Employment Costs, Productivity, Unemployment and Economic Growth

When we are employed, we receive wages. That's what we tend to believe is our level of compensation. The cost to our employer of employee benefits is often not fully considered.

For those who employ us, however, total compensation expenses are taken into account when deciding whether to hire, raise pay levels, increase benefits and such. Thus, the overall costs associated with our employment are much higher than the wages or salaries paid to us as employees. In fact, employee benefits and related costs often amount to more than one third of the total costs of a full time employee.

Especially in the current weak economy, productivity is paramount. Thus, employers will continually emphasize productivity and remain reluctant to increase hiring. This fact of life won't change anytime soon.

Increased employee benefit costs not only will discourage new full time hiring but will also limit pay increases for current employees as well. That in turn will restrict the amount of consumer spending due to these smaller paychecks. Of course, smaller consumer spending will make the economic recovery and reduction in unemployment levels even more difficult.

Worker Costs Rise. Don't Expect Salaries To discusses the rising costs of employee benefits and has this to say:

"Employees may not realize it, but they are getting more expensive.

It isn't that their paychecks have suddenly started bulging. It's that other employment costs—like health and retirement benefits—continue to rise. Benefit costs in the private sector were up 4% year-on-year in the second quarter, more than double the 1.7% increase in wages and salaries. On Friday, the Labor Department's employment-cost index for the third quarter is likely to show this trend continuing.

The trouble is, this means employers are paying more for workers without actually paying their workers more. Higher benefit costs eat into profits without directly raising a company's output in the way hiring more workers would. In fact, this can actually discourage hiring. And the more that companies have to spend on benefits, the less take-home pay goes to workers. This undermines the virtuous cycle of consumer spending and job growth needed to help lower the 9.1% unemployment rate.

This is already a management concern: The third-quarter Duke/CFO Magazine outlook survey shows companies expect health-care costs to jump 7.8% over the next year, while wage and salary costs are seen up just 2.3%. Just last week came word Wal-Mart Stores is raising health premiums for workers and cutting coverage for new part-time employees working fewer than 24 hours a week altogether because of rising costs.

Pension-related costs may also jump as companies grapple with higher deficits due to earlier falls in equity markets and the still super-low interest-rate environment. With any luck, stock-market rallies like the sharp one seen this month will help relieve some of that pressure.

Keeping health costs down, however, will prove more formidable. This, at a time of high unemployment, is likely to keep the squeeze on wages and salaries.

Americans, in fact, sense this already. "People are worried about income security to an unprecedented degree," says Moody's Analytics economist John Lonski. Indeed, the share of those expecting their income to fall remains higher than the share expecting income to rise over the next six months, as per the Conference Board's October confidence survey. This situation never occurred in the survey's 30-year history prior to 2008. Now, it has become the norm. Low wages at least could spur hiring. But if employees are getting more expensive for other reasons, the risk is nobody benefits."

We'll all hope that Friday morning's announcement concerning hiring, the unemployment rate and accompanying employment data will present us with a favorable surprise. That said, don't count on it.

In any event, it is absolutely imperative that we get our nation's health care costs and retirement costs under control sooner rather than later. In addition to being costly, they continue to act as a drag on employment and our nation's economy.

Stay tuned. Bob.