Boca Raton, FL – NCCI recently released the latest edition of its Quarterly Economics Briefing Newsletter, which examines the current state of the economy and the implications for workers compensation insurance.
Featured in this issue:
Increased Employment Positive for Workers Comp
The decline in the aggregate unemployment rate to a level below the Fed’s year-end target from just three months ago, together with the absence to date of wage inflation, strongly suggest that the Fed may revise its target rate for structural unemployment from the existing 5.1% level to 4.8% or lower, although it has not done so yet.
As it impacts workers compensation, a lower structural unemployment target indicates that employment in the U.S. is indeed continuing to recover from the Great Recession. Increased employment is clearly positive for premium collections, although it may also portend an increase in injury frequency as new and less experienced workers enter (or re-enter) the work force. On the other hand, the premium increase due to growing employment is tempered by the absence of wage inflation. Since workers compensation premium is based on the wage bill, it tends to increase both as the number of workers grows and as wages increase. Over the past year, average hourly earnings to private non-farm employees have increased only 2.2% versus 1.2% growth in the core personal consumption deflator. Rising employment accompanied by relatively static wage growth takes away one of those drivers, at least for the time being.
However, there are clear indications that while benign for now, wage growth may be set to accelerate within the next year. Overall employment growth in the U.S. has continued to be steady, averaging 247 thousand jobs per month over the year through last August, although employment growth in some sectors, notably manufacturing, has been relatively flat over the same period. As we observed above, the U.S. aggregate unemployment rate has already declined to 5.1%, and may go below 5% in 2016. While the structural or “full employment” unemployment rate is somewhat uncertain and may be less than 5%, there seems to be little doubt that we are getting close to it. A variety of hiring indicators and employer surveys suggest that slack in the labor market is now mostly gone, and that skilled positions have become particularly difficult to fill. We think it is likely that wage growth will begin to accelerate in 2016, marking the end of the prolonged period of declining or static wages since 2008.
What Does It All Add Up To?
Significantly for workers compensation, aggregate employment continues to recover. The pace of recovery is uneven across sectors, and particularly in important sectors such as construction and manufacturing. But the overall employment trend remains positive, sector variability is nothing new, and perhaps most significantly, employment growth has been largely unaccompanied by wage inflation – so far. Paradoxically, wage inflation when it does occur should probably be seen as a positive sign for workers compensation, since it will indicate a healthy premium environment, even if incipient inflationary pressure also prompts the Fed to begin raising the federal funds rate in earnest.
Click here to read: NCCI Quarterly Economics Briefing Newsletter, September 2015 (PDF)