Leaping health costs sap pay hikes
Benefits spending up 24% in 4 years

By Kimberly Blanton
Boston Globe Staff, June 25, 2004

Money that might have gone directly into workers' take-home pay is instead being sapped by employers' soaring costs for healthcare benefits, new government data show.

The US Bureau of Labor Statistics reported yesterday that spending on benefits by private-sector employers rose 24 percent from March 2000 to March 2004, primarily because of escalating healthcare premiums. The bureau said that came at the expense of wages, which increased 15 percent over the same period but are a declining share of the total compensation employers pay to workers.

Historically low inflation contributed to slower wage growth during the recession and its aftermath. But the current trend is a sharp reversal from the years 1994 to 2000, when wages grew much faster than benefit costs.

Employers "are constrained by the cost of benefits," said Denis McSweeney, head of the Northeast region for the labor bureau. "They're there to run a business, and they realize with rising benefit costs they don't have the ability to give everyone the increase in wages."

Businesses have become vocal about the financial squeeze caused by relentless increases in their health insurance costs, and they have used this as a bargaining chip in labor negotiations. Healthcare premiums have been rising at a double-digit clip, a pace unseen since the late 1980s. Premiums surged 14 percent last year and 13 percent in 2002, according to the Henry J. Kaiser Family Foundation. Increases in some small employers' costs were double or triple that.

Wages still outpaced inflation over the past four years. The average wage of US workers in the private sector rose 17.3 percent, to $23.29 per hour in March 2004 from $19.85 per hour in March 2000. Inflation rose 9.5 percent in that period.

But benefits are swallowing up more of employers' total spending on compensation to workers. Benefits now represent 29 percent of total compensation, up from 27 percent in 2000. Wages dropped to 71 percent of total compensation, from 73 percent, over the same four years.

"The insurance costs have risen so much for employers," said Heather Boushey, an economist with the Center for Economic and Policy Research in Washington, D.C. "It's obviously got to come from somewhere."

But other studies have shown that healthcare is also eating up more of workers' paychecks. Many employers, citing spiraling health costs, have shifted a greater share of premium payments to their employees or required them to pay more out-of-pocket expenses, in the form of higher copayments for hospital visits or prescription drugs.

Employers have used the weak job market to hold down wages and shift health costs to employees, economists said. Most workers are unwilling or unable to leave a job when hiring opportunities elsewhere are scarce.

Employers "don't have to worry that if they raise John Doe's insurance premium that he's going to Company B, because Company B isn't hiring," Boushey said.

Paul Harrington, an economist for the Northeastern University Center for Labor Market Studies, said workers paid more for their healthcare benefits at a time when corporate profits "exploded." Early in this economic recovery -- in 2002 and 2003 -- corporate profits reached a record 41 percent of the growth in national income. Historically, corporate profits represented 16 percent of the growth in national income in recovery periods.

Corporations "don't have to raise wages and benefit levels because you've got a lot of excess labor supply, so they're able to take advantage of that," Harrington said.