Why Would a Firm Not Want 50 Employees?

I was especially pleased to have read a WSJ column by University of Chicago economist Casey Mulligan about what he believes are the labor market tradeoffs of the Affordable Care Act (ACA). My goal today is just to consider some of the conclusions in his column and in his new Kindle book, Side Effects. 

The ACA and Labor Markets

Alluding to the academic and political debate surrounding the Affordable Care Act, Dr. Mulligan tells us that labor markets need more attention. He then starts with the big idea that allocating more resources to healthcare means less land, labor and capital somewhere else unless productivity increases or we get a bigger workforce. Yes, he says that certain populations will get a bigger slice of the economic pie, but then he predicts the pie will shrink because of labor market “taxes”.

Explaining how the act will transform incentives in labor markets, in one example he details the “29er phenomenon”. The key, he says, is that 50 worker tipping point. Go from 49 to 50 full time workers and your firm’s insurance obligations multiply. However, because full-time is defined as a 30 hour work week, employers might just increase the number of people who come in for 29 hours. Employees, meanwhile, will respond to incentives that affect decisions about where and how much they work.

Discussing the supply and demand sides of labor markets, Dr. Mulligan concludes that healthcare financial incentives will nudge firms and individuals toward less productivity.

France’s 50 Employee Rule

Dr. Mulligan’s predictions reminded me of a recent NY Times description of two French firms.

In France, hiring worker #50 means your business has to create worker councils, establish profit sharing, and report to employee representatives when firing people for economic reasons. As a result, in 2012, there were 2.4 times as many businesses in France with 49 employees as there were with 50.

One business owner in Provence explained a somewhat convoluted expansion decision. A former mountaineer, he had created a firm composed of individuals who could paint suspension bridges, scale cooling towers and handle height comfortably. Because the 50th employee would have made his expenses climb by 4%, he decided instead to start a new firm. And then, when he grew even more, he created yet another new business.

By contrast, a French artisanal chocolatier who chose to hire his 50th employee regretted the decision. He told a reporter that it meant “…50% of my time spent trying to apply rules that don’t advance the business and that distract me from finding new products and markets.” Not only did his operating costs spike by €32,000, but also he had to devote more time to administrative tasks. The government even asked him to project how much chocolate he could produce during wartime rationing.

Tradeoffs and Our Bottom Line

With the ACA spawning 14,000 pages of regulations with countless incentives, labor markets will remind us that there is never a free lunch. Summarizing the ACA tradeoff, Dr. Mulligan says at the end of his book, “Time will tell whether the health reform is remembered for its intentions or its economic surprises.”