Health Care and Hiring in Booms and Busts

February 9th, 2014 at 2:40 pm

Bin Appelbaum has an interesting piece on the impact of recent developments in the health care sector on the macro economy. It is widely agreed that the sector is bloated with inefficiencies, often characterized by extremely high costs for the same products and treatments that cost much less elsewhere in the world. Scolds, including myself, endlessly point out that other countries spend half to two-thirds what we do per-capita, covering far more of their citizens, and with comparable or better outcomes.

Appelbaum argues that achieving these efficiencies in a recession—or slow slog out of a recession—kinda gets the timing wrong. You want to slim the sector for good economic reasons, but is this the right time for health care to go on a diet?

For example, the piece points out slower growth in health care employment of late is one reason we’ve seen weaker jobs reports over the past few months. The figure below shows yearly percent changes in health care jobs wherein you can see the recent deceleration at the very end of the series.


On the other hand, it’s easy to overplay this. The next figure plots health care jobs against total employment (minus health care). Health care demand surely has a cyclical component, say regarding elective procedures, but it’s also got a significant inelastic component, as patients typically don’t wait for the macroeconomy to improve before seeking needed treatment, especially those with coverage. At any rate, excepting the last couple of months, the sector has clearly been a stalwart job creator throughout the recovery.


Source: BLS

But the point I wanted to stress has to do with the role of health care costs in the macroeconomy in boom versus slog times because I think they demonstrate an important difference in the economic dynamics.

In the 1990s, there was a very significant shift in the health insurance industry away from fee-for-service to bundled payments, through HMO’s and similar provider arrangements. The figure below shows one dimension of the impact of prices, in this case on the growth of employers’ health costs. Note that even as the economy was moving towards full employment in the mid-1990s, the growth in the health part of compensation costs hit zero.


Source: BLS

Alas, as the figure reveals (see red line), the savings of the 1990s turned out to be more one-time than lasting. The inefficiencies embedded within the delivery system soon kicked back in and costs were again growing well ahead of overall growth (implying health spending growing as a share of GDP). But back in the 1990s, it was quite widely agreed upon that the slowdown of health costs was an important contributor to full employment.

Employers faced increasing demand and—due to the shift away for fee-for-service—lower all-in compensation costs, and the collision of these two was recognized by many economists as one reason hiring boomed and unemployment fell to 4% by 2000.  So, unlike the focus of the NYT piece, here we have a case where slowing costs were clearly very helpful to the near-term economy.

[BTW, economists were also scratching heads back then because the theory is that any decrease in health costs should just show up in higher wages and thus should decidedly not lower the cost of hiring and boost labor demand.  I’ve never thought that tradeoff is as etched in stone as is commonly assumed, and certainly not in the near term.]

To me, this is a microcosm of a larger point. As Keynes pointed out long ago, in recessions, lower labor costs don’t drive more hiring because the missing ingredient is overall demand. “Downward wage flexibility,” touted by conservatives to this day as a solution to our hiring problems, would just make things worse, as lower wages (and lower prices) dampen demand further, an observation more in the spirit of the NYT analysis.  But in bona fide growth periods, a shock like the one in mid-90s health costs can lower the cost of hiring at a time when firms are facing strong demand for their products or services, and that can lead to a lot more jobs.

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7 comments in reply to "Health Care and Hiring in Booms and Busts"

  1. Larry Signor says:

    The ACA is going to change the calculus of individual and employer offered health insurance. Soon corporate America will realize they are missing out on the benefits of the subsidies. This is why we see the Employer Cost Index continuing to dive the last two years. Single payer is on the way. The ACA is a huge fiscal stimulus program dressed up as social engineering. I never expected to have as much respect for a President and Vice as I have for Barrack and Joe. More’n one way to skin a hog.

  2. smith says:

    “any decrease in health costs should just show up in higher wages”
    Why? The average worker is oblivious to their employer health care cost contribution, they just know they have coverage (or don’t). Ask a worker how much they made last year, and he/she can probably tell you. Ask what their employer’s health care contribution was and he/she probably can’t. Even more so when thinking about increases, salary vs. employer healthcare contribution. Annual review time, the employer isn’t saying, here’s an additional X number of dollars due to lower healthcare costs. But the employer also doesn’t say we’re cutting your salary 1% because insurance premiums went up 15% (except in distressed industries, and public sectors facing revenue shortfalls).
    I thought employer paid healthcare exists mainly as an artifact WWII wage price controls (limits on wage increases partly compensated by benefit increases). Once unions (30% of private workforce) had this, management couldn’t be denied the same, nor non-union workers that management wanted to keep non-union.
    Did rising health care wages retard growth, stifle hiring, stagnate wages? No. GDP rose, but productivity gains flowed to the 1%. This happened not because the 1% were super healthy and had lower health care costs (healthy or not, their insurance costs are probably greater than the average income earner). Even in the auto industry where healthcare continues to add thousands of dollars to costs (vs. Japan and Germany that have government healthcare), they nearly went bankrupt due to disastrous marketing decisions (over reliance on SUVs and pick up trucks), engineering (vs Japanese reliability) and cannibalizing their own customer base (with foreign factory locations)

  3. Jill SH says:

    I’ve been intrigued that real push for health care/insurance reform came in the 2000s, not a time the baby boomers were entering Medicare, as they are now, but when they hit middle age, the 50s, when a lot of chronic diseases like heart disease really start showing up in statistics, and especially when these risk factors start impinging on insurance rates. Could that be another factor in the upward thrust of costs after the 90s?

  4. save_the_rustbelt says:

    ACA has caused some shifts within the health care sector; clinical and support staff are gradually being cut and replaced with administrative and IT staff, especially in the hospital sector.

    The next IT meltdown will be ICD-10 and EMR/EHR at the end of this year.

    Great plan, don’t ya think?

  5. Mark Jamison says:

    Some bright young economist needs to do some reach on whether the conventional wisdom that lowering employer benefit costs will show up has higher wages.
    With exceptions in some fields the power is almost entirely with the employer. Ask yourself, if the employer portion of the payroll tax were reduced or eliminated would that result in higher wages? More hiring? Perhaps theoretically but in the current environment virtually all that gain would flow to capital. The old rules and relationships have changed and that is not reflected in the thinking of many economists. Glad to see you’re at least skeptical on this Dr. Bernstein.

    • smith says:

      The difference between the payroll tax and health benefits are many
      1) Payroll tax is a fixed amount (except when tax law changes), for a certain salary it doesn’t change from year to year. Health care is very variable and can easily outpace inflation.
      2) The employer’s payroll tax contribution is pegged to a percentage of the salary or wages of the employee. Health care benefits generally are the same for an employee or their supervisor making 50% or 100% more in salary.
      3) Health benefits were not required by law prior to ACA, and still not for small businesses. The payroll tax applies to every employer no matter the size.
      4) Health benefits vary hugely according to the number of dependents added (spouses and children).
      5) The employer’s contribution to payroll tax is always counted as part of employee’s income when considering national income.
      6) The fiction that it’s not means that conservatives can deny it’s regressive nature (a large 12.4% flat tax) and liberals can deny the cost (the tax is12.4% of your salary not 6.2%).
      7) Eliminating the payroll tax and lower health benefit costs would have no effect on wages because the employee never bargains for these, he doesn’t bargain with the government over what the payroll tax should be, he doesn’t bargain with the health insurance company over contributions, he bargains with his employer over salary.
      8) Just the opposite getting increased wages is occurring in union environments where employees are asked to contribute more to benefit plans.

      If the entire 12.4% tax was assessed to employees, that would be different, likewise if salary was negotiated with no employer contribution to healthplans, but with increases and mandates to pay for them, the situation would be different.

      The real distortion comes from income gaps that don’t consider the $20,000/yr worker with health benefits is really making $27,000 (or more depending on children) vs. the part time or minimum wage worker at $15,000 pre ACA with no benefits or $20,000/year worker at small company or freelancer and pre ACA no benefits, meaning the poor are/were poorer.

      Finally corporations are sitting on record amounts of cash, hardly any going to workers. There is a surplus of workers, thus zero wage pressure.

  6. Grace Evans says:

    In regards to your graph about slowing growth in healthcare employees, it’s actually expected to grow significantly over the next decade. Many of the medical careers are forecasted by the BLS to grow 30%+ over the next decade compared to 11% in all jobs. For example, according to BLS, physical therapists are expected to grow a whopping 36% during this time!!!