Economic Realities Suggest Pandemic Has Been 'Manageable Event' for WC: Part 2

Orlando, FL (WorkersCompensation.com) – The latest numbers show a strong, stable workers’ compensation environment. As discussed in Part 1 of this series, underwriting profitability was up in 2021 – for the 8^th  consecutive year; new written premium was up, and reserve redundancy was $16 billion by year’s end. 

Despite the good news, things have clearly changed, thanks to COVID-19. Experts speaking at NCCI’s Annual Insights Symposium outlined what’s been happening during the last couple of years.

Financial Rollercoaster

The pandemic has been accompanied by a “financial rollercoaster,” said Robert Hartwig, clinical associate professor of Finance in the Darla Moore School of Business at the University of South Carolina, and NCCI’s former chief economist. The labor market, for example, has seen extremes.

The beginning of the pandemic saw many people out of work, especially as businesses temporarily or permanently closed their doors. That changed as companies started reopening. But they’ve had difficulty finding people to fill the jobs. It’s led to the situation where there are an estimated two job openings for every job seeker.

“I think it’s the lowest number on record,” Hartwig said. “Employers are beginning to substitute benefits for wages … labor seems to be having its moment.”

But the good news, at least for employers, is that the situation is likely to change. Recent data shows the rate of people leaving their jobs has been decreasing.

“That suggests … that the tightness in the labor market has probably peaked,” Hartwig said. “There’s enough evidence … there’s a tempering going on in the labor market right now.”

Hartwig predicted that the gap between the number of job openings and job seekers would be narrower a year from now, as the economy slows. For the time being, though, workers are quitting “in record numbers because they sense there is greater opportunity elsewhere,” he added.

Despite the wide open market for them, workers are unhappy. One reason is employees feel their wages are not keeping pace with rising inflation, despite the fairly robust rate of increased wages in the last two years.

“Many workers have seen their real wages decline. But put it in perspective,” Hartwig said. “The consumer price index is increasing monthly by about 8.5 percent; wages are increasing 5.5 percent. Prior to March of last year, the real wage gains were very strong; all private workers were generating income growth far in excess of inflation. So we saw an acceleration of inflation, wages not keeping up right now. But real wages have actually had a good run of it in the last couple of years.”

Inflation is the top concern among many people at the moment. However, that too can be put into perspective. The price of gasoline, for example, is at an all- time high – unless you adjust for inflation. “Actually, it’s been higher many times when adjusting for inflation,” Hartwig said. “That doesn’t mean it isn’t painful, but it gets back to the point that this isn’t the 1970s, it’s not the 1980s.”

The fact that inflation is rising is not totally unexpected – and might drive more people back to the workforce. During the pandemic, many people who were out of work were collecting money through unemployment and government stimulus programs.

“They had record amounts of cash in checking and savings accounts and they spent it with abandon. They demanded record numbers of things, like Pelotons, that are now gathering dust,” Hartwig said. “It was an unprecedented spending spree, it was clearly unsustainable. Getting inflation is not a surprising outcome. We are in the hangover phase.”

With the inflation running at about 7.5 percent this year, Hartwig said economists generally expect the rate will recede to approximately 3 percent in 2023.

One interesting note about inflation concerns healthcare costs. Typically higher than the overall CPI, the medical cost index is now about 2.93 percent, compared to overall inflation at 7.5 percent.

“It’s an open question as to whether or not healthcare will see substantial increases or an acceleration in inflation over the year ahead,” Hartwig said. “Many health insurers are attempting to put through fairly substantial increases in 2023.”

What it all means for the workers’ compensation system is the subject of Part 3 of this series. 

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