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Rising Labor Costs in Washington Jeopardize Employers’ Ability to Capitalize on Improved Economic Conditions |
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Written On: January/February 2004 |
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Written By: By Richard S. Davis |
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An improved national economy promises to ease the budget pressure on state and local government. Even our state, which continues to lag the nation, appears likely to benefit. In October, Washington’s unemployment rate dropped to 7 percent, down from 7.6 percent, and tax collections are up.
For lawmakers, the good news means that no Damoclesian budget sword will swing over their heads (although a sharp pencil will still come in handy) while they consider the long-term strategies required to assure a sustained recovery. The upturn does not mean that our competitive challenges are behind us. In order to capitalize on the opportunity represented by an increasingly strong national recovery, policymakers here must maintain their focus on the business climate.
They might want to begin by recognizing that rising labor costs here jeopardize the ability of employers to capitalize on the improved economic conditions, and threaten to delay our economic rebound. Specifically, increased unemployment insurance taxes, workers’ compensation premiums, and a nation-leading minimum wage hike kick in January 1.
We cannot be sanguine about the state’s competitive position. It’s tempting, certainly. Uncharacteristically, Chang Mook Sohn, the state’s chief economist, littered his November 12 memo to the revenue forecast council with upbeat phrases not heard here in years.
With respect to the national economy, Sohn wrote, “Economic news continues to be very positive. Real Gross Domestic Product (GDP), the broadest measure of economic growth, increased at a 7.2 percent annual rate in the third quarter of 2003. This is the strongest growth since 1984. … (T)he ‘jobless recovery’ may be over ….”
For our state, he said, “Although Washington’s payroll employment declined slightly in September, strong growth in revenue indicates that consumer and business confidence is improving. … Revenue growth has continued to improve on a quarterly basis and if the state’s job picture gets better as expected, we are likely to continue to see improvement….”
Tax payments from nearly every sector were up, led by retail trade, which showed 5.5 percent year-to-year growth. The upturn, largely incorporated in earlier revenue forecasts, led the forecast council to boost the estimate of biennial revenues by $65.2 million, to $22.82 billion, with reserves of $544, including $400 million in federal money.
Still, employment fell sharply over the last few years, particularly in manufacturing. The cumulative impact of mandated labor cost hikes threatens job creation by giving employers additional reasons to delay hiring or add jobs out of state.
Unemployment Insurance Reformed in 2003
Despite the unemployment insurance reforms adopted last session, UI taxes will increase an average of 14 percent. The increase has nothing to do with the actions taken by the legislature, resulting instead from a 24 percent decline in the size of the UI trust fund in the past year. With the large number of unemployed workers, benefit payments have drawn down the account, making a tax hike necessary in order to keep the fund solvent, according to the state employment security commissioner. She may have added that Washington’s high benefits and lax enforcement significantly compounded the drain on the fund.
The impact of the UI tax increase will vary considerably among employers, depending on several factors, including the extent to which they lay off employees. The department estimates the average per employ tax will increase from $527 in 2003 to $600 in 2004. Employers next year, then, will be paying for the costs of the unreformed UI system that existed prior to this year’s welcome correction. Washington’s system, even after the legislature’s adjustments, remains among the nation’s more expensive. This increase provides a painful reminder of why reform was – and still is – needed.
Workers’ Comp Needs Reform in 2004
Premiums will increase an average of 9.8 percent for firms participating in the state fund, a welcome reduction from the previously announced proposed hike of 19.4 percent, but a substantial cost increase nonetheless. The increase follows a 29 percent increase last year. The department and governor responded to protests from employers who decried the rate increase, saying it would cost jobs. Along with the revision in rates, the governor will convene a group of labor and business leaders to examine the state system.
A full review is appropriate. These rate hikes could be avoided – and future costs brought under control – if the legislature and the Dept. of Labor and Industries address cost drivers stemming from flawed policies and administrative practices.
On the policy level, a pair of recent Washington State Supreme Court decisions substantially increased employer costs. In the Cockle decision, the Court ruled that employer-provided health insurance must be considered in the definition of wages, substantially boosting benefit payments. Seasonal workers became eligible for substantially increased benefits because of the Avundes decision, which changed the usual understanding of intermittent work. As a result, seasonal workers may collect more in benefits than they were likely to earn on the job.
Administratively, employers cite several concerns: a pattern of misestimating reserves, resulting in unnecessary premium collections, weak claims management, and use of workers’ compensation funds for overhead and programs not directly related to serving injured workers.
Minimum Wage. Because of a citizens’ initiative passed in 1998, Washington’s minimum wage increases with inflation, rising 15 cents to $7.16 per hour January 1, 2004, the highest in the nation. Research by Ohio University economists Richard Vedder and Lowell Galloway, released earlier this year, suggests that our state’s higher minimum wage has boosted our unemployment rate by about 1 percent, or 30,000 jobs. They report that the initiative “has cruelly and capriciously brought about job and income loss to workers and small entrepreneurs,” hitting restaurants, farmers, and retailers particularly hard.
Beyond UI, workers’ compensation, and the minimum wage, employers face a barrage of cost increases. Cecil Osborne, CEO of Regional Building Services Corporation (RBSC), recently wrote the Kirkland City Clerk a letter protesting the increase in his Business License fee. In his letter, he notes that in the last year his business endured increases of 54 percent in workers compensation, 100 percent increase in UI taxes, 34 percent in employee health insurance and 150 percent in liability insurance.
We heard similar stories in the interviews conducted for the Washington Alliance for a Competitive Economy. Employers throughout the state can recite Osborne’s litany, the cumulative impact of which is stifling.
In the coming months, policymakers can apply the brakes to unnecessary tax and fee increases. When they do, employers will be better positioned to accelerate job creation and economic recovery.
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