UCLA Forecasters Say Health Costs To Hurt Economy

Staff Reporter

Rising health care and workers' compensation costs will continue to play a significant role in keeping the nation and state economic recovery a jobless one, UCLA Anderson School's upcoming quarterly forecast will report.

Increasing corporate profits, workforce productivity and other positive economic indicators traditionally result in a major boom in job growth.

Yet employers remain reluctant to add jobs to their rolls because of the skyrocketing fixed costs associated with employee benefits, according to economists at the Anderson School.

"It's hard to say productivity is a bad thing," said Joe Hurd, a senior economist with the UCLA Anderson School who authored the state's portion of the forecast. "(But) rising health care and workers' comp costs have made employers look more closely at hiring workers and getting more out of their current workforce."

The forecast will be released on March 25 in conjunction with a daylong conference at the Westin Bonaventure Hotel in downtown L.A. UCLA economists agreed to discuss portions of the quarterly findings, but did not make an advance copy of the report available.

The state's employment climate has improved over the past year, but not dramatically. Some economists believe the numbers paint a more favorable picture because a large portion of the working-age population has dropped out of the labor force, discouraged by the lack of jobs.

The state's jobless rate dropped to 6.2 percent last month from 6.8 percent in the year-earlier period. L.A. County mirrored the trend, with a jobless rate of 6.1 percent for February, down from 6.8 percent in the year-earlier period.

Instead of hiring new workers to keep up with demand, employers are requiring longer hours, Hurd said. That way, they avoid paying additional benefits, such as health care.

Employers are also pumping more funds into pension accounts to make up for the losses incurred when the stock market went south, said Christopher Thornberg, senior economist with the forecast.

Rebound in jeopardy

On a broader scale, UCLA's report will challenge the existing consensus that the national economy is on a steady rebound and that gross domestic product will increase by 5 percent in 2004.

UCLA economists project a 3 percent increase in GDP this year (down from a 3.6 percent forecast in December), and a 1 percent increase in employment, less than half the job growth that is being projected in some quarters.

That's because every other recession and subsequent recovery since the end of World War II was spurred by a cycle of falling and then rising consumer spending on homes, cars and other durables. But in the tech bust of the late 1990s, blame was laid for the first time on businesses.

Corporations, particularly in the information technology sector, began slashing costs in mid-2000 after three years of new investing with no correlating rise in profits.

Meanwhile, consumer spending has been growing faster than income over the last three years, pushing consumer debt to an all-time high. The result will be weak consumer demand and a slow-growing economy, according to the forecast.

"There is no recovery on the consumer side of the economy because there was never a downturn on the consumer side of the economy," said Thornberg. "Therefore, consumers are borrowing from the future and not making up for the past."

Job growth won't rise to significant levels until employer costs are contained, he said.

In California, health care coverage for a family of four costs more than $8,504 per year, up from $6,265 in 2001, according to the Kaiser Family Foundation.

Meanwhile, employers paid an average of $6.30 per $100 payroll expense on workers compensation, up from $2.30 in 1999, according to the Workers' Compensation Insurance Rating Bureau of California.

Employers are demanding that their workers pick up a larger share of these costs even though worker contributions for family coverage in California increased to $2,452 last year from $1,450 in 2000, according to the Kaiser foundation.

Health care coverage was the major reason behind last year's strikes by unionized workers at the Metropolitan Transportation Authority and the nation's three largest grocery chains in Southern California, underscoring the contentiousness of the issue in both public and private sectors.

Furthermore, the bulk of the U.S. workforce is non-unionized, so those employees will have little recourse when hit with higher bills. "I don't know anybody who likes to pay more for anything," said Hurd. "Obviously, it's a very contentious issue."

Fewer uninsured children

One bright spot in health care has been increased coverage for the underprivileged population.

Countywide, the rate of uninsured children dropped to 10 percent in 2002-03, from 19 percent in 1997, according to a survey conducted by the Los Angeles County Department of Health Services.

But nearly all of the new enrollments are the result of publicly funded programs, such as Medi-Cal and Healthy Families, not an increase in employer-paid plans that would come with job growth, said Jonathan Fielding, director of the county health agency.

"All this puts increased strain on the public health care system that the Department of Health Services operates," said Fielding, whose system is already facing a projected annual deficit of $700 million by 2007.

Fielding is scheduled to discuss the issue at the UCLA conference.

He said health care systems could save money by reducing the ratio of money spent on administration. He also believes that by focusing more on prevention, the nation can reduce by hundreds of billions of dollars each year the money spent treating diseases.

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