4. Aggregate Time Allocation and Additional Effects on the Federal Deficit

The estimates in this section do not introduce an independent forecast of induced work; they monetize the time-allocation implications of the scenario assumptions in Table 39. As noted, at least 50 percent of able-bodied adults enrolled in Medicaid did not work. If, say, 80 percent are to work when the IFC is in effect (see Table 39), then at least 30 percent of those who would participate absent the IFC must have their time allocation affected by the IFC. An applicable individual demonstrates community engagement through employment by either working not less than 80 hours or the income alternative ( printed page 33462) of having a monthly income not less than $580 (applicable Federal minimum wage multiplied by 80). Table 42 shows this bound separately for the four scenarios introduced in Table 39.

Table 43 shows the annual hours added to the labor market for each scenario, assuming baseline adult group enrollment of 20.4 million, 75 percent of which are subject to the community engagement requirement. The high-impact scenario (scenario 2 requires $580 dollars of earnings, which would be about 27 hours per month for a worker with hourly wage at the 25th percentile. CMS expects, in that scenario, 3.8 million to meet such a requirement who would not have worked. Another 0.6 million would be in unpaid community engagement, for a total of 4.4 million moving to engagement, as shown in the table. As shown in the low-impact scenario, a weaker requirement of just 1 of the past 6 months is expected to be met by an additional 1.0 million beneficiaries. The table's first aggregate hours row shows what the added hours would be if all 5.4 million met the requirement only at the minimum. The next “additional months” row assumes that the 4.4 million in scenario 2, who would meet the “maximum” requirement (all months at $580 income), instead would work at a level halfway between the minimum and maximum while they are enrolled in Medicaid. An accurate forecast requires an “additional months row” because working in 1 month involves the acquisition of knowledge, relationships, and other experiences that increase the net benefit to work in adjacent months.

Note that Table 43 otherwise has a tendency toward underestimation in that it (a) it ignores those who work due to exiting the Medicaid program, (b) it assumes that all those exempt or noncompliant are neither working under the IFC nor in the baseline, and (c) that workers meet the requirement by earning $580 for the month rather than working 80 hours. [ 152 ] Additional underestimation of Table 43's cost entries (thus generating a tendency toward overestimation of net benefits) is possible if $12.92 were a lower bound on affected individuals' opportunity cost of time.

Tables 44 and 45 show the costs and benefits associated with the IFC's change in time allocation using annual discount rates of 7 percent and 3 percent, respectively. The dollar ( printed page 33463) amounts in the top part of the tables are annualized. For beneficiary engagement, aggregate dollar amounts are obtained by multiplying the aggregate annual hours of Medicaid beneficiaries from Table 43, including the bare-minimum hours as well as the additional hours, by the hourly MPL of $24.84 or the opportunity cost of $12.92.

A substantial fraction of adults on Medicaid during 1 calendar year would no longer be enrolled in Medicaid the following year. Individuals who move to work and satisfy the community engagement requirement while participating in Medicaid acquire knowledge, relationships, habits, and health increase the net benefit to work even after they leave Medicaid. In other words, working encourages human capital investment, which itself feeds back to encourage additional work hours. The human capital perspective suggests that some fraction of beneficiaries would continue to work in months after the requirement ended. Based on (a) Card and Hyslop's (2005) finding that the additional earnings resulting from participation in a welfare demonstration project persisted over time but decayed at 3 percent per month after exit from the program, (b) an able-bodied engagement-compliant adult Medicaid annual exit rate of 43 percent, and (c) a 29 percent annual reentry rate of former beneficiaries, we estimate the effect of the community engagement requirement on engagement after Medicaid exit. [ 153 154 155 ] Because these are effects in the future, the corresponding “ex-beneficiary” benefit and cost rows in Tables 44 and 45 depend on the assumed discount rate for future benefits and costs. The ex-beneficiary rows are about 45 percent of, and in addition to, the current beneficiary rows.

The total annual expected net benefit (averaging across scenarios) from the time reallocation effects of the IFC is about $52 billion. The final entry in each table is the net present value (NPV) of time allocation benefits minus time allocation costs, calculated as an expectation by weighting each scenario value according to the scenario weight. The NPV is $459 billion at a 3 percent annual discount rate and $388 billion at a 7 percent rate.

An important reason for the labor wedge-adjacent societal welfare gain—the gap between the aggregate benefit of an hour of market work and the worker's opportunity cost at the margin—is that work (and the spending it enables) generates revenue for government treasuries in the form of taxes on income, payroll, sales, and excise. [ 156 ] (Work also tends to move workers off safety net programs, or at least phase out some of their benefits. Either way, the work reduces deficits.)

Table 46 uses the most recent marginal tax rate calculations posted at the National Bureau of Economic Research website in The Redistribution Recession that focuses on measuring the labor wedge and its fiscal components. [ 157 ] The components include Federal revenue items, such as payroll taxes, State tax items, as well as Federal and State safety-net spending items. The Federal savings as additional work results in Medicaid exits is excluded from Table 46 in order to avoid double-counting savings calculated in previous tables. The Table's marginal tax rate (MTR) column is the part of the 48.0 percent labor wedge that reflects the contributions to the indicated segment of society to which the benefits accrue. [ 158 ]

After the MTR column, each entry in Table 46 is in billions of dollars. Each is calculated in two steps. First, we refer to the scenario-specific time allocation aggregate benefits from Table 44 (7 percent discount rate) or Table 45 (3 percent discount rate) but eliminate unpaid volunteer time because that does not generate tax revenue. We estimate the unpaid volunteer time from Table 33 as half of the non-work part of community engagement. The remaining aggregate benefits can be understood as the MPL applied to non-volunteer community engagement hours. These remaining aggregate benefits are multiplied by the corresponding MTR from Table 46. The final column of Table 46combines the four scenarios into a single weighted average using the weights from Table 39.

Overall, the time-reallocation effects of the IFC are expected to reduce annual government deficits by about $35 billion. This is economically substantial, although somewhat less than the fiscal effects of reducing enrollment in Medicaid.