Tuesday, February 11, 2014

The economics of a reduction in labor supply...

Here's economist/columnist Paul Krugman on the recent CBO report that predicts the Affordable Care Act will inspire some folks to work less: 
Oh, and because labor supply will be reduced, wages will go up, not down.

Just to be clear, the predicted long-run fall in working hours isn’t entirely a good thing. Workers who choose to spend more time with their families will gain, but they’ll also impose some burden on the rest of society, for example, by paying less in payroll and income taxes. So there is some cost to Obamacare over and above the insurance subsidies.

Of course Krugman sees paying less taxes as the burden on society.

Here's economist Greg Mankiw thinking deeper: (HT Don Boudreaux)
In a couple of recent articles written by smart economists, I have read the following claim: CBO says the incentives in the Affordable Care Act will reduce labor supply. If it does, then real wages will increase.

That sounds like reasonable, textbook economics. But I don't think it is true. The problem is that the logic is entirely partial equilibrium. It is holding everything else constant. But that is surely not right in the long run. Lower labor supply means lower income, which means lower saving, which means lower investment, which means a lower capital stock, which means lower productivity, which means lower labor demand.

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