An article from the New York Times - August 19, 2004
Rising Cost of Health Benefits Cited as Factor in Slump of Jobs
August 19, 2004
By EDUARDO PORTER
A relentless rise in the cost of employee health insurance
has become a significant factor in the employment slump, as
the labor market adds only a trickle of new jobs each month
despite nearly three years of uninterrupted economic
Government data, industry surveys and interviews with
employers big and small indicate that many businesses
remain reluctant to hire full-time employees because health
insurance, which now costs the nation's employers an
average of about $3,000 a year for each worker, has become
one of the fastest-growing costs for companies. Health
premiums are sapping corporate balance sheets even more
than the rising cost of energy.
In the second quarter, the cost of health benefits rose at
a 12-month rate of 8.1 percent - more than three times the
inflation rate and the rate of increases in wages and
"Health care is a major reason why employment growth has
been so sluggish," said Sung Won Sohn, the chief economist
at Wells Fargo.
Although the economy emerged from recession long ago,
posting 11 straight quarters of growth, there are still
about a million fewer jobs in the United States than there
were at the beginning of 2001, just before the country sank
A spurt in job growth between March and May raised hopes
that employment would emerge from the doldrums. But job
growth slowed sharply again in June and came to a virtual
standstill last month. In July, businesses added a mere
32,000 jobs, and for the first time this year more
businesses let workers go than hired new ones.
Because of the cost of health insurance, "we are making
decisions not to hire people," said Steve Hayes, the owner
of Custom Electronics in Falmouth, Me., which installs
electronic systems like home theaters and communications
networks in homes and offices. "Before, we hired based on
workload," he added. "Now it's a question of
Mr. Hayes said his health insurance premiums had risen by
22 percent a year in the last four years. He now pays
$4,150 a month in health insurance premiums for his 33
employees, and the workers contribute an equal amount from
their own pockets. The company's revenue - less than $5
million annually - has been growing briskly, he said, but
outlays for health benefits are growing even faster, eating
into the company's profits.
The increase in health insurance premiums reflects the
rising cost of health care, which is being driven by
expensive new drugs, many of them heavily advertised to
consumers; medical advances including diagnostic tests that
require costly new machines; and a reaction to past
restrictions in managed care health plans that sought to
rein in costs.
In the presidential campaign, both candidates have proposed
measures for tackling the high cost of health insurance,
including tax credits for small businesses and low-income
President Bush has pointed out that consumers can buy
relatively inexpensive, high-deductible insurance to
protect against catastrophic illnesses and can pay for
routine care with new tax-free health savings accounts.
He also favors pending legislation that would let small
businesses get volume discounts by buying insurance through
trade associations, a plan that is opposed by many
insurers, state insurance officials and some influential
Senate Republicans. Critics say they are concerned that
those associations would be largely exempt from state
regulation and their insurance pools might attract
healthier people, driving up costs for those who stay in
the traditional insurance market.
Senator John Kerry's campaign plans to weigh in today with
its own study of the link between rising health care costs
and the employment slump. A summary of the report, which
was prepared by Laura D. Tyson, who served as an economic
adviser to President Bill Clinton, contends that industries
with more health care benefits - like automobile
manufacturing - have suffered the biggest losses in jobs
and that those, like food service, that typically offer few
benefits have realized the biggest gains.
"We're losing jobs in high-wage, high-benefits sectors like
manufacturing, where employers are responding to this surge
in health care costs,'' Ms. Tyson said in an interview
A centerpiece of Mr. Kerry's plan would be to reduce health
insurance premiums by having the federal government pick up
75 percent of the cost of catastrophic medical care. That
would reduce the cost to employers and employees about 10
percent, or $1,000 a year, according to campaign officials.
Businesses, meanwhile, are trying all kinds of coping
strategies. Some companies have responded by shifting part
of the health insurance burden onto their workers or by
ratcheting up premiums and deductibles. Some have
eliminated coverage for dependents, while others have
canceled their medical plans altogether. Many have frozen
or reduced wages to compensate for ever bigger health
"Our health care costs are rising at three to four times
the rate of increase of our revenues," said Michael Stoll,
vice president for corporate benefits at the Kroger
Company, a supermarket giant that owns several retail
chains, including Ralph's, Food 4 Less and King Soopers,
and employs 290,000 people around the nation.
Kroger, one of the targets of the five-month supermarket
workers' strike in California that ended in March, reached
an agreement with unions in that state to retain existing
health benefits for current workers but to allow the
company to offer new employees significantly curtailed
Trotter Machine, a small maker of parts for hydraulic
valves in Rockford, Ill., has taken a different approach.
In the last year, the company has doubled the employee's
deductible on the company health plan, to $1,000 a year,
and it has slowed wage increases - all in response to the
company's escalating health care premium, which has risen
to $18,000 a month from less than $10,000 five years ago.
Trotter's business has picked up after two flat years, and
the company has responded by adding 12 full-time jobs since
last November, bringing the total to 65 full-time workers
and 5 temporary positions. But health care inflation has
instilled a new level of caution in the hiring process: 9
of the 12 new workers started off as temps, achieving
full-time status only after three or four months on the
"In the past we would hire people right out of the gate,
and they could get on the health plan in 60 days," said
Skip Trotter, the company's vice president for operations.
"Now we use temp services. I can keep a temp for 90 to 120
days, and the agency pays for the health benefits."
The lagging job market has contributed to brisk growth in
the temporary employment industry, where jobs may or may
not include health benefits. In July, 2.4 million people
were working for temporary agencies, according to the
Bureau of Labor Statistics. That was a 9 percent increase
from a year earlier, compared with an overall increase in
the labor force of 1 percent, to 131.2 million.
Mr. Hayes, at Custom Electronics in Maine, says the soaring
cost of health insurance has tempted him to do away with
health benefits altogether. But he has held back.
"You lose your best people, you don't lose your worst
people," he said. "I would rather fire more of the bad
people and keep the benefit than risk losing my good
Other businesses are resorting to tactics of dubious
legality to avoid the health care burden.
Phyllis Burlage, an accountant in Millersville, Md., whose
clients include several small businesses, said rising
health insurance costs were driving some employers to skirt
age-discrimination law by hiring only younger workers as a
way to reduce premiums. "It's the deep dark secret of small
businesses," Ms. Burlage said.
Even though the economy emerged from recession in late
2001, unremitting international competition has led to
continued financial restraint by American employers. They
have been uncharacteristically reluctant to invest in
capital equipment and have tried to wring as much
productivity and profit as possible from their existing
"In other business cycles, businesses hired in anticipation
of demand; that's no longer the case," Mr. Sohn of Wells
Fargo said. "Today businesses only hire people because they
have to, to meet demand."
In this economic environment, rising health care costs are
particularly burdensome because they increase labor costs
even as wages are barely moving. In the second quarter,
wages for private-sector workers increased 2.6 percent from
the year before, according to the Labor Department's
employment cost index. Yet the inflation rate for benefits,
primarily for health insurance, was 7.3 percent, pushing
total compensation costs up 4 percent.
The trade-off between health and wages has become a prime
workplace topic. In 2002, Local 226 of the hotel and
restaurant workers union in Las Vegas negotiated a contract
agreement with casino and hotel operators for a blanket
raise of 60 cents an hour, which the union could apportion
between wages and health care.
The union considered the deal a victory because it allowed
workers to maintain health care benefits at virtually no
cost. In the first year of the contract, though, all of the
increase ended up going to health care, leaving nothing for
higher wages. "It was the first time we had to sacrifice
wages to health care," said Pilar Weiss, assistant
political director of Local 226.
The growing portion of employee compensation used for
health care ultimately depresses workers' ability to spend
on other items. And health care outlays can, in turn, force
automakers and other consumer-product companies to raise
The Big Three automakers spent $8.5 billion last year on
health care. General Motors estimates that providing health
coverage for its workers and retirees adds about $1,400 to
the price of each of its vehicles built in the United
Allan D. Gilmour, the vice chairman at Ford Motor, said it
was difficult to trace a causal relationship between higher
health care costs and weak employment, because hiring
decisions were driven by many factors. But he agreed that
escalating health care costs were a drag on the labor
"Health is a larger and larger part of our compensation
package," Mr. Gilmour said. "It is hard to know what we are
doing or not doing because of this. But on a macro level
there's no question about it: this pressure comes to bear
on everything we do."
Milt Freudenheim and Edmund L. Andrews contributed
reporting for this article.