The Independent Market Observer

5/8/13 – First Signs of Obamacare

Posted by Brad McMillan, CFA®, CFP®

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This entry was posted on May 8, 2013 4:29:43 AM

and tagged Market Updates

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For some time, I’ve been convinced that a sustainable expansion has been going on in the economy, but I do have some concerns. The primary one is employment. While housing continues to recover, business investment is doing relatively well, and consumer spending is growing more strongly than expected, all of this depends on employment growth. For the next several months, the signs are good that it should continue.

What will increasingly matter, however, is whether the job growth continues, as well as the quality of the jobs, and here I have some worries. One of the biggest is how Obamacare will affect both the amount and type of hiring. This isn’t a political argument; the law contains multiple incentives that should—if employers are rational—influence their behavior.

In this context, the core of the law is that, starting in 2014, employers with more than 50 employees will have to provide full-time workers, defined as more than 30 hours a week, with health insurance or pay a $2,000 fine.

I see a couple of issues here that, as an employer, I would consider. First of all, my costs per employee have increased. So, if the costs are unavoidable, I may not hire as many people as I would otherwise and pay the ones I do hire less, to reflect the added insurance costs. If, that is, the costs are unavoidable.

In fact, the costs are avoidable. If none of my employees works more than 30 hours, I’m off the hook. Second, from a cost-reduction standpoint, if insurance is more than $2,000, it would be cheaper to pay the fine. If I have a high-skilled workforce that isn’t easily replaced, then I have to buy the insurance anyway. If not, I have other options.

For sectors such as retail and services, this could mean that the employment base shifts from full-time to part-time workers. Although the law won’t take effect until the end of this year, evidence indicates that such a shift may not be just a theoretical concern.

A May 7 economic update from Capital Economics discusses a set of trends in the retail sector that suggest this is exactly what’s happening. Over the past 12 months, the average hours worked in the retail sector has decreased even as hiring has increased. This trend wasn’t apparent before, and the increase in the number of employees who work fewer hours is exactly what would be expected if employers were limiting hours to avoid full-time status.

A supporting indicator is that another predominantly low-wage sector, hospitality, hasn’t shown a similar decline in hours—but, since the average hours worked is already under 30 in this sector, there would be no need to reduce aggregate hours per employee.

It’s early days yet, and signs of this trend aren’t apparent in other sectors, but I will be watching to see if it spreads. If so, jobs growth might not provide all of the benefits in income and spending growth that we would otherwise expect, and the economy might face yet another set of headwinds toward the end of this year. We will see.

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