Health Care Reform or Labor Market Reform? A Quantitative Analysis of the Affordable Care Act

The Patient Protection and Affordable Care Act (ACA) requires all individuals to have health insurance, and introduces penalties to large firms that do not offer affordable coverage to their employees. While the possible effects of the ACA on the insurance decision of individuals have been studied, what is less studied is how the ACA can affect labor demand. In particular, since the ACA does not require small firms to offer health insurance, and does not require firms to offer health insurance to part-time employees, there are concerns that employers will either stay small, or replace full-time workers with part-time workers in order to avoid offering health insurance to their employees. The main focus of this paper is to study the effects from the distortions caused by the ACA, modeling employer’ decision on hiring part-time and full-time workers, as well as the decision to offer coverage. The aim is to quantify the effect of the possible changes in the size distribution of firms and the composition of the labor force on employment, aggregate output, and welfare.