Bob Carlson

Larger businesses have been doing well since the economy’s bottom in 2009 and have been hiring at a reasonable clip. But employment overall still is weak, and small businesses seem to be the reason. They aren’t hiring, and surveys by the NFIB indicate they don’t plan to hire anytime soon. It’s been assumed that this is partly an effect of the financial crisis and partly because small businesses are more dependent on housing.

But what if there’s another reason? What if small businesses aren’t hiring because their money is paying for higher employee medical care expenses for employees? That’s the argument here. Scott Shane of Case Western Reserve University says he’s looked at the data and that hiring by new businesses has been declining since 1999. He pins the cause on the cost of providing medical coverage to employees.

The slide in job creation appears linked to the rising cost of employee benefits. As the cost of providing for employees’ health care and retirement increases, hiring people becomes more expensive. The cost of employee benefits has been rising faster than businesses’ revenues since at least 2000. The BLS reports that from 2001 to 2010 the cost of employee benefits at private businesses rose faster than inflation, going up 13.6 percent in inflation-adjusted terms. The increase in benefit costs over the past decade suggests that benefit costs are eating into companies’ profits.

EQUIPMENT OVER LABOR

It is only natural that entrepreneurs try to reduce those costs. One way to do that is to hire fewer people. Equipment doesn’t need health insurance or retirement plans. So if a business can produce the same results by substituting investment in equipment for investment in labor, it can solve the rising benefit cost problem, albeit at the expense of employment. Therefore it’s not surprising that a smaller fraction of entrepreneurs hires employees, and those who do hire fewer people than they once did. The profit motive demands it.

He says the solution is to contain medical expenses. But the health care overhaul enacted in 2010 doesn’t do that, and some studies say it increases costs.