I post from time to time over on the "daily Kos" and thought I'd copy my latest entry here.
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A good friend of mine continually tells me that it "isn't productive to worry about things over which I have no control". Of course he is right but unfortunately I am not wired that way. I obsess about many things and the mere mention of health care will put me on my soapbox for a few hours. My family has gotten to the point of avoiding the subject for fear of me going off on it as my views on the subject are well known to them.
I see health care from a different angle than most as I have worked in the finance department for a Fortune 500 company for much of my business career and watched as these costs have steadily risen to alarming levels. In the last few years I started advising managers about what I called the health care overtime break-even whenever we were looking to hire new employees.
If the term "Health Care Overtime Break-even" doesn't make sense to you I'll explain it in more detail after the break.
I firmly believe that the long term future of every country's economy is directly tied to the employment levels of people that make, ship, and sell goods and services. These employees are the lifeblood of the economy and this is exactly the hardest hit segment in the United States over the last 30 years. Health care costs have made this situation even worse by depressing the number of people that companies can afford to hire. I like to think of this in a simple formula of:
x = y / (0.5z)
At first glance, perhaps this formula isn't that simple. Let me explain...
x = Overtime Hours Break-even
y = Benefit Cost
z = Hourly Wage Rate
When a company hires an employee, there are two components to the cost. The first is the actual salary paid to the employee and the second part is the benefits. Salary is easy to understand as in most cases it is an hourly wage rate. Benefits are more difficult for people that don't look at them closely as it includes every other piece of compensation paid to employees (Health Care, Long/Short Term Disability, 401k, Employer FICA match among others). Truthfully, most employees don't care about the cost of benefits as they look at them one of two ways -- they have them or they don't. For this example we are going to lump all benefits together as one fixed cost. I do realize that the FICA match isn't fixed but I want to keep this simple and the answer is directionally correct using this assumption.
If you notice, what I described in the previous paragraph is the basis for the formula. "Y" is fixed cost per employee for benefits and "Z" is the Hourly Wage rate. Let's do an example:
Using a Benefit Cost of $10,000 per year and an Hourly Wage Rate of $15 per hour, I get an answer of 1,333 hours annual (or 25.6 per week). What does this number mean? This is the number of hours over 40 that a company should work an hourly employee so that they maximize profits to the company. In this example, the cost of the overtime premium is greater than the cost of benefits when an employee works more than 65.6 hours in a week.
To hopefully make it even a bit more clear I have done the math below for a company that has 60 hours worth of work:
Weekly Cost of Benefits per employee = 200 (10,400 annual)
Wage per hour = $15
Cost of 1 Employee = 60 hours x $15 + 20 OT hours x $7.5 + 200 or $1,250
Cost of 2 Employees= 30 hours x 2 Employees x $15 + 200 x 2 or $1,300
Notice that the cost of 1 employee working 20 hours of overtime is actually cheaper that working 2 employees 30 hours. The formula I listed above is the break-even that shows at what point additional overtime hours are actually costing them money.
What does this mean to the average worker? Let's look at the formula again.
Overtime Hours = Benefit Cost / (0.5 x Hourly Wage Rate)
In the last few decades benefit costs have increased 8-10% per year while hourly wage rates have increased around 2-4%. The impact is that the overtime breakeven has steadily increased over that time.
This has put downward pressure on hiring which didn't matter much when we were at full employment but is a barrier today. I know when I entered the workforce in the late 80's my company's average hourly wage was about $10 and benefits were around $2,000 per employee or an overtime break-even of 7.7. Today's numbers are about $16 and $10,000 or an overtime break-even of 24.0. At one point it made sense to hire more people when we had more work but now it makes more sense to work our existing workforce harder and sadly this will only get worse in the future.
I realize that this is only one small piece of a large issue. Anyone in business that is being honest will agree that the current health care system is a huge disadvantage for American companies. I believe that many CEOs would be delighted if they could remove anything related to health care from their planning discussions. The current health care reform is a good first step to getting this done and I really hope the Democrats have the leadership to make this happen. Because if health care reform doesn't occur, the long term implications are disastrous not only to people who aren't covered today but to every American business.
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