My Supply-Side Senses Are Starting to Tingle

One of the most contentious debates over the past few years has been whether the U.S. slump is the result of  an aggregate demand shortfall or a spate of negative supply shocks. Depending on which view you take, the policy implications are very different. In the former case, monetary policy could help by closing the output gap. In the latter case, it would only be 'pushing on string' and might even create more problems. 

I have argued that the slump has largely been the result of an aggregate demand shortfall. One piece of evidence for this view I have repeatedly pointed to is a question on the NFIB Small Business Economic Trends survey. This survey question asks firms what specific developments they see as the "single most important problem" they face. Answers to question include lack of sales, regulation, taxes, inflation, financing costs, quality of labor, insurance availability, competition from large business, and other. This question, therefore, allows us to see from a small firm's perspective how important supply shocks are--as measured by regulation, taxes, financing, and quality of labor--compared to demand shocks--as measured by a lack of sales. Since the crisis the started, a lack of sales has been the number one problem. This series has led changes in the unemployment rate in a remarkably consistent manner since the data starts, as seen below. The easiest and most straightforward interpretation of this relationship is that firms cut back on production and employment as a result of the expected weak sales. From the firm's perspective, this suggests an aggregate demand shortfall is the key driver behind the slump.

Now I still buy this story, but recent developments in the survey question suggest supply-side concerns are becoming a bigger deal. In fact, a lack of sales is no longer the number one problem. Rather, it is concerns about regulation, as seen below.

What is even more alarming about these regulation concerns is that they have consistently risen since 2009 and are now at their highest level since the previous peak in 1994. See the figure below:

 

So what possibly could be driving the rise in regulation concerns? I think the answer is obvious: Obamacare. And I think observers like Brad DeLong, Paul Krugman, and myself who have been so quick to use this NFIB data when it fits our views need to be honest and acknowledge what this data is saying now.

So how do we interpret the rising small business concerns about government regulation? One manifestation of these concerns might be the claim that some firms are cutting back employee hours to under 30 so that they do not have to offer them health insurance. This claims resonates with me since I know people in my community who have had their hours cut back for this reason. Brad DeLong, Jared Bernstein, Max Sawicky, and others say no way, there is no evidence of this in the employment data. They also ask why would firms start doing this now if this requirement does not become law for another year.

I acknowledge their point on the employment data, but would direct them to two polls that suggest firms are cutting back on hours in one form or another. The first one was a Gallup poll and reported on CNBC:

Small business owners' fear of the effect of the new health-care reform law on their bottom line is prompting many to hold off on hiring and even to shed jobs in some cases, a recent poll found.

"We were startled because we know that employers were concerned about the Affordable Care Act and the effects it would have on their business, but we didn't realize the extent they were concerned, or that the businesses were being proactive to make sure the effects of the ACA actually were minimized," said attorney Steven Friedman of Littler Mendelson. His firm, which specializes in employment law, commissioned the Gallup poll...

Forty-one percent of the businesses surveyed have frozen hiring because of the health-care law known as Obamacare. And almost one-fifth—19 percent— answered "yes" when asked if they had "reduced the number of employees you have in your business as a specific result of the Affordable Care Act." 

A more telling survey was done by the Foundation of Employee Benefit Plans. They found that 15% of firm with 50 or more employees and 20% of firms with less than 50 employees had plans to adjust hours so that fewer employees qualify for full-time medical insurance under the ACA. The smaller firms also planned to make other changes in seen the figure below from their survey:

So according to these surveys and the data from the NFIB, Obamacare is now having an effect on labor markets. Now this evidence does not speak to the size or magnitude of this effect. The figure above suggests it is limited to smaller firms. Maybe that is why folks like Brad DeLong, Jared Bernstein, Max Sawicky, and others who are associated with big institutions have not met anyone adversely affected by the ACA. I too work at a large institution, but live in rural Tennessee where I have met people whose hours have been cut because of Obamacare. Further examples of people affected by the ACA can be found here in this Guardian article.

So yes, firms appear to be cutting back on employees and hours. And they are at a high point for concerns over regulations. This has my supply-side senses tingling. Your supply side senses should be tingling too. The only question is how big is this effect.

P.S. To be clear, I still view most of the lingering labor market weakness as a result of the ongoing shortfall in aggregate demand. However, the evidence above suggests supply-side concerns are increasingly becoming important.

Update: Jed Graham has compiled a list of firms who have cut hours or jobs because of the ACA.