Are benefit costs increasingly driving the cyclicality of employment?

by on November 25, 2012 at 5:27 pm in Economics, Law, Medicine | Permalink

Here is the job market paper of Grace Weishi Gu, from Cornell:

The Cost of Benefits and Employment Dynamics in Recent U.S. Recoveries

Abstract: I document (1) the slow rebound in U.S. aggregate employment following recent recessions, despite recoveries in output, as well as (2) a rising trend in per worker benefit costs, the cyclicality of those costs, and a positive correlation of the cyclical benefit costs with employment growth cycles. I show how these two phenomena are related. Then I develop a DSGE model that includes firms’ dynamic benefit costs, financial conditions (i.e., borrowing capacity), and the tradeoff between extensive and intensive labor margins to explore the effects of these features on post-1990 employment dynamics. I find that the benefit costs’ rising trend, cyclicality, and interactions with financial conditions have contributed significantly to the observed slow employment growth following the three most recent recessions in the U.S. This paper offers two main improvements over the standard model, which lacks such arrangements: (1) delivering 2-to-7-quarter delays relative to NBER business cycle troughs for the employment recoveries from the 1990, 2001, and 2007 recessions while generating no delay for the pre-1990 period, which is in line with the data; and (2) explaining 40-90 percent of employment volatility and harmonizing with that of output and per worker hours.

I would like to see more testing of this against alternative explanations, but still this is provocative and important work.

john personna November 25, 2012 at 5:36 pm

It is unsurprising that there should be some feedback. The perverse thing is that the “pro-business party” has blocked “single payer” solutions, forcing “per worker benefits” as the path of least resistance. Their argument now might be rollback, but I can’t see that gaining broad traction.

Andrew' November 26, 2012 at 5:58 am

The pro-government party started this with WWII wage and price controls. Why would the opposition just take that as the only options being whole hog or whole hog?

tomrus November 25, 2012 at 6:47 pm

It is astonishing to me how parochial US grad schools have become. The same pattern of slow employment recovery is observed in almost all G7 countries, yet benefit patterns are very different across the sample. Do workers in the UK react to US benefit changes?

NAME REDACTED November 25, 2012 at 7:29 pm

“Do workers in the UK react to US benefit changes?”
Yes. Duh. Labour does move across borders.

Roy November 25, 2012 at 11:05 pm

No, but possibly their own structural weakness, which may or may not be related to the cost of each employee to employers, may make them dependent on the dynamism of the huge US economy and its consumer spending,

I have no idea if this is true, but it is an explanation consistent with the idea. This is a far better explanation than labor mobility, which is basically nil between the US and other first world economies at the moment.

prior_approval November 26, 2012 at 1:51 am

Careful – you might be on the path to be labelled ‘condescending’ when pointing out such glaringly obvious points concerning a larger world.

Slocum November 26, 2012 at 7:27 am

They really haven’t shown the same pattern, though, at least not with respect to employment. The U.S. has experienced a sharp drop in labor participation rates — a drop that has not been generally shared by other industrialized countries

Roy November 26, 2012 at 8:50 am

But continuing my hypothetical, what if those countries have already absorbed the effect of their prexisting regulatory costs long ago, while the increased cost of labor has only recently become prohibitive in the United States.

Of course this would be magnified by the current weak economy following the last recession which was a sharp enough shock that it may have greatly reduced the number of low or zero marginal productivity workers.

Slocum November 26, 2012 at 9:09 am

Except it’s not the case that the U.S. employment-population ratio has dropped down to match those of other industrialized countries — rather the U.S. has dropped well below the levels of Germany, the U.K., Canada, Australia, and others.

By this measure, the ‘recovery’ of the U.S. labor market has been notably weak relative to other western countries.

Steven Kopits November 26, 2012 at 12:17 pm

Interesting chart, Slocum. In rank, US was 5th in 1994; 10th in 2004; and 15th in 2010. Not a pretty story.

Joe Smith November 25, 2012 at 7:50 pm

“Labour does move across borders.”

Yes – but not very quickly. We have not seen a flood of Americans moving into Canada.

The article really underscores that the cost of health care may be the single most important issue facing the American economy generally.

The Anti-Gnostic November 26, 2012 at 8:28 am

Wrong on two counts. There were plenty of foreign labourers available very quickly when the housing boom started. Also, when workers started getting too expensive here, capital moved very quickly to elsewhere.

Joe Smith November 26, 2012 at 12:25 pm

I was responding to points made by Tomrus and Name Redacted which talked about movement of workers among the G7 and I used the specific example of Canada – US movement labor movement. Movement of Mexicans into and out of the United States may be different.

Bryan Willman November 25, 2012 at 9:07 pm

Isn’t the real issue Total-Cost-of-Employment? So benefits+wages+required-capital+whatever-else required for hiring an addition worker to be profitable?

What’s more – since the majority of young and working age US citizens are covered by some employer offered healthcare plan to day, and many of those plans are gold plated, why does anybody think there will ever be political will to back down from that? Whether it’s an employer deductible part of compensation, or a gross-up on employee wages for a new tax or mandate, or some other scheme, it will be part of the total-cost-of-employment for some time.

Also, apparently “single payer” in a “pure” form only actually exists in Cananda and the UK – even France actually has some more complicated scheme.

And why, pray tell, would single payer be any better? Single payer would have to be paid for with taxes, and there’s no particular reason to think that politicians would directly assign these taxes to employees rather than to employers. Unemployment insurance, workman’s comp, part of social security, etc. are all at least made to look “free” to the employee, but are paid by the employer, and add to the total cost of employment. I am baffled why anybody things single-payer vs few-combine-payers vs other schemes would change this?

David C November 26, 2012 at 3:35 am

The argument for single-payer is the evidence that it is much better at controlling costs. This is primarily because a single insurer has a lot more negotiating leverage over prices than multiple insurers do. See, for example,

Primary care physicians in Europe earn half as much as those in the US. For some specialties, its a 4:1 ratio. I paid $5,000 for a colonoscopy in the US five years ago, but only $1,000 last year in Switzerland.

Andrew' November 26, 2012 at 6:04 am

“The argument for single-payer is the evidence that it is much better at controlling costs.”

Then there is no evidence. The argument has ONE datapoint: the US. A US that spends MORE government money on medical than virtually ALL “single payer” countries total expenditures. It used to be all of them IIRC, last I checked it was all but 3 or 4, but since those countries aren’t really controlling costs, just rising as fast or much faster (e.g. S. Korea) from a lower base, they continue to catch up.

We still pay more. Part of is because government broke it. Part of it is because we have more to pay and $/GDP is not linear for “something as important as healthcare.” Part of it is because of genuine inefficiencies, most of which were distorted to get where they are.

Benefits work when they are INSURANCE, that is that each payer does not expect to use all the present value of the benefit. When the beneficiaries start taking out as much or more than they contribute, not on average, but personally, then the role of benefits doesn’t make any business sense.

Brian Donohue November 26, 2012 at 8:52 am

Bears repeating ad nauseum. Hayek was sympathetic to social insurance for ‘insurable risks’- this is 101 stuff:

Yog Sothoth November 26, 2012 at 6:55 am

Can anyone explain why benefit costs are procyclical? I haven’t been able to follow that part of the argument.

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