Rising Health Costs: Short Run Job Loss, Long Run Wage Cuts

A while back, I criticized Hillary Clinton for arguing that national health insurance would create jobs. She wrote:

American companies are outsourcing jobs to countries where the price of labor does not include health coverage, which costs Americans jobs and puts pressure on employers who continue to cover their employees at home.

I pointed out that standard economic theory says that falling health costs will just lead to an offsetting rise in wages. There are lots of reasons to support national health insurance, but creating jobs isn’t one of them.

So I was dismayed to see the NY Times and the Kerry campaign making a similar argument last week, in an article titled “Rising Cost of Health Benefits Cited as Factor in Slump of Jobs.”

It turns out, though, that Kerry advisor Laura Tyson and her co-author Sarah Reber are making a much more sensible argument than Hillary’s. They agree that health costs don’t affect hiring in the long run, but argue that they do in the short run, since it takes time for firms to pass higher insurance costs on to workers. Here’s their thesis:

Economic theory predicts that employers can respond to these rising costs in three ways:

* First, the employer can pass on more of the cost of health insurance to employees. This has happened: the average worker contribution for a family plan rose by 49 percent between 2000 and 2003, even faster than the growth in the total premium.

* Second, the employer can reduce wages or wage growth in order to pay for the higher benefit costs without raising total employee compensation. This also appears to have happened: wage growth has fallen steadily for several years and real wage growth has been negative for several years.

* Third, the employer can respond to the higher cost of labor by reducing employment or slowing its rate of increase. This is likely to occur if the employer cannot pass on the higher cost of health care to employees in the form of higher employee contributions to health insurance premiums or lower wages, because wages and other terms of employment are fixed in the short run.

Tyson and Reber take a simple but fairly convincing look at the data, and find that soaring health costs have indeed been prolonging the recession:

Rising health costs are consistent with the pattern of job losses, with the largest job losses occurring in industries with the highest benefits. Furthermore, rising health costs are consistent with evidence that the quality of jobs has deteriorated, with higher-paying jobs contracting and lower-paying jobs expanding.