What Obamacare Means for Janet Yellen and the Fed

How much hotter can the job market get before spurring inflation?

Janet Yellen, chair of the U.S. Federal Reserve, and President Barack Obama.

Photographer: Andrew Harrer/Bloomberg

There’s probably a little less slack in the labor market than meets the eye.

President Barack Obama’s signature health-care act has raised the number of people working part-time involuntarily—i.e., those who would prefer to have a full-time job—by anywhere from 320,000 to 580,000, according to research by Michael Feroli, chief U.S. economist at JPMorgan Chase. Starting this year, the law requires employers with 100 or more workers on payrolls to offer health insurance for most employees working at least 30 hours a week. Beginning in 2016, those with 50 or more employees will also need to comply.

Here’s why that means one of Federal Reserve Chair Janet Yellen’s favorite labor-market metrics is showing numbers that are probably weaker than the true underlying trend.

Yellen pointed to these so-called part-timers for economic reasons during her press conference last week as one reason central bankers will take their time in raising the benchmark interest rate.

“Involuntary part-time employment remains elevated,” Yellen said. “Although progress clearly has been achieved, room for further improvement remains.”

The chart below shows how far another measure of slack has already come. There were 563,000 workers so discouraged by job prospects in May that they weren’t even looking for work, the fewest since October 2008. They represented about 0.36 percent of the labor force, closing in on the 0.27 percent average for the period from 1994 through 2007, and suggesting there’s less room for further improvement here.

discouraged as share of LF with avg

The next chart shows that wasn’t the case for involuntary part-timers, who totaled 6.65 million in May, or 4.2 percent of the labor force, compared with an average 2.9 percent for the 14 years through December 2007, when the last recession began. That remains significant, which is why Yellen and her colleagues say they want to go slow. Reduce the part-time total by Feroli’s estimate, however, and the gap is a little less daunting (see the red dots).

Part-Time for Economic Reasons with dots

Because it’s probably influenced by the Obama administration’s Affordable Care Act, some portion of that gap will persist even when the labor market has fully healed, Feroli wrote. (Note: The Supreme Court is due to rule this month on a challenge to the ACA that could unravel the core of the law, resulting in millions of Americans losing their insurance.)

Feroli went on to say that he’s not making any value judgments on the ACA’s efficacy. It could be that the benefits of the law outweigh any costs from the distortions to the workweek, he said. It could also mean that employers are hiring more workers than they normally would, but keeping them under 30 hours a week. In other words, companies may be hiring three people part-time to do the work of two full-time staff.

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