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Timothy Slaper
Indiana Business Research Center

George Vlahakis
IU Communications

Last modified: Wednesday, January 25, 2012

Report focuses on impacts of Affordable Care Act and right-to-work legislation on employment

Jan. 25, 2012

Editors: The complete report discussed in this release is available online at this link.

BLOOMINGTON, Ind. -- According to a new report by researchers at the Indiana Business Research Center, the Hoosier state is a prime example of how the Affordable Care Act could place thousands of jobs created by small businesses at risk.

The same report also found that Indiana is heavily dependent upon out-of-state investment for creating new jobs, an important consideration as the state legislature is embroiled in the contentious right-to-work issue.

"Our research shows that, absent small businesses and new investment creating jobs, Indiana would have hemorrhaged jobs, even during the last economic expansion," Timothy Slaper and Ryan Krause wrote. "Were it not for small firms hiring and the state's ability to attract investment to create jobs, Indiana would have lost more than 100,000 jobs from the third quarter of 2003 to the second quarter of 2008.

"The Affordable Care Act unquestionably puts thousands of jobs at small businesses at risk as the economy recovers," Slaper and Krause added.

Slaper is director of economic analysis and Krause is an economic research analyst, both at the IBRC, which is based at Indiana University's Kelley School of Business. Their report, "Where the Jobs Are," was done without support from an outside group. The report reflects their conclusions and not those of the IBRC or the university. The report was researched using data from the quarterly census of employment and wages.

They analyzed whether small firms create the majority of jobs, as is often asserted. They defined small businesses as having fewer than 50 employees, which is the Affordable Care Act definition. Indiana firms that started small (49 or fewer workers), grew past the 50-employee threshold and remained relatively small with more than 50 employees as of the second quarter of 2008 were labeled "homegrown."

In contrast, firms that grew quickly, starting with fewer than 50 in the third quarter of 2003 and growing by more than 100 from one quarter to the next, were labeled "parachute" firms.

"Employment grew so quickly at parachute firms, it's as though hundreds or even thousands of jobs parachuted to the state overnight. Because the production scale ramps up so quickly, most of these jobs were likely the result of large out-of-state companies investing in Indiana," they said, suggesting the Honda plant in Greensburg as an example.

Homegrown and parachute firms made up 2.5 percent, or roughly 4,500, of all the firms that existed in Indiana over the five-year period. They created more than 190,000 jobs during a period for which the entire state generated a net 86,395 new jobs.

Homegrown and parachute jobs also paid more than the Indiana average annual wage, about $600 and $1,700 more, respectively.

"Those not in favor of Indiana becoming a right-to-work state would look at these results and conclude that Indiana has been relatively successful attracting parachute firms and the jobs they create even without RTW status," they said.

"On the other hand, those advocating for Indiana becoming a right-to-work state would reach a different conclusion based on this analysis. Given Indiana's dependence on parachute firms investing in Indiana and creating jobs, why put the state at a competitive disadvantage for those jobs?" they noted.

"The average Hoosier may have had an unconscious understanding about the importance of out-of-state investment for job creation, but probably was not aware that such investments, together with small businesses, were the only sources of net job creation in the state."

Slaper and Krause said their findings also have implications for the Affordable Care Act.

"Homegrown firms also contributed mightily to Indiana's job growth," they wrote. "Given that these firms crossed the 50-employee threshold above which ACA requires firms to provide health care coverage or pay a substantial penalty if they don't, we estimated the jobs that would have been at risk of not being created."

They suggest that about 12,700 jobs would have been at risk in Indiana during the last expansion had the Affordable Care Act been in force.

"While not a huge number, it still represents nearly 15 percent of total employment growth in Indiana over the five-year study period," they said. "Most firms that crossed the threshold did not grow significantly past the 50-employee mark. Given the high additional cost of hiring the last few workers compared to the 49th worker, it is quite likely that most of those jobs would have not been created.

"Subsequent to the 50th employee, each new employee costs the firm an extra $2,000 above salary to cover the ACA penalty. For a small business, paying essentially two salaries for one employee might be prohibitively expensive," they added. "For the firm looking to grow to 200 employees, this might not be much of a concern, but the firm wondering if it should expand from 49 to 55 employees might just choose to continue without hiring, costing Indiana six jobs it otherwise would have gained."