Will ObamaCare Discourage Small Firms From Growing Past 50 Employees?

ObamaCare imposes a fine on employers who do not provide qualifying health insurance for their employees. This is supposed to encourage employers to offer health insurance and keep too many from dumping workers onto the law’s new health insurance exchanges. But there’s a significant exemption: Small businesses, defined as those with fewer than 50 employees, don’t have to pay the fine.

That provides some relief for small businesses. But it also provides an obvious incentive for them to stay small by penalizing companies that pass the 49-employee threshold. Growing companies will likely think long and hard about pushing past that mark, perhaps delaying hiring or declining it altogether in order to avoid the law’s fines. Many will probably choose to grow to 49 employees and then stop, at least temporarily.

We can see this effect at work in France, which regulates companies with 50 or more workers far more heavily than those with 49 or less. A December 2012 paper by Boston University economist Francois Gourio and University of Wisconsin economist Nicolas A. Roys for the National Bureau of Economic Research notes that, as a result of the regulatory cliff, the size distribution of firms in France “is visibly distorted: there are many firms with exactly 49 employees.” And they’ve got the graphs to prove it.

Here’s their graph showing the distribution of firms with between 1 and 100 employees:
Credit: National Bureau of Economic ResearchCredit: National Bureau of Economic Research

And here’s a zoomed-in detail of the same graph showing the number of firms with between 40 and 60 employees:  

Credit: National Bureau of Economic ResearchCredit: National Bureau of Economic Research
Not only do you see pretty big dropoff at the 50 employee mark, you also see an oversized cluster of firms with exactly 49 employees. This is exactly what you'd expect given that there's a penalty for growing larger.

Gourio and Roys conclude that the regulatory threshold as “a sunk cost that must be paid the first time the firm reaches 50 employees.” The stark dividing line, they say, “clearly distorts the firm size distribution, leading to an obvious misallocation of labor,” and removing it could lead to a 0.3 percent productivity improvement if the number of firms stays the same.

It’s hard to predict exactly how U.S. businesses will react to ObamaCare’s dividing line. But I’d be surprised if we didn’t see some measurable effect, and a noticeable increase in the number of firms with exactly 49 employees coinciding with a decrease in the number who employ 50 or a little more. In other words, it’s yet another way that ObamaCare discourages some employers from hiring and probably makes it harder to create new jobs.

(Hat tip to Gabriel Rossman for pointing out the study.)

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  • Virginian||

    The fact that this story even has to be written shows us the state of economic education in this country. I've had more then one conversation with leftists who either would not or could not believe that raising the cost of something means you get less of it.

  • Professional Target||

    So when are you going to Virginia Beach for pizza?

  • Virginian||

    Why would I go to Virginia Beach for any reason?

  • Professional Target||

    Reference to an article in AM Links about a pizzeria giving 15% off to gun owners.

    I go to Virginia Beach, or at least the Hampton Roads area, a couple times a month to see clients. I figure I'll give All Around Pizzas a bit of business while I'm there next.

  • Virginian||

    I was just bashing VD....uh I mean VB. I did see the item in the links, and I appreciate what the guys doing. But I'm never unarmed. Concealed means concealed.

  • Professional Target||

    Agreed. Get the 15% by showing the CHP.

  • John||

    The fact that this story could have been written for 50 years about any number of federal regulations, shows the sorry state of economic education in this country.

    You want to do something about unemployment, raise the threshold for being subject to federal regulation to 100 employees and watch what happens.

  • Virginian||

    I like it. Then move it up to 150, and then 200. See if the idiots figure out the connection.

  • John||

    Call it a temporary, emergency measure. Bring in business owners who are sitting at 49 employees to testify before Congress.

  • WTF||

    Bring in business owners who are sitting at 49 employees to testify before Congress.

    So they csan be publicly denounced as wreckers and Kulaks?

  • LTC(ret) John||

    And hoarders and splitters!

  • ||

    Unlikely that they will. Their dumbfuckery knows no limit.
    When I pointed out to a lefty how many people are going Galt she was incensed and cursed those people because "they have a duty to the rest of us".
    She absolutely could not grasp that people act in their own interest and so could not see the sense in a system set up to that end.

  • John||

    Wreckers, kulaks!! Those genocides didn't come from nowhere.

  • Shùn Yú||

    going Galt

    ???

  • robc||

  • ||

    I recommend robc's link. Buy it, read it.

    Here is a quicker explanation

    http://en.wikipedia.org/wiki/John_Galt

  • Shùn Yú||

    Suthernboy, Rob,

    My thanks to you both for the responses. I may indeed purchase and read.

  • AuH2O||

    The minute she said "they have a duty to the rest of us" did you immediately say, "How the fuck do you figure that, Einstein?"

    Because I feel I am at the point where I will start doing that shit a lot more often. These people need to be made to feel stupid and small and wrong.

  • ||

    As a matter of fact, I did.

    Her answer amounted to a rehash of the "you didn't build that" argument from captain zeroes vomitous speech.

  • Night Elf Mohawk||

    The people who want to do the stealing had access to the same fucking infrastructure that the Galts did. That the Galts used it to be productive and she didn't doesn't entitle her to their effort. Fuck her with a rusty shovel.

  • KPres||

    It's not education, they don't care. They'd burn us all down if it meant they could get revenge on rich people for having more stuff.

  • Almanian!||

    Yes.

  • Almanian!||

    PS Nice to see you guys were able to end yesterday's strike amicably.

  • Professional Target||

    Oh, I spent yesterday touring a college campus with my daughter. Was there a strike?

  • Almanian!||

    No morning or PM lynx. It was CHAOS here - people randomly posting on the couple of articles that were posted. It was horrible. Horrible.

  • Professional Target||

    [single gentle tear, but a big one]

  • SugarFree||

  • Counterfly Guard||

    Oh please. These jokers couldn't steal a T-shirt from Hot Topic and get away with it.

    2 Chilly maybe. But then there would have been like 40 dead on both sides.

  • $park¥||

    With a crew lead by Nick "The Jacket" Gillespie and Matt "Baby Face" Welch, at least they have the appropriate gangster names. I think they should be ready for the big time in a matter of weeks, not months. They just need to get "The Beard," "The Gamer," and "2Chilly" trained up a bit more.

  • db||

    No love for "The Mick" and "Kit-Kat?"

  • Jordan||

    Why have you abandoned the people of Whiterun? Seriously, please explain the new name.

  • SugarFree||

    They refused his insurance claim to get a knee replacement.

  • Counterfly Guard||

    There's another guy called Thane of Whiterun, and I thought it'd be confusing. So I'm changing to just Counterfly, but I figured I'd do a slow roll so people know who I am or something.

  • Jordan||

    I always just imagined you had a very amicable relationship with your boss.

  • johnl||

    I hope your knee gets better.

  • Palin's Buttplug||

    CEO - "Yeah, we're sitting on the next Google. But dammit, we can't hire that next developer because we will have to offer him health insurance."

  • libertarian viking||

    Because every small business is the next Google?

  • KPres||

    Google didn't even know they were the next Google.

  • SugarFree||

    Shrike's Aluminium Laws: Raising the regulatory burden and expense of a business has no effect on that business whatsoever.

  • $park¥||

    Corollary: Businesses aren't in business to make money, they are in business to employ people.

  • Jordan||

    Corollary: Incentives don't matter.

  • libertarian viking||

    Since large numbers of people spend the bulk of their waking hours during their formative years in public schools, and this is how they are operated, it makes sense that they would see business this way as well.

  • SugarFree||

    We should think of more laws. How about:

    Government is only wrong when the matters are inconsequential.

  • $park¥||

    Media is only unbiased after an election is safely won.

  • WTF||

    Actually, not even then.

  • SugarFree||

    Too general. That's just confirmation bias, which everyone indulges in.

  • $park¥||

    Well yours is just a version of "never make a bet with a Sicilian when death is on the line."

  • SugarFree||

    Whatevs. I spent the last 5 years building up a resistance to your ad homs.

  • WTF||

    Cogent argument, well thought out, with lots of factual information to support it. I'm convinced now that raising the cost of something will have no negative effects.
    /derp

  • Virginian||

    Right, because if it's just some plebe with a restaurant that wants to open a second location, then fuck him.

    This won't stop the world changers. But it will stop a guy who can make a great burger and keep a balance sheet, who's ready to create a better life for his family. It stops him cold.

  • John||

    Leftists are incapable of understanding that a small effect on incentives can add up to something very big.

  • $park¥||

    How dare you call Shreek a leftist! He's a libertarian as pure as the driven snow.

  • WTF||

    Well, he did score very high on the Shrieky Libertarian Purity Test.

  • sarcasmic||

    They don't understand voluntary incentives. They only understand force.

  • $park¥||

    CEO - "Besides, I started this business to make money, because I like money, and I'm making plenty as it is. I can't see why I should need to lower the amount of money I make by hiring more people. It's not like I owe anyone a job or anything."

  • ||

    I would say that is incredibly short sighted, but totally his right to think that way.

  • $park¥||

    Any company that is putting that much thought into hiring a 50th person is probably exactly in this position. Someone looking to hire up to 100 people, not so much.

  • johnl||

    Even then. Anyone with 90 employees should be thinking about how to reorganize or divest.

  • phandaal||

    It's also possible that they're skating on the razor's edge of profit and failure already, and hiring another employee would subject them to higher costs for all of their employees.

    My fiancee's father has a small business, and he's very worried about the costs coming from the health care overhaul. He's definitely not the kind of guy who's jetting around the country while lighting up stogies with $100's. More like the guy who drives his car until it's got 350k miles on the engine.

  • RPR2||

    from looking at the chart there appears to be something that happens at 10 employees too.

  • Fatty Bolger||

    Additional employment taxes kick in at 10 employees.

  • sarcasmic||

    With this nifty thing called "google" I found this.

    http://economix.blogs.nytimes......ic-number/

    France also has regulations kicking in at employment levels of 10, 11, 20 and 25.
  • sarcasmic||

    Silly, silly people. Intentions are all that matter. When results don't match up with intentions, well then it was obviously the fault of the free market or something. But never the fault of well meaning intentions. How could it? They mean well. Really. They do.

  • ||

    This has already played out in France. It's call 49 employee company. If a company needs to grow beyond that threshold, they will just start another one, even with all of the red tapes involved. Here's the article from last May in Business Week: http://www.businessweek.com/ar.....-companies

  • WTF||

    Shrieky says that's nonsense.

  • Ken Shultz||

    "ObamaCare imposes a fine on employers who do not provide qualifying health insurance for their employees."

    It's a tax.

    A tax on not doing something.

    Think of all the people who don't brush their teeth.

    That's the solution to our budget problems right there.

  • WTF||

    And it's all legal because the Constitution provides the authority for a PenalTax.
    /JohnnieRob

  • Ken Shultz||

    Think of all the people who don't smoke!

    Why should they get to avoid the cigarette tax with such an obvious ploy?

    If you can tax people for not doing something, why not tax them for avoiding taxes?

    All the people on bicycles, too. They're not buying gasoline--and if that's something they're not doing, then that's something we can tax, right?

  • VG Zaytsev||

    Just saw Obama's campaign event against the sequester.

    And I've got to give him credit.

    It's damn near impossible to cram that many lies into a ten minute speech, more lies than sentences, but he managed to do it.

  • John||

    MSNDC has bought the weather channel. The Weather Channel used to be quite watchable. You had some reasonably attractive women in a tight skirt, sweater and boots (in the winter at least) giving you the weather. What is not to love. Now they spend half the morning slipping in lefty propaganda. Usually it is about global warming. But this morning it was about the evils of the sequester and how that was going to end weather forecasting as we know it.

  • VG Zaytsev||

    Is there anything that proglodytes can't ruin?

  • WTF||

    But this morning it was about the evils of the sequester and how that was going to end weather forecasting as we know it.

    How the fuck are they even related?

  • John||

    The National Weather Service may have its budget cut. That is how.

  • ||

    The horror.

  • VG Zaytsev||

    But Obama just told me that sequester would cut millions of soldiers, teachers, firefighters and cops. Leading to Madd Maxx levels of anarchy.

    If we had any real journalists in this country, at least would ask the obvious:

    Uh then why did you propose this plan, mr President.

  • John||

    They will ask that question right after they ask him just what he and Reggie Love were up to last weekend at Tiger Woods' house.

  • In Time Of War||

    Hmm, those are all government jobs, so if they are cut, won't that actually reduce the amount spent on their salaries, benefits, etc?

  • WTF||

    Ah, so it's the old, 'if the government doesn't do it, it won't get done' idiocy. Well, fuck the Weather Channel if they can't survive without government basically subsidizing their business.

  • Lord Humungus||

    Everyone talks about the weather but no one does anything about it - Twain (I do believe)

  • Libertymike||

    John, the idea is to use the weather babes to lure men and lesbians to the channel so that they can sprinkle in some shrieky snippets and thereby further indoctrinate you.

  • John||

    Of course it is. But it didn't used to be that way. Only after NBC bought it did it become yet another propaganda arm of the DNC.

  • R C Dean||

    I'm no specialist, but the OCare penaldate isn't the only thing that lands on businesses once they have 50 employees. Probably the biggest and baddest, but not the only.

  • John||

    I have a bigger and badder one. It is spelled OSHA.

  • Ken Shultz||

    It'll be a huge one for companies that are extremely price competitive, though.

    A standard restaurant with table service can easily have more than 50 employees.

  • ||

    Split the restaurant into two companies?

  • Ken Shultz||

    That's what I'm thinking.

    Why hold them all under one taxable entity if you can hold them separately?

    I don't have 147 employees! I only have 49(X3).

  • Ken Shultz||

    Which just goes to show, once again, that Obama and the Democrats live in an imaginary static universe, where people don't react to their stupid regulations.

    It just ends up making it more expensive to go into business in first place. You're adding more legal costs, more bookkeeping costs--more taxation, too. Cause you can't depreciate an asset in one entity against the profits of an asset in another entity. It's just making the economy less efficient, less competitive...

    They don't care, though. They live in an imaginary static universe, where people don't react to their stupid laws and unicorns shit Obama speeches.

  • califernian||

    Don't kid yourself that it's Obama and the democrats only.

  • Alex the wolf||

    Like it or not the GOP is the only thing stopping total socialization.
    Get over it

  • John||

    What you do is hire temp firms for your labor. That way they work for the temp firm and don't count against your employee total.

  • robc||

    Temporary workers: Temporary employees count, even if you contract for them through an employment agency.

    This is for all the size-based regulations.

  • Brandon||

    But the temp firm still has to make a profit, so the temps end up costing a lot more than just hiring employees would.

  • robc||

    Was googling around and found a 1998 article that says that costs for the Family and Medical Leave Act (which kicks in at 50) mean that for the typical company 49 is more profitable than 60.

  • Alex the wolf||

    But that is the idea. If there are less jobs there are more people unemployed and dependant on government

  • Ken Shultz||

    I see that point, but I'm still in the never assume nefarious motives when simple incompetence will explain it just as well.

    Obama is an economic illiterate. His cronies job is to make his illiteracy seem really smart. The emperor has no clothes.

    I can't seem to get many people who like him to see he's an evil bastard, so I'm resigned to just pointing out that he's completely incompetent.

  • califernian||

    He's as economically illiterate as the last few presidents were. And the next one more likely.

  • WC Varones||

    It always comes back to the General Theory of Liberalism: liberals don't understand incentives.

    http://www.wcvarones.com/2009/.....alism.html

  • sarcasmic||

    They only understand intentions. Observations about results are viewed as attacks on their good intentions.

    For example when they raise the minimum wage the intent it for that unskilled single mother to get a raise. When it is pointed out that the result is her losing her job because she is priced out of the labor market, the observer is attacked for not wanting her to receive a living wage.

    My General Theory of Liberalism is that they are so consumed by their emotions that they are incapable of taking a thought past step one.

  • dantheserene||

    This reminds me of the right to work question of, "Do you want to push for a higher paid union job that doesn't exist, or a lower paid non-union job that does exist?"
    Despite progressive intentions, that is a very real question.

  • Auric Demonocles||

    Peter! With great power (publishing) comes great responsibility (of posting alt-text)! I thought you had learned this already?

  • robc||

    I mentioned this recently but it is appropriate here.

    I while back I had lunch with a former boss of mine (1997-2000). He said the woman that does their books/HR stuff/office manager/etc told them she will quit that day if they ever hire a 50th person.

    They arent that close, about 35-40, I think.

    There is very little value to having 51 employees. You stop at 49 and then jump to 65.

  • Auric Demonocles||

    This is totally ridiculous and would never happen. It's not like you can find examples of this happening in other similar situations, say with the number of barrels of beer your produce a year.

  • robc||

    Yeah, that one is more silly than similar though. Same result, but is actually from a poorly thought out tax cut than from an additional regulation.

  • robc||

    And to be fair, I need to point out two GOOD changes in regulation made by the TTB recently.

    1. Brewers who pay over 50k in excise taxes per year (about 7000 bbls) have to file biweekly and have a bond of 10% of annual taxes. Smaller brewers only had to file quarterly but had to have a bond of 29% of annual taxes (or $1000 minimum). This led to a large bond for some brewers so they instead filed biweekly to get a lower bond. The change is that now those small brewers MUST file quarterly, but the bond requirement is a flat $1000.

    2. The quarterly filing document has changed, small production brewers now use the brewpub doc which is much less complex.

    I will point out that in both cases they made the process simpler and cheaper. In other words, LESS regulated.

  • The Late P Brooks||

    If we abolished small businesses and turned everybody into government employees, this problem would be solved.

  • The Late P Brooks||

    Not only do you see pretty big dropoff at the 50 employee mark, you also see an oversized cluster of firms with exactly 49 employees.

    It's almost as if the marginal return to that fiftieth employee is negative.

  • robc||

    That is just crazy talk.

  • The Late P Brooks||

    Just saw Obama's campaign event against the sequester.

    I made a desperate lunge for the channel changer thingy, but not before I noticed the careful placement of an attractive blond in a (I suspect) Fireperson's uniform just over his shoulder.

    What sort of monster would throw this poor delicate flower into the cruel streets, to demean herself by working for a profiteering capitalist, when she has devoted her life... HER LIFE, damn you... to helping people?

    Oh, it makes one weep for Humanity.

  • Doctor Whom||

    I grew up in a county that imposed affordable-housing requirements on all subdivisions of 50 or more houses. People seemed genuinely surprised that all new subdivisions had exactly 49 houses.

  • ||

    It's the same reason why 49cc size engine is popular in Taiwan. At 50cc, it's taxed at motorcycle rate.

  • ItalCali||

    It definitely will.

    It will be like the Union law in Italy, where I come from.
    Any companies with more than 15 employees needed to have a Union representative among the employees.
    Lo and behold, many many companies had 14 employees.

    Given the high unemployment, they would subcontract work to individuals, all under the table, nothing reported to the authorities.
    Thus the flourishing black market in Italy - high taxation and apparently very progressive laws actually created a very exploitative black market.

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