I've written many columns over the past several years concerning the detrimental impact rising health care costs exert on the productive economy, and considered the issue from multiple perspectives. In this column I'll do so again by considering the drift in the employee costs for wages vs. that of total compensation, and what the trend implies for income growth.
Every month the Bureau of Labor Statistics (BLS) releases the "Employment Situation" report detailing its estimates of job and wage growth for the preceding month. Financial market participants and the media watch the report closely and parse it for what it implies about the health of the economy, capital markets and monetary policy.
Every quarter, the BLS also releases a report called the "Employer Costs for Employee Compensation." The latest available is for the first quarter of 2016 and was released on June 9. Each quarterly report covers the last month of each calendar quarter and the archives may be found here.
For whatever reason, the financial media do not pay attention to this report. I don't know why.
In short, the Employment Situation report is an estimate of what employees are receiving by employers in the form of jobs and wages. The Employer Costs for Employee Compensation is a review of what the total cost of those jobs is to the employer.
The principal difference between the two is that the first doesn't include the cost of employee benefits paid for by the employer and the second one does.
The germane point concerning this column is that increases in the costs of benefits come at the expense of increases in wages and jobs.
From 1986 through 2001, the percentage of total employee costs attributed to wages was constant at about 73%, with the remaining 27% being for benefits.
Since 2001, however, those percentages have steadily shifted, and today the percentage of total compensation represented by wages has decreased to 68.5%, while benefit costs have increased to 31.5%.
One of the most notable points of this shift is that it occurred simultaneously with the shift from defined benefit retirement plans (pensions) to defined contribution retirement plans (401(k)/403B/SEP IRA).
That shift allowed the potential of employers to decrease the retirement funding for their employees and increase wages, which employees could then use to contribute to their own retirement fund.
What actually occurred, however, is that rather than wages rising as a percentage of total compensation, the money that was previously allocated to employee retirement funding by the employer was reallocated to health care expenses and other insurance.
By the start of this century, most of the transition from defined benefit to defined contribution plans had been completed by the costs of health care and related insurance kept rising faster than aggregate economic activity and inflation.
The only way for employers to continue to fund health care-related expenses for employees was to reallocate income that would previously been used to increase wages, provide supplemental income, create more jobs, increase paid leave/vacation time or provide some other kind of benefit.
This process has been accelerating since the start of this century, with health care spending by employers increasing from about 5.5% of total employee compensation in 2000 to about 8.4% today.
If the process of health care expenses increasing faster than inflation and economic activity continues, which is highly probable, the funding of it will have to come from continuously lower wage growth, and fewer other kinds of benefits.
As I've written about previously, the implementation of the Affordable Care Act (ACA) was supposed to reverse this trend, decrease the aggregate cost of health care as a percentage of national income and afford for higher wages, more jobs and greater economic activity as a result.
It's also positive for hospitals and medical service providers, such as HCA Holdings (HCA) , Tenet Healthcare (THC) , Universal Health Services (UHS) , Community Health Systems (CYH) and LifePoint Health (LPNT) .
Investing in these companies on the assumption that this process will continue is probably a good decision, especially if Hillary Clinton wins the presidential election in November.
This activity is not, however, positive for the economy overall or for the equity markets in general, as the health care sector and insurance provide the lowest multiplier effect. That means that every dollar allocated there that puts upward pressure on economic activity and inflation comes at the expense of more than a dollar lost to the rest of the economy, and a greater negative impact on real economic activity.
Health care spending is steadily suffocating the U.S. economy.