Health Care Costs Called "Job Killer"

Employee benefit costs have been rising at a fast pace over the past few years. The rise in benefit costs, coupled with falling inflation, has created a divergence between product prices and total labor compensation.

The growth in compensation is being driven entirely by the rise in healthcare and pension costs. Over the past two years, benefit costs have risen about 5.5% each year, outpacing growth in wages and salaries by nearly 2.5 percentage points.

The problem is particularly pronounced in manufacturing. Total compensation in manufacturing is up about 4.6% over the past year. During this same time, producer prices have been essentially stable (see chart). Although the sector has many other structural problems, rising benefit costs have surely added to the misery.

Informal evidence also suggests that benefit costs have been a major impediment to hiring. Polls of chief executives of major corporations have consistently listed health-insurance costs as the biggest barrier to adding workers. Also, according to a recent survey conducted by the Michigan Manufacturers’ Association, two out of five manufacturers in Michigan have laid-off workers or scaled back hiring due to rising healthcare costs.

Small businesses have been particularly hard-hit. Healthcare costs for small businesses have been rising at a faster pace than the national average. According to a survey conducted by Mercer Consulting, soaring worker healthcare costs overtook taxes as the biggest concern for small businesses. This is important because these businesses are also, typically, the first to begin hiring during a labor market upturn. By claiming an increasing share of cash-flow, rising healthcare costs are surely delaying hiring.

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