It's an economic truism that businesses will respond to the incentives that the government provides. That principle is playing out right now in the jobs market, as small businesses adjust to the incentives created by the Patient Protection and Affordable Care Act (PPACA), also known as Obamacare, to cut employment and worker hours.
Small-business owners expect Obamacare to raise the cost of employee benefits, surveys reveal. Sixty percent of business owners queried in 2012 by benefits-consulting firm Mercer said they expect the Act to raise the cost of employee health-care coverage, and 55 percent of small-business owners surveyed by the Gallup Organization this year say that the PPACA will raise their business’s health-care costs.
Higher health-insurance costs create an incentive for firms to produce their products and services with fewer workers. Therefore, it is no shock that some small-business owners have responded to higher expected insurance costs by reducing employment. An International Foundation of Employee Benefit Plans survey found that 7.2 percent of small businesses have already reduced the size of their labor force in response to costs associated with the new law, while a July 2013 Gallup poll of small-business owners reveals that 19 percent have already cut headcount because of the new law.
An even higher fraction of the respondents to the Gallup poll -- 41 percent -- indicated that they "have held off on plans to hire new employees," and 38 percent "have pulled back on plans to grow their business" because of Obamacare. Similarly, almost one quarter of small businesses responding to a July 2013 survey by the U.S. Chamber of Commerce say that they will "reduce hiring" in response to the Act.
The Act also creates an incentive for non-insuring businesses with close to 50 employees to refrain from hiring because it will impose a penalty on businesses with 50 or more full-time workers who do not provide employee health insurance. While some economists believe that most businesses will pay for health insurance rather than cut employment (because they can pass the cost of insurance on to workers), the IFEBP survey reveals that 11.3 percent of businesses with between zero and 50 employees have already reduced hiring to stay below the 50-employee cut off, even though penalties now won’t go into effect until 2015. That may be because companies can't pass the cost of health insurance on to low-wage workers or workers governed by collective bargaining agreements.
Some companies have responded to the Act by reducing their fraction of full-time workers. Under the new law, companies need to provide health insurance to employees who work at least 30 hours per week, beginning in 2014. To avoid this cost, some small businesses have been swapping part-time for full-time workers, and cutting worker hours. The 2013 IFEBP survey reveals that 16 percent of companies have already changed or intend to change employee hours so fewer of them qualify as full-time. Similarly, 18 percent of small-business owners responding to the July 2013 Gallup survey said they reduced employee hours to part time in response to the law. Twenty-seven percent of small-business owners told surveyors administering a July 2013 Chamber of Commerce poll that "they will cut hours to reduce full time employees." And 23 percent told interviewers from the Chamber of Commerce that they "plan to replace full-time employees (30 hours per week or more) with part-time workers to avoid triggering the mandate."
While some defenders of the Act have sought to show that it will have little impact on small-business employment, business owners themselves think differently. They have repeatedly told multiple surveyors that they are cutting employment, reducing hiring plans, and shifting workers to part-time status to avoid the costs imposed by the new health-care law.
The author is an Entrepreneur contributor. The opinions expressed are those of the writer.
Scott Shane is the A. Malachi Mixon III professor of entrepreneurial studies at Case Western Reserve University. His books include Illusions of Entrepreneurship: The Costly Myths That Entrepreneurs, Investors, and Policy Makers Live by (Yale University Press, 2008) and Finding Fertile Ground: Identifying Extraordinary Opportunities for New Businesses (Pearson Prentice Hall, 2005).