CEA Blog

  • Exploring the Link between Rising Health Insurance Premiums and Stagnant Wages

    Posted by Christina Romer & Mark Duggan on March 12, 2010 at 1:17 PM EDT

    The rapid growth in health care spending in the U.S. in recent years has placed an increasingly heavy financial burden on individuals and families, with a steadily growing share of workers' total compensation going to health care costs. Because firms choose to compensate their workers with either wages or with benefits such as employer-sponsored health insurance (ESI), increasing health care costs tend to “crowd out” increases in wages. Therefore, recent rapid increases in employer-sponsored health insurance premiums have resulted in much lower wage growth for workers.

    Recent data from the Bureau of Labor Statistics' "Employer Costs for Employee Compensation" (ECEC) survey can shed light on this issue. According to the ECEC data, workers' inflation-adjusted average total compensation per hour increased by 1.3 percent per year from 2000 to 2009 (from $26.23 per hour to $29.39 per hour in 2009 dollars)1  However, the annual growth rate of average wages and salaries during this period was much lower. More specifically, if one subtracts out the employee share of health insurance premiums2, workers' average hourly wage and salary compensation increased by just 0.7 percent per year from 2000 to 2009. As shown in the following figure, the corresponding growth rate in ESI premiums (including both the employer and employee share) was much higher at 5.1 percent per year.

    Annual Growth in Components of Worker Compensation

    As a result of these very different growth rates, the fraction of workers' total compensation going to employer-sponsored health insurance premiums increased from 7.4 percent in 2000 to 10.3 percent in 2009. If the growth rates in both workers' average total compensation and in employer-sponsored health insurance premiums remain at their recent rates, this share will increase to 15.0 percent by 2019 and will continue to increase thereafter. Thus in the absence of reform that slows the growth rate of costs, a steadily increasing share of workers' total compensation will be eaten up by health insurance premiums.

    The increase from 2000 to 2009 in the average share of workers' total compensation going to ESI premiums is even more striking when one considers that a steadily declining share of workers and their dependents are covered by ESI. More specifically, according to the most recent data from the U.S. Census Bureau, the share of non-elderly adults and children covered by ESI fell from 68 percent in 2000 to 62 percent by 2008. This decline was to a large extent driven by a decline in the fraction of firms offering ESI to their workers, which fell from 69 percent in 2000 to 60 percent in 2009.3 Thus if one focused only on those firms that offered ESI during this period, the trends outlined above would be even more striking.

    These trends, along with recent empirical research4 on this issue, make clear that increasing health care costs are reducing the wage growth of American workers below what it otherwise would be. The President's Proposal for health insurance reform would genuinely slow this growth in costs, allowing workers to enjoy more of the benefits of their productivity increases in the form of higher take-home wages.

    Christina Romer is Chair of the Council of Economic Advisers
    Mark Duggan is a Senior Economist at the Council of Economic Advisers who focuses on Health

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  • Statement on the Employment Situation in February

    Posted by Christina Romer on March 5, 2010 at 10:36 AM EDT

    Although the labor market remains severely distressed, today’s report on the employment situation is consistent with the pattern of stabilization and gradual labor market healing we have been seeing in recent months. 

    The unemployment rate remained constant at 9.7 percent.  Many had expected that some of January’s 0.3 percentage point decline would prove to be a transitory drop.  That it was maintained for a second month makes it more likely that it was a genuine decline, not statistical noise.  The number of workers unemployed for more than 26 weeks fell by 180,000, the first decline in over a year.

    Payroll employment declined by 36,000, slightly more than last month.  However, as many analysts have discussed in recent weeks, the large snowstorms in the Mid-Atlantic region in mid-February likely had a substantial negative impact on this number.  Someone who has a job but missed the entire pay period that included the 12th of the month because of the weather, and so did not receive a paycheck, is not counted as being on the payroll.  The Council of Economic Advisers estimates  that the impact of bad weather on the February employment number was likely substantially negative.  Importantly, negative weather effects this month would be expected to be counteracted next month, as workers who temporarily disappeared from payrolls because of the snow are once again counted.  In addition, according to the Bureau of Labor Statistics, temporary Census employment was an unusual factor adding about 15,000 to the payroll employment total in February.  Census employment is expected to rise substantially over the next few months, before declining again over the summer as the Census is completed.
     
    Of course, an unemployment rate of 9.7 percent is unacceptably high and we need to achieve robust employment growth in order to recover from the terrible job losses that began over two years ago.  That is why it is essential that Congress pass additional responsible measures to promote job creation.  It is also vital that we continue to support those struggling with unemployment.

    As always, it is important not to read too much into any individual data release, positive or negative.  Because of the disruptions from the weather, this is especially true of today’s employment data.  Although the overall trajectory of the economy has improved dramatically over the past year and appears to be continuing to improve, there will surely continue to be bumps in the road ahead.

    Civilian Unemployment Rate

    Christina Romer is Chair of the Council of Economic Advisers

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  • Snowstorms Likely Reduced Measured Payroll Employment in February 2010

    Posted by Steven Braun on March 5, 2010 at 10:26 AM EDT

    The back-to-back snowstorms in the northeast corridor on February 4-7 and 9-11 appear to have substantially reduced payroll employment and shortened the workweek during the reference week for the February labor market data.  Based on previous instances of bad weather during the survey reference week, we think that measured February employment was reduced by roughly 100,000 while the measured workweek was shortened by about 0.3 hour.  Such a weather-related decline does not indicate that the February level of overall economic activity was weak.  Rather, it indicates that the survey reference week did not reliably reflect activity for the month as a whole.  Whatever the weather-related loss in February, it likely will be reversed in March, resulting in a larger-than-normal gain. 

    Why Weather Affects Measured Payroll Employment and the Workweek

    Although payroll employment data—collected from the Current Employment Survey—are released as monthly values, the survey counts employment for the pay period that includes the 12th of the month.  Because about half of firms issue weekly paychecks, one can approximately describe this survey design as measuring employment during the week that includes the 12th.  The back-to-back February snowstorms prevented many workers from reporting to work for several days during the week including the 12th.  Some missed the entire week.  Of those missing the entire week, some missed an entire paycheck, and so are not counted as employed in the establishment survey. (Salaried workers and others who are paid whether or not they have a snow day are counted as employed.)  In contrast, the household survey counts these workers as employed, so that bad weather would have only a small effect on the employment and unemployment data reported through that survey.   

    Although some workers may have missed an entire week of work, many more workers likely missed a few days during the week including the 12th because of the storms.  Because many workers are not paid for snow days, bad weather shortens the reported workweek.

    How Previous Storms Have Affected Payroll Employment

    One good measure of a storm’s effect on employment comes from the other survey released with each labor market report: the survey of households.  The household survey reports the number of people who usually work full time but did not work at all during the survey reference week because of bad weather (Series LNU02036012 from the Current Population Survey). 

    We detrended this “not at work due to bad weather” series by dividing by nonfarm employment.  Measured in this way, January 1996 was the most severe weather event during a survey reference week since our data began in 1976, when it prevented 1.66% of the workforce from reporting to work.  Chart 1 shows the number of people who said they were not working because of weather in the household survey along with the monthly change in payroll employment in the mid-1990s.  This figure makes clear that the 1996 snowstorm had a substantial one-time negative effect on payroll employment growth in January 1996.  This was followed by a corresponding one-time positive effect in February 1996.

    Weather Unemployment Charts

    Table 1 shows that in January 1996, payroll employment growth was 210,000 below the five-month moving average.  The table also shows the effect of six other important storms since 1976 (as measured by the household survey data) on not working due to bad weather.  As the table shows, the shortfall in payroll employment growth ranged from 53,000 to 210,000.  Although the February 2010 bad weather was less than half as severe as the January 1996 event, it was similar in scale to several of the others, such as January 1978 (when employment fell 146,000 below trend).  In view of the events shown in the table, an estimate of a bad-weather effect of roughly  100,000 for February 2010 appears reasonable.

    Weather Unemployment Table 1

    As shown in table 2, bad weather often has a big effect on the length of the workweek.  Another household survey question reveals the number of short workweeks among those who usually work full time (LNU02033223 on the BLS database).  Scaled against earlier storms, it appears that the February 2010 storm likely reduced the workweek by about 0.3 hour. 

    Weather Unemployment Table 2

    How the Recent Storms Compare with Previous Major Storms

    As can be seen in the weather map of the February 4-7 storm, and the February 9-11 storm, one or both of the February storms affected the highly populated region from Richmond to New York, with both storms creating heavy snowfall in the Washington to Philadelphia region.  According to NOAA, over 12 million people experienced over 30 inches of snow from the two storms combined.

    Measured by the impact on the population, these storms individually rank as the 20th and the 25th most severe snowstorms since 1956, according to National Oceanic and Atmospheric Administration’s (NOAA’s) Northeast Snowfall Impact Scale (NESIS).  According to NOAA, their combined impact is much more severe, however, and ranks their combined snowfall on a par with the January 1996 snowstorm, the second most severe in a record that extends back to 1956. 

    On the basis of the two bad-weather variables from the household survey, the two February storms do not appear to have as large an effect on the February jobs report as might have been expected based on the NESIS.  In particular, the February 2010 storms appear to have had only about half as large an effect on the survey reference week as did the January 1996 storm.  Differences between the severity indicated by the NESIS and the bad-weather variables from the household survey could be accounted for by factors such as the timing of the storms relative to the survey week, the efficacy of snow removal between the two storms, as well as many others. That said, the two storms had a major effect on the labor market survey. 

    Implications for March Employment Growth

    The workers who were unable to work in the February survey week because of the weather are likely to be working in March.  Thus, whatever negative impact the weather had on February employment growth will likely be roughly matched by a positive impact on March employment growth.  Similarly, the workweek is likely to rebound to a more normal level.

    Steven Braun is the Director of Macroeconomic Forecasting for the Council of Economic Advisers

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  • Health Insurance Reform Will Help Small Businesses

    Posted by Christina Romer and Mark Duggan on February 26, 2010 at 3:08 PM EDT

    As President Obama made clear at the bipartisan meeting on health insurance reform, and has emphasized all year, small businesses stand to gain substantially from his proposal for comprehensive health insurance reform.

    Small businesses are essential to the nation’s economy and its recovery from the recession. They are responsible for a disproportionate share of economy-wide net employment growth, and account for a large majority of jobs in start-ups, a key source of innovation and economic growth.

    Nevertheless, both a CEA report released last year and new analysis by the Council of Economic Advisers shows that the status quo of rising costs and declining coverage is unsustainable for small businesses. Over the past decade, average annual family premiums for workers at small firms increased by 123 percent, from $5,700 in 1999 to $12,700 in 2009, while the percentage of small firms offering coverage fell from 65 percent to 59 percent. As shown in the following figure, this insurance offer rate is especially low at small firms with fewer than 10, 25, or 50 employees.

    CEA Chart of Small Business and Health Care Reform 2-25-10

    While opponents of reform have raised concerns that some of the provisions in the President’s proposal will harm small businesses and their employees, the facts, figures, and discussion below show that the proposal will mean tax cuts, no new requirements, and numerous other benefits for small firms and their employees:

    The President’s proposal makes more than 60 percent of small firms eligible for tax credits to help combat rising costs and declining coverage for their workers.

    • CEA estimates indicate that more than 60 percent of small employers would be eligible for the new $40 billion small business tax credit in the President’s proposal. This represents a total of nearly 4 million small firms eligible for the credit. Moreover, millions of workers at small firms and their families would be eligible for their own tax credits to purchase coverage through the Exchange if their firms did not offer coverage.

    The President’s proposal exempts virtually all small businesses from any employer responsibility requirements.

    • The proposal specifically exempts all firms that have fewer than 50 employees – 96 percent of all firms in the United States or 5.78 million out of 6.02 million total firms – from any employer responsibility requirements. These 5.78 million firms employ 33.8 million workers.
    • More than 96 percent of firms with 50 or more employees already offer health insurance to their workers. Thus under the President’s proposal, less than 0.2 percent of all firms in the U.S. (approximately 10,000 out of 6.02 million) would face new employer responsibility requirements. And many of the firms not currently offering coverage are likely to do so because of the lower premiums and greater set of plan choices in the Exchange.   

    Pooling together with other small firms and individuals through a competitive Exchange will reduce costs, increase plan choice, and provide pressure on insurers to reduce their markups.

    • Because individuals and small businesses are not currently pooled together into larger health insurance groups, the administrative costs of marketing and operating health plans are up to 26 percent higher as a percentage of claims compared with larger firms, leading to higher premiums.
    • A report by the Congressional Budget Office (pdf) confirms that the Exchange will reduce costs and increase competitive pressure on insurers, driving down premiums for a given amount of coverage for a given group of enrollees by 1 to 4 percent in the small group market.

    The President’s proposal will reduce “job lock,” and spur entrepreneurship, job growth, and productivity at small firms.

    • As described in a recent CEA report, health insurance reform will reduce “job lock” – the fear of switching jobs or starting a small business due to concerns over losing health coverage – by guaranteeing access to coverage for all Americans. This will encourage more people to launch their own small businesses.
    • Moreover, reform will make small firms more competitive by allowing them to offer coverage comparable to that of larger firms, letting them recruit and retain talented workers.
    • Finally, improvements in access to coverage will lead to better health status and reduced disability, increasing workplace productivity. 

    Health insurance reform will benefit workers, firms, and the government budget in many more ways.  For a discussion of these impacts, please read the CEA’s report on the Economic Case for Health Care Reform.  Chapter 7 of the Economic Report of the President (pdf) also provides a comprehensive discussion of the challenges in the current health care system and the way that reform components work together to address these problems.

    Christina Romer is Chair of the Council of Economic Advisers and Mark Duggan is a Senior Economist at the Council of Economic Advisers who focuses on Health

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  • Fiscal Stimulus Making an Impact around the World

    Posted by Jay Shambaugh on February 19, 2010 at 11:26 AM EDT

    One of the challenges in evaluating the impact of fiscal stimulus is to figure out what would have happened had there been no stimulus. Earlier, this blog discussed evidence that the American Recovery and Reinvestment Act of 2009 is having a positive impact on the U.S. economy.  More evidence can be found in the Second Quarterly Report of the American Recovery and Reinvestment Act of 2009,  and independent evaluations have been highlighted in the media like in this analysis from the New York Times.

    Another type of evidence can come from looking at the impact of stimulus across countries.  This economic crisis has been a world-wide crisis and the government of nearly every major economy engaged in discretionary fiscal stimulus to try to rekindle demand.  As shown in Chapter 3 of the Economic Report of the President, real GDP growth performance varied with the amount of stimulus.   One cannot simply look at growth and stimulus alone, because the economic crisis differed in depth across countries and because different countries have different typical growth rates.  Thus, to understand the impact of fiscal stimulus, one must estimate what would have happened had there been no stimulus—a counterfactual.  Private sector expectations in November 2008—after the crisis had begun but before most stimulus packages were adopted—can serve as that counterfactual.  The evidence in the figure below shows that countries with larger fiscal stimulus on average exceeded expectations to a greater degree than those with smaller stimulus packages. 

    Discretionary Spending in 2009

    This picture attempts to control for all other effects (other policies, size of shock, automatic stabilizers) by using expectations.  If fiscal stimulus is larger in countries that faced an unexpectedly large negative shock, this procedure would be an underestimate of the impact of stimulus.  If fiscal stimulus is correlated with unanticipated monetary stimulus, it could overestimate the role of fiscal stimulus.  But, this is an attempt to control for “what would have happened” based on what the market expected.  Using OECD forecasts or a time series forecast gives similar results.  See more details in the Economic Report of the President and in our report The Effects of Fiscal Stimulus: A Cross-Country Perspective.

    Quarterly growth rates can exhibit some volatility and can be very hard to predict many months out, but looking at cumulative growth from the second quarter to the end of the year against forecasts for that period shows a very similar picture (though GDP data for the fourth quarter is still not available for many countries).  High stimulus countries outperformed expectations.  Fiscal stimulus helped restart the world economy.

    Jay Shambaugh is a Senior Economist at the Council of Economic Advisers who focuses on International Macroeconomics and Trade

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  • One Year Later: Recovery Act Making an Impact

    Posted by Christina Romer on February 17, 2010 at 1:42 PM EDT

    Today is the first anniversary of the American Recovery and Reinvestment Act of 2009.  The Recovery Act is the biggest, boldest, anti-recession fiscal policy action in American history.   After a year, its impact on the economy is apparent.  As discussed in Chapter 2 of the Economic Report of the President, the trajectory of the economy has changed dramatically, thanks in large part to the Recovery Act.  The CEA estimates that the Act has raised employment relative to what it otherwise would have been by between 1½ and 2 million as of the fourth quarter of 2009.

    Estimated Effect of the Recovery Act on Employment

    It has also played a key role in turning GDP from falling to rising again.  These estimates and conclusions are echoed by private sector analysts across the ideological spectrum and by the nonpartisan Congressional Budget Office. 

    The Recovery Act provided a tax cut to 95% of working families, helped state and local governments keep teachers and first responders on the job, cushioned the fall in income for unemployed workers, and made pioneering investments in the future of our economy.  For details about the impact of the Recovery Act, please read the CEA’s Second Quarterly Report.  This report not only discusses the overall economic impact of the Act, it highlights one area of particular investment – clean energy.  By investing more than $90 billion in energy efficiency, clean energy manufacturing, renewable electricity generation, grid modernization, R&D, and other clean energy programs, the Recovery Act is helping to jump-start the transition to the clean energy economy.”

    Recovery Act Clean Energy Appropriations by Category

    Christina Romer is the Chair of the Council of Economic Advisers

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