August 19, 2004
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August 19, 2004
Rising Cost of Health Benefits Cited as Factor in Slump of Jobs
By EDUARDO PORTER
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 growth.
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 salaries.
“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 into recession.
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 affordability.”
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 people.
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 yesterday.
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 insurance bills.
“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 health plans.
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 job.
“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 people.”
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 workers.
“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 prices.
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 States.
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 market.
“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.
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August 19, 2004
Oil Prices Set a New Record as Supply Falls
By JAD MOUAWAD
ARIS, Aug. 18 – Oil prices climbed above $47 a barrel on Wednesday, setting yet another record, after figures showed supplies in the United States were down for a third consecutive week and a report from OPEC highlighted the threat of high oil prices for world economies.
Crude oil for September delivery settled at $47.27 a barrel in New York, up 52 cents, after rising as high as $47.45. Futures prices are up about $10 a barrel since the end of June.
Fears of disruptions in major producing nations, including Iraq, Russia and Venezuela, have pushed prices up by more than half since the beginning of the year. At the same time, robust demand from Asia, and particularly China, has swelled the demand for more oil this year.
“OPEC produces almost at capacity while you have very strong demand – that’s pressuring the market,” said Muhammad-Ali Zainy, an energy analyst at the Center for Global Energy Studies, based in London. “If there are supply disruptions you’ll see a spike in prices because we have little or no cushions left. On top of that, there are concerns about Iraq and Saudi Arabia.”
For the last nine days, Iraq’s exports have been cut in half, to a million barrels a day, after the country’s southern pipeline was partly shut following threats on Aug. 8. That has taken greatly needed oil out of the market, analysts said, at a time when other producers cannot make up for it.
“Whatever spare production capacity the market thought was out there has been wiped out by what’s happening in Iraq,” said Lawrence J. Goldstein, president of the Petroleum Industry Research Foundation in New York. “The market is very fragile.”
Oil prices rose after the Energy Department’s weekly figures showed that stockpiles in the United States fell 1.3 million barrels, to 293 million barrels, in the week ended Friday.
Demand is growing as well, according to OPEC’s monthly oil report released Wednesday. The Organization of the Petroleum Exporting Countries raised its forecast for global oil consumption this year to 81.18 million barrels a day, up 280,000 barrels from an earlier estimate.
While the Standard & Poor’s 500-stock index reached a 2004 low last week on concern that high oil prices would stifle economic growth, there was some evidence this week pointing to the contrary.
United States consumer prices fell in July for the first time in eight months, indicating inflation was in check despite high oil prices, the government reported Tuesday.
Still, the pace of economic growth slowed in the second quarter, as consumers were faced with higher energy bills and cut spending elsewhere, figures from the Commerce Department showed last month.
OPEC, which produces a third of the world’s crude oil, insisted high prices had not had much effect on global growth yet. “The direct contribution of the concern-driven rise in oil prices to the economic slowdown in 2004 has been very small,” OPEC said.
OPEC said it provided “adequate supplies to the market to meet the record-breaking levels of demand and at no stage was the upturn in the world economy threatened by supply shortages.”
Still, OPEC acknowledged that should prices remain high, world growth would be hurt, especially if OPEC’s reference price, the average of a basket of seven types of crude oil, remained above $35 a barrel. It was valued at $41.75 a barrel on Tuesday.
Oil’s importance to the world economy has declined over the last two decades but remains a crucial factor for growth. In 1980, expenditures on oil in real terms amounted to more than 6 percent of United States gross domestic product. That has dropped to less than 2 percent today, according to Deutsche Bank.
However, an increase of $5 a barrel in the price of oil can shave as much as half a percentage point off global growth in the next year or two.
“Of course there’s a high correlation between oil prices and economic growth,” Mr. Zainy said. “But economies will behave differently according to their characteristics. China or India will be much more affected than the United States for example.”
The OPEC reference price has averaged $33.45 a barrel so far this year, up $5 from last year. It has been above the high end of OPEC’s reference band of $22 to $28 a barrel since early December 2003.
OPEC knows that high prices threaten to reduce demand as consumers turn to other fuels or more stringent energy-conservation measures. That is why top officials have come forward repeatedly in past weeks to say OPEC is doing all it can to help bring prices down.
On Aug. 4, Purnomo Yusgiantoro, the Indonesian oil minister and OPEC president, said he was “concerned” by the price increase and said OPEC still had as much as 1.5 million barrels a day of spare capacity, a figure many analysts viewed as too high.
Last week, it was the turn of Ali al-Naimi, the Saudi oil minister and the most influential OPEC member, to step in and say Saudi Arabia was pumping 9.3 million barrels a day and could add 1.3 million.
And when that failed to stem the price increase, Crown Prince Abdullah himself gave an interview to Kuwaiti newspapers this week telling them he favored oil at $25 to $30 a barrel.
Anything above that might hurt developing economies, he said in comments published Tuesday.
Still, prices are rising.
“Frankly, OPEC is enjoying the higher prices even as they try to boost production,” Mr. Zainy said. “It’s a demand-led market and not some manipulation by OPEC.”
The OPEC report also highlighted the group’s limited spare capacity. Its 11 members are pumping 30 million barrels a day and can lift production to 30.5 million barrels next month, OPEC said.
Excluding Iraq, where production has been patchy since April of last year because of attacks on oil installations and pipelines, OPEC’s official ceiling is 26 million barrels a day. OPEC disputed suggestions that it was not bringing enough crude on the market.
“On current trends, OPEC production will be more than adequate to meet demand in the remainder of 2004 and 2005,” OPEC said in its report. OPEC ministers meet next on Sept. 15 in Vienna.
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