Upjohn Press Upjohn Research home page 1-1-2001 Pay at Risk: Compensation and Employment Risk in the United States and Canada John A. Turner AARP Public Policy Institute Follow this and additional works at: https://research.upjohn.org/up_press Part of the Labor Economics Commons Citation Turner, John A., ed. 2001. Pay at Risk: Compensation and Employment Risk in the United States and Canada. Kalamazoo, MI: W.E. Upjohn Institute for Employment Research. https://doi.org/10.17848/ 9780880994194 This work is licensed under a Creative Commons Attribution-Noncommercial-Share Alike 4.0 License. This title is brought to you by the Upjohn Institute. For more information, please contact [email protected]. Pay at Risk Compensation and Employment Risk in the United States and Canada John A. Turner Editor 2001 W.E. Upjohn Institute for Employment Research Kalamazoo, Michigan Library of Congress Cataloging-in-Publication Data Pay at risk : compensation and employment risk in the United States and Canada / John A. Turner, editor. p. cm. Includes bibliographical references and index. ISBN 0-88099-222-0 (cloth : alk. paper) — ISBN 0-88099-221-2 (paper : alk. paper) 1. Wage payment systems—United States. 2. Wage payment systems—Canada. 3. Compensation management—United States. 4. Compensation management—Canada. 5. Labor economics—United States. 6. Labor economics—Canada. 7. Employee fringe benefits—Finance. 8. Social security—Finance. 9. Old age pensions—Finance. 10. Insurance, Health—Finance. 11. Job security. I. Turner, John A. HD4927.U6 P39 2001 331'.0971—dc21 2001023606 © 2001 W.E. Upjohn Institute for Employment Research 300 S. Westnedge Avenue Kalamazoo, Michigan 49007–4686 The facts presented in this study and the observations and viewpoints expressed are the sole responsibility of the authors. They do not necessarily represent positions of the W.E. Upjohn Institute for Employment Research. Cover design by J.R. Underhill. Index prepared by Diane Worden. Printed in the United States of America. Contents 1 Introduction 1 John A. Turner Canada–United States Comparisons 1 Compensation Risk Bearing in Labor Markets 2 Conceptual Issues 2 Policy Issues 4 Theoretical Issues 5 The Approach of the Book 10 Outline of the Book 10 Risks to Wages: The Traditional and Contingent Workforces 10 Risks in Nonwage Benefits 12 Conclusions 15 References 17 2 Wage and Job Risk for Workers 19 John A. Turner Canada 20 Macroeconomic Instability 20 Job Turnover 21 Unemployment 22 The Effects of Government Programs: Unemployment Insurance 22 United States 23 Macroeconomic Instability 23 Fluctuations in Wage Rates 24 Earnings Instability 25 Job Instability 26 Conclusions on Wage and Job Instability 35 The Increasing Cost of Job Loss 35 U.S.–Canadian Comparisons 37 Job Creation and Destruction 37 Wage Flexibility 38 Employment Protection 39 Unemployment and Unemployment Compensation 40 Theories as to Why Job Insecurity Has Increased 41 Macroeconomic or Economy-wide Theories 41 Labor Demand 42 Labor Supply 44 Summary 46 iii Conclusions 46 References 47 3 Risk in Employment Arrangements 53 Sophie M. Korczyk Introduction 53 Why Worry About Nonstandard Employment? 54 Nonstandard Employees in the United States 54 Contingent Employees 57 Part-time Employees 58 Employees in Alternative Arrangements 58 Trends in Nonstandard Employment 60 Employee Benefit Coverage among Nonstandard Employees 63 Nonstandard Employees in Canada 68 Part-time Employment 68 Self-employment 69 Temporary Employment 70 Flexible Work Arrangements 70 Employee Benefit Coverage among Nonstandard Employees 71 Are Nonstandard Employment Arrangements Involuntary? 72 Policy Issues and Options 75 Who Is an Employee? 75 Expanding Continuation Health Care Coverage for 76 U.S. Part-time Workers Prohibiting the Exclusion of Part-time Workers from 76 Pension Plans That Cover Full-time Workers Increasing the Access of Alternative Workers to 76 Unemployment Insurance Conclusions 77 Notes 78 References 80 4 Health and Coverage At Risk 83 Robert B. Friedland, Laura Summer, Sophie M. Korczyk, and Douglas E. Hyatt Introduction 83 Overview of the U.S. Health Care System 83 Employer Coverage 84 The Medicare Program 84 The Medicaid Program 85 Health Care Coverage in the United States 87 iv Some Groups are More Likely to Have Health Care Coverage 87 A Lack of Coverage Limits Access to Care 93 Increasing Risk in the Coverage Market 94 Risks Associated with Employer-provided Coverage 98 Is the System at Risk? 101 Overview of the Canadian Health Care System 104 Universal Coverage 104 “Socialized Medicine”? 105 Rising Costs 106 Demographic Changes and Their Implications for Pay-As-You-Go Financing 108 Policy Options for the United States and Canada 110 United States 110 Canada 111 Conclusions 112 Notes 113 References 113 5 Risk Sharing through Social Security Retirement 115 Income Systems John A. Turner Risk Bearing in Retirement Income Systems 116 Wage Risk 117 Early Retirement Risk 117 Longevity Risk 118 Demographic Risk 118 Inflation Risk 118 Political Risk 118 Social Security in Canada 118 Social Security in the United States 123 Comparison of Risk Sharing in the Canadian and 124 U.S. Social Security Systems Income Replacement 124 Early Retirement Risk 124 Insurance Against Low Earnings Years 125 Progressivity 126 Indexation of Benefits 128 Survivor’s Benefits 128 Conclusions 129 References 129 v 6 Risk Bearing in Individual and Occupational Pension Plans 131 James E. Pesando and John A. Turner Introduction 131 Background 132 Individual and Occupational Pension Plans in Canada 133 and the United States Canadian Pension Plans 133 Canadian Pension Regulation 135 Private Pension Plans in the United States 136 The Tax Treatment of Pensions in Canada and the United States 138 Pension Coverage 139 The Generosity of Pension Plans 147 Defined Benefit versus Defined Contribution Plans 149 Comparison of the Risk Bearing Aspects of the Canadian 153 and U.S. Occupational Pension Systems Early Retirement Insurance 154 Pension Insurance 154 Conclusions 155 Notes 156 References 157 7 Risk Shifting in Workers’ Compensation 161 Douglas E. Hyatt Introduction 161 A Brief Overview of Workers’ Compensation 163 Who Pays for Workplace Injuries? 167 The Current Climate in Workers’ Compensation 175 Workers’ Compensation Reform Backlash 182 Concluding Remarks 186 Notes 187 References 187 The Authors 191 Author Index 193 Subject Index 197 About the Institute 211 vi List of Figures 4.1 Employment-Based Health Care Coverage 89 4.2A Premium Shares by Type of Coverage in Smaller Firms, 96 1988 and 1996 4.2B Premium Shares by Type of Coverage in Larger Firms, 96 1988 and 1996 7.1 Workers’ Compensation Claims Incidence Rates, 166 United States, 1972–1996 7.2 Workers’ Compensation Claims Incidence Rates, 166 Canada, 1972–1996 List of Tables 2.1 Tenure Statistics for Workers Age 20 and Over 27 with Long Tenure, 1983–1998 2.2 Displacement Rates for Workers, Age 20 and Older, 1981–1996 31 2.3 Displacement Rates for Different Demographic 31 Groups, 1981–1996 3.1 Contingent and Alternative Employment Arrangements in the 56 United States from February 1995 CPS Special Survey 3.2 Definitions of Contingent and Alternative Workers, 57 1989 and 1995–1997: A Concordance 3.3 Pension and Health Coverage by Type of Worker, 1995 65 3.4 Trends in Nonstandard Employment in Canada: 1989–1994 68 4.1 Public and Private Health Expenditures in Canada, 1990–1996 107 5.1 Retirement Income from Government Programs, 1993 122 5.2 Income Replaced by Social Security in the United States 125 and Canada 6.1 Pension Coverage Rates, by Income, All Workers 141 6.2 Marginal Federal Plus Provincial or State Income Tax Rates 142 in Canada and the United States vii viii 1 Introduction John A. Turner Major changes have occurred in the U.S. labor market over the past few decades. The rate of growth of real earnings decreased and even turned negative for periods, and earnings inequality has increased. Many observers also believe that earnings and job instability have increased. While the decline in real earnings growth and increase in inequal- ity are well documented, less is known about changes in earnings and job instability. Do workers bear more employment-related financial risks than in previous decades? Have work hours and pay become increasingly sensitive to the labor market? Have labor market risks in North America been shifted from employers to workers? Has there been a decline in the U.S. version of the welfare state (where employ- ers play a relatively large role in providing social welfare benefits), just as the welfare state has declined in Europe? CANADA–UNITED STATES COMPARISONS Comparing Canadian and U.S. labor markets yields insights about the risks workers bear. Labor markets in the two countries have many similarities, although the relatively small Canadian economy is less than 10 percent as large as that of the United States. The proximity and dominant size of the United States cause substantial economic, cul- tural, and intellectual influences on Canada, and U.S. firms own a sig- nificant proportion of Canadian industry. Even before the Canada– United States Free Trade Agreement, the precursor to the North Amer- ican Free Trade Agreement (NAFTA), the United States and Canada exchanged more goods and services than any other two countries in the world. Each country is the largest trading partner of the other. 1 2 Turner Given the similarity of the two countries and their interconnec- tions, one would expect Canadian employers to act much like their American counterparts, especially since firms from both countries often compete in the same markets using similar technologies (Verma and Thompson 1988). The similarities in the two countries and their integration through trade make it likely that the policy experiences of one have relevance for the other (Gunderson, Hyatt, and Pesando 1996). This chapter provides an introduction to some of the conceptual issues concerning compensation risk bearing by workers in labor mar- kets.