Blog author: jcarter
Wednesday, June 5, 2013

trip_hurdles_400_clrOne of the most basic concepts in economics and business is marginal or incremental cost, the additional cost needed to produce or purchase one more unit of a good or service. For example, if a business can produce 100 widgets at a total cost of $5,000 and 101 widgets for $5,500, the marginal cost of the 151st unit is $500. At that rate, the company has a disincentive to produce more than 100 widgets since the cost rises sharply (an average additional cost of $4.45 per widget).

The same principle applies to the cost of labor. Imagine a worker who makes $16 an hour for 29 hours per week but whose incremental cost for the 30th hour of work each week rises to $112.15. For the 29 hours of labor, the cost is $464 while for 30 the cost is $576.15. That sharp increase would prevent many employers from hiring workers for more than 29 hours per week.

According to Jed Graham at Investor’s Business Daily, that is exactly what effect Obamacare will have on wages.

Here’s how: Employers who offer health coverage that is deemed either too pricey or too skimpy will owe $3,000 for each full-time, 30-hour-per-week, worker who taps ObamaCare subsidies.

Because the $3,000 fine is nondeductible, it’s equal to $5,000 in deductible wages for a profit-making firm facing a 40% combined federal and state tax rate.

Simply dividing that $5,000 by 52 weeks yields an ObamaCare cost of $96.15 per hour.

The 31-hour, 32-hour, 33-hour and 34-hour workweeks also may become relatively rare.

For example, ObamaCare could tack on as much as $48 per hour for a worker clocking 31 hours, or two hours beyond ObamaCare’s care-free threshold of 29 hours per week.

Yet, even for those clocking 40 hours, the incremental cost of ObamaCare of $8.74 per hour beyond the 29th hour of work could effectively add 55% to a $16/hour wage.

This increase in incremental cost will likely result in companies hiring fewer less-skilled, low-wage workers and ensuring that those that are hired are only part-time. Needless to say, this is not an ideal means of helping the working poor. But this is a prime example of the unintended consequences that occur ¬†when technocrats attempt to “solve” problems that are best handled through the free-market.

(Via: Reihan Salam)

  • Math fail. $96/wk, not per hr

    • In Graham’s example, he’s talking about one extra hour per week. So we could say it is $96 per hour or $96 per week since its the same thing.

  • Without some distortionary effect (like the Obamacare) example, you’re unlikely to find such a drastic spike in marginal cost of labor. The reason is that people tend to be satisfied with slight increases in wages. You don’t find too many people who would say that they’ll work for $16 a hour for 29 hours a week but fo the 30 hour they have to be paid $20 per hour. If they are satisfied with $16, they are likely to stay satisfied with that up to about 40 hours (which is where we’ve been conditioned to expect overtime pay).

    But the closest thing we have to a real world spike is the marginal cost between 0 hours of labor and 1 hour of labor. Because of the federal minimum wage, the first hour of labor spikes from 0 to to $7.25 an hour. Again, though, that is because of the distortionary effect of government intervention. There are many employees and employers that would be willing to freely negotiate for less than that wage for certain types of work.

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  • Eric Freeman

    If I put on my cynical hat, I think the 29 hour workweek is a feature not a bug. There will be a surge in part time employees without health insurance. To solve this “problem,” the rule will change to cover all employees. Faced with increased costs, firms will need to reduce headcount. At this point, socialized medicine will be proposed as a job saving program.

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