs of enterprises would go up as a result. To offset the increase of operating cost, employers might be going to reduce wages or other compensation. Because the supply of labor moves proportionately to the level of compensation, labor supplies would be going down if the employer mandate policy is enforced.
Employers could choose a different way to cover their increased operating costs. Because reducing wages and compensations could negatively impact on the productivity of workers according to the efficiency wage theory, employers would lay off some workers instead of changing compensation. In the long-term, the decease of labor demand would cause the decrease of equilibrium wage, and workers could be worse off as a result. Even though the Affordable Care Act is devised to make the working class better off, it could ironically make the class worse off by decreasing the demand for labor.
Health Insurance Exchanges:
The government is going to provide financial subsidies to the uninsured and self-employed people through the Health Insurance Exchanges. I think that the most important purpose of this subsidy is helping workers who do not have health insurance to work with less worries about their health. However, the subsidy ironically could negatively impact on the supply of labor through both a “Substitution Effect” and an “Income Effect.” According to the structure of subsidy, people could receive more subsidies when they earn less. This means that people are better off when they do not work if the amount of subsidies are pretty large. Therefore, some people would decide not to work or less and supply of labor is going to decline. In addition to this, people could decrease their work amount and time because they actually earn more money through the subsidy program and do not need to work hard to maintain their living standards same. Because both a substitution effect and an income effect work simultaneously, government’s effort to positively impact on the supply and quality of labor forces could not work effectively.

Paying for the Plan:
If the government tries to find financial resources for the Affordable Care Act by levying various taxes on high-income people and insurance companies, this could negatively impact on both supply of labor and demand for labor. Starting in 2012, the Medicare Payroll Tax would be expanded to include unearned income. Because this tax will be levied on