One 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)
