The Economic Threat of Obamacare’s Employer MandateMarch 19, 2012
If you’re a foodie like me you’ve enjoyed following the ebbs and flows of the food scene over the past few years. Cupcakes were cool as ice-[ing] and then not, local craft beers bubbled up and then fizzed out, and bacon was sizzling and then…well, ok, everyone still loves bacon.
Perhaps my favorite culinary trend has been the emergence of the food truck – a cheap, delicious, and quick way to add some variety to your noontime meals or late night eats.
But the oft-overlooked reason behind the existence of food trucks exists well beyond some tasty trend to simple economics. A truck is cheaper than a freestanding restaurant. No land needs to be bought and no rent (with the exception of maybe a parking meter needs to be paid). And perhaps most importantly, all you need is a couple of cooks, not an entire front-of-house staff and waiters.
This cuts the cost for consumers, but it can also result in significantly more profits for the owners, especially since they often double as the chefs.
This also means that there are many fewer jobs available in leisure and hospitality fields, which often offer the greatest opportunities for entry-level workers.
This fundamental shift from moderate-size businesses (those that have 50+ workers) to much smaller entities is being hastened by Obamacare. A little discussed provision of the Democrats’ health care reform law has an “employer mandate,” the business-side cousin of the much-derided “individual mandate.”
The provision requires employers with more than 50 full-time workers to purchase a government-approved health insurance plan for their employees. Should they fail to do so the company will be forced to pay a $2,000 fine for every employee beyond the first 30 workers. Even if an employer does offer an insurance plan, if their employees are found to be eligible for a tax credit because their premium contribution is deemed “unaffordable” the company could face a $3,000 per employee penalty.
The impact of these provisions on hiring could be devastating, especially for young adults. As Manhattan Institute fellow Diana Furchtgott-Roth writes,
The $2,000 per worker penalty significantly raises the cost of employing full-time workers, especially low-skill workers, because the penalty is a higher proportion of their compensation than for high-skill workers, and employers cannot take the penalty out of employee compensation packages.
Suppose that a firm with 49 employees does not provide health benefits. Hiring one more worker will trigger a penalty of $2,000 per worker multiplied by the entire workforce, after subtracting the statutory exemption for the first 30 workers. In this case the tax would be $40,000, or $2,000 times 20 (50 minus 30). Indeed, a firm in this situation might have a strong incentive not to hire a 50th worker, or to pay him off the books, thereby violating the law.
. . . This combination of penalties gives a business a powerful reason to downsize, replace full-time employees with part-timers, and contract out work to other firms or individuals.
This creates a set of perverse incentives for mid-size businesses. On the one hand, if you are just over 50 workers Obamacare motivates you to think about downsizing. On the other hand, if your company is under 50 workers the law encourages you to stop growing.
Neither of those situations is what our economy needs to keep growing.
Take the food truck trend as an example. Those trucks should be created because entrepreneurs are looking for a low-cost launching point for growth, not because restaurateurs are looking to cut salaried workers because of a health care mandate. Either way may lead to delicious food, but only one of those paths is a recipe for economic recovery.