Sunday, November 1, 2009

Healthcare costs and the fragile labor market

The cost of healthcare to employers has been rising at a rate of about 9% a year in the past 10 years.

source: The Kaiser Family Foundation Survey

This is an unsustainable rate that drove employment costs to levels that prohibited real wage increases, squeezed margins, and made US corporations far less competitive. This was particularly painful for smaller businesses that generated a large fraction of new job creation. Employers had no choice but to pay, until now. Employers still continue to pay those high healthcare premiums, but mostly at the expense of having far fewer employees.

Th only way they can drive costs down is to lower wages or lay off workers. Lowering wages has had an impact in limited cases, as reality sets in for the unions that employers now have the upper hand. But rising healthcare costs limit corporations' ability to cut wages because employees' share of these costs has also been rising dramatically. The combination of wage cuts and rising insurance premiums is pushing net real earnings to the breaking point. Ultimately, cost cutting comes from job reductions as employers try to survive with fewer employees.

The chart below shows the Bureau of Labor Statistics Employment Cost Index that includes healthcare insurance costs. In spite of rising premiums, the growth in costs has dropped significantly. Employers are trying to squeeze every last drop from existing workers. This allows firms to survive by driving efficiencies, but doesn't help the employment picture.

source: Bloomberg

The thinking is that with costs somewhat under control and inventories low, as orders start to pick up, employment may improve. But the situation is extremely delicate because credit, particularly to smaller business, continues to be tight. One way or another the 9% a year healthcare cost increases must end in order to see any signs of improvements in jobs. It also doesn't take extensive analysis to conclude that in this fragile environment, any government policy that increases employer healthcare costs (whether directly or through taxation) will quickly dash hopes for significant labor market recovery.
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