Health Care and Education 1

Important QOL Factors, But Who's Accurately Measuring Them?

Corporate real estate executives readily agree that health care and education are important quality-of-life factors in location decisions. But few say their firms can accurately measure their impact.

 

Consider this conundrum in looking at how health-care costs are impacting corporate location decisions. On the one hand, Ford Motor Co. executives have reported that they are spending the equivalent of $311 a vehicle for health care for the company’s American employees. In its Canadian facilities, though, Ford has found that it is spending some !six! times less. On the other hand, here’s a comment from a recent Site Selection survey of corporate real estate executives on quality- of-life (QOL) issues: "We rarely -- in fact, never -- have considered health-care costs as a factor in site selection."

That comment was typical of the SS corporate-side survey response: Only 13 percent of corporate real estate executives said their companies are "able to accurately measure health- care costs when considering various locations for a facility."

That low percentage of companies saying they can gauge health-care costs for potential locations is somewhat surprising in light of the fact that larger and larger amounts of corporate funds are being sucked into the black hole that health care has become in the corporate world. In the U.S., for example, health- care costs are expected to break the $2 billion-a-day barrier before year’s end.

Moreover, several of the corporate real estate executives who say their companies can accurately measure and compare health-care costs among potential locations say that the information necessary to fashion those cost comparisons is readily available. Other findings from this year’s Geo-Life corporate-side survey include:

-- Despite the survey’s finding of a general lack of accurate measurement of health-care costs in location decisions, the issue is playing a role in some siteselection decisions. Some 17 percent of survey respondents say their companies are using health care "as a tiebreaking factor between comparable sites."

-- Likewise, health care is also playing a role in the areas and countries some corporations are avoiding. Thirteen percent of responding corporate real estate executives say their firms avoid particular areas in the U.S. "because of what [the firm] considers excessive health-care costs." And in considering locations outside the U.S., 20 percent of respondents from firms with international operations are avoiding certain areas and countries "because of excessive health-care costs or the lack of available quality health care."

-- Corporations are apparently much more readily able to take a hard-cost look at health-care expenditures once the location leap has been made. Seventy- two percent of responding corporate real estate executives say their firms "can estimate health-care costs as a percentage of annual operating costs at...present locations."

-- Corporate real estate executives are apparently enjoying more success in measuring another important qualityof- life variable, education. Thirty-two percent of respondents say their companies "can quantify the educational quality of potential locations as a cost of recruiting." Another 19 percent say their firms can quantify educational quality as a cost of turnover. Here’s a more in-depth look at the issues examined in this year’s Geo-Life corporate-side survey.

Author: Jack Lyne

Health Care and Education 2

Health Care's Upward Spiral

Concerns over health-care costs have mounted rapidly in recent years inside the corporate world, and that concern is based on numbers, big ones. For example, $660 billion will be spent in the U.S. this year on health care, with corporations picking up a sizable chunk of that tab for their employees.That comes out to $2,600 for every man, woman and child in the country. And, despite the promise of a number of cost-containment mechanisms put in place in recent years, the upward spiral in health-care costs is gettingworse. After single-digit increases from 1985 to 1987, health-care inflation has again rocketed into the stratosphere.Benefits consultant Foster Higgins predicts that health-care costs will increase an average of 16.5 percent this year.

All the while, published comparisons of health-care costs reveal wide geographicvariations (see developmentside health- care feature elsewhere in this issue). Yet only a scant 13 percent of survey respondents say their corporations are able to accurately measure health-care costs when considering various locations for a facility. "I’m absolutely amazed that people aren’t looking at health- care costs [when considering various locations]," says Wayne Mills, vice president, corporate facilities and service division for The Travelers Cos. "If you asked 50 CEOs what their top five concerns are, I think at least 90 percent would put health care in there.""Maybe my response has something to do with my working for a health-care provider," Mills adds. "[But] healthcare costs impact directly on both the employee cost of living and the cost of doing business."

The Travelers is one firm able to accurately measure health- care costs among different locations, says Mills.

"It (health care) is a tie-breaker for us in some location decisions." Mills says information on what insurance

companies call "usual and customary" reimbursed charges "are readily accessible. You can easily get information on the customary charges for things like a day in the hospital, a bone graft, etc."John Dues, director, corporate real estate for Mead Corp., says his firm can also accurately measure health-care costs as part of the site-selection process.

And he, too, says much data needed to fashion those cost comparisons are readily accessible: "If you look at Dayton or New York, for example," says Dues, "you can ascertain what the acceptable reimbursement level for an insurance provider in that area is. We can then accurately measure our costs, because our medical insurance is set up to reimburse at that level. We delegate that to our HR (human resources) department, and

they do the benefits analysis."

Those companies which say they are able to accurately gauge health-care costs in their location decisions are also successfully constructing geographically specific cost comparisons. For example, 75 percent of the companies which say they can accurately measure health-care costs are able to focus those comparisons down to the percentage of operating costs for each metro area under consideration. The other 25 percent of those companies are able to construct cost comparisons down to the individual county level. "If you get [health-care cost] comparisons that are as [geographically] broad as the state or regional level," responded one executive, "they really don’t help you that much."

Health Care and Education 4

2Health-Care Location Factors

In looking at the health-care systems among potential locations, survey respondents gave highest priority to data delineating the availability of health care in an area: numbers of publicly and privately run hospitals, the number of doctors per 1,000 people, etc. (see accompanying chart of toprated health-care location factors).

But in addition to the matter of healthcare quantity, there’s also the issue of health-care quality, says Wayne Mills: "We ask about the quality of the healthcare facilities [among potential locations].

We do have a lot of doctors who work for The Travelers, but almost every corporation has a chief medical director they can ask." In something of a surprise, the incidence of AIDS (Acquired Immune Deficiency Syndrome) in an area under consideration for a facility location has not emerged as a top-level health-care concern. (See News Highlights elsewhere in this issue for study results predicting future AIDS-related healthcare costs.) Responding corporate real estate executives only rated the incidence of AIDS as the 10th most important health-care location factor.

Health Care More a Concern with ‘Brainpower’ Locations Paralleling previous Site Selection quality-of-life surveys, nterviewed corporate real estate professionals say the health-care QOL factor is a higher consideration in those facilities fueled by a key core of"brainpower" -- highly skilled, highly mobile professionals. At the same time, the age of the work force in a particular facility is also a factor to be reckoned with in looking at health care, since older workers tend to record a higher percentage of health-care claims.

"How important health care is in the location decision depends on the type of operation," says Wayne Mills. "For example, if you’re looking at a shortterm location using a young work force, it’s not as important. But if

you’ve got a facility that’s going to be staffed by older professionals, it’s more of a big deal." Shervin Freed, vice president for siteselection consultant A.T. Kearney, Inc., handled a corporate relocation which graphically points out the different weight given to QOL issues like health care in siting different types of facilities.

"The company was relocating from Michigan to North Carolina," says Freed, "and it had a dual purpose. We

ended up locating the technical and professional people in Raleigh-Durham, where they had more ready access to amenities like health care. We ended up putting the company’s manufacturing operation in Goldsboro, about an hour’s drive from Raleigh-Durham." As for health care’s role in future location decisions, there’s another development unfolding in Pennsylvania which may make health care both a bigger and much more measurable QOL location factor.

Many states have health-care cost-containment boards, which regularly publish reports on hospital death rates or costs. But the Pennsylvania Health- Care Cost-Containment Council has gone much further. In an unprecedented move, it has compiled statewide comprehensive data on costs, death rates and complication rates by region and by hospital. Moreover, it specifically identifies hospitals by name.

The resulting data is both revelatory and controversial. For example, one hospital in Pittsburgh is reportedly charging almost twice as much to repair or replace a heart valve ($95,185) as another hospital across town. If such specific data become available on a widespread basis around the U.S. and the globe, corporate real estate executives would have access to a very valuable tool to use in fashioning health-care costs comparisons. "People are really waiting to see what happens in Pennsylvania," says Lisa Iezzoni, a Harvard Medical School physician and health-care researcher.

Health Care and Education 3

Avoiding High-Cost Health-Care

Locations Despite the fact that few companies say they are utilizing accurate measurements of health-care costs in comparing locations, 13 percent of responding corporate real estate executives do say their firms are avoiding certain areas in the U.S. because of what they perceive as "excessive health-care costs."

New York City and Chicago were two cities mentioned by respondents as areas their companies tend to avoid because of high health-care costs. States similarly singled out included California, Florida, Massachusetts, New Jersey and New York.

"If you’re looking at a high-cost area," says Wayne Mills, "generally you’re going to find high-cost medical health care." The areas corporate real estate professionals say their companies are "favoring as corporate locations because of...reasonable health-care costs" are heavily weighted toward the Southeast, Southwest and Midwest U.S. States frequently named by respondents as low-cost areas included Alabama, Arizona, Iowa, Kentucky, Mississippi, Nebraska, Tennessee, Texas, South Dakota and Utah. Companies with international operations are also avoiding some countries in their non-U.S. locations. "We generally avoid underdeveloped countries without sufficient health-care facilities to provide a good level of care for our employees," says Wayne Mills. "[Those places] "end up being high-cost healthcare areas because the care is just not available."

On the other hand, some countries outside the U.S. do offer a health-care system that takes less of a bite out of the corporate coffer. "America’s healthcare system is the world’s most expensive to administer," says former Health, Education and Welfare Secretary Joseph Califano. "We spend $100 per person in administrative costs, compared to $21 in Canada." Figures reveal that the $2,600 spent in the U.S. this year for every person in the U.S. is 50 percent more than that spent in Canada. Likewise, U.S. spending on health care is twice that spent per person in Japan and almost triple that in Great Britain.

And those lower health-care costs apparently don’t translate into lower health-care quality: Canada, Japan and Great Britain all have lower infant mortality rates than in the U.S. and enjoy similar longevity.

Human Capital

Author: Gary S. Becker**

To most people capital means a bank account, a hundred shares of IBM stock, assembly lines, or steel plants in the Chicago area. These are all forms of capital in the sense that they are assets that yield income and other useful outputs over long periods of time.

But these tangible forms of capital are not the only ones. Schooling, a computer training course, expenditures of medical care, and lectures on the virtues of punctuality and honesty also are capital. That is because they raise earnings, improve health, or add to a person's good habits over much of his lifetime. Therefore, economists regard expenditures on education, training, medical care, and so on as investments in human capital. They are called human capital because people cannot be separated from their knowledge, skills, health, or values in the way they can be separated from their financial and physical assets.

Education and training are the most important investments in human capital. Many studies have shown that high school and college education in the United States greatly raise a person's income, even after netting out direct and indirect costs of schooling, and even after adjusting for the fact that people with more education tend to have higher IQs and better-educated and richer parents. Similar evidence is now available for many years from over a hundred countries with different cultures and economic systems. The earnings of more educated people are almost always well above average, although the gains are generally larger in less developed countries.

Consider the differences in average earnings between college and high school graduates in the United States during the past fifty years. Until the early sixties college graduates earned about 45 percent more than high school graduates. In the sixties this premium from college education shot up to almost 60 percent, but it fell back in the seventies to under 50 percent. The fall during the seventies led some economists and the media to worry about "overeducated Americans." Indeed, in 1976 Harvard economist Richard Freeman wrote a book titled The Overeducated American. This sharp fall in the return to investments in human capital put the concept of human capital itself into some disrepute. Among other things it caused doubt about whether education and training really do raise productivity or simply provide signals ("credentials") about talents and abilities.

But the monetary gains from a college education rose sharply again during the eighties, to the highest level in the past fifty years. Economists Kevin M. Murphy and Finis Welch have shown that the premium on getting a college education in the eighties was over 65 percent. Lawyers, accountants, engineers, and many other professionals experienced especially rapid advances in earnings. The earnings advantage of high school graduates over high school dropouts has also greatly increased. Talk about overeducated Americans has vanished, and it has been replaced by concern once more about whether the United States provides adequate quality and quantity of education and other training.

 

This concern is justified. Real wage rates of young high school dropouts have fallen by more than 25 percent since the early seventies, a truly remarkable decline. Whether because of school problems, family instability, or other factors, young people without a college or a full high school education are not being adequately prepared for work in modern economies.

Thinking about higher education as an investment in human capital helps us understand why the fraction of high school graduates who go to college increases and decreases from time to time. When the benefits of a college degree fell in the seventies, for example, the fraction of white high school graduates who started college fell, from 51 percent in 1970 to 46 percent in 1975. Many educators expected enrollments to continue declining in the eighties, partly because the number of eighteen-year-olds was declining, but also because college tuition was rising rapidly. They were wrong about whites. The fraction of white high school graduates who enter college rose steadily in the eighties, reaching 60 percent in 1988, and caused an absolute increase in the number of whites enrolling despite the smaller number of college-age people.

This makes sense. The benefits of a college education, as noted, increased in the eighties. And tuition and fees, although they rose about 39 percent from 1980 to 1986 in real, inflation-adjusted terms, are not the only cost of going to college. Indeed, for most college students they are not even the major cost. On average, three-fourths of the private cost—the cost borne by the student and by the student's family—of a college education is the income that college students give up by not working. A good measure of this "opportunity cost" is the income that a newly minted high school graduate could earn by working full-time. And during the eighties this forgone income, unlike tuition, did not rise in real terms. Therefore, even a 39 percent increase in real tuition costs translated into an increase of just 10 percent in the total cost to students of a college education.

The economics of human capital also account for the fall in the fraction of black high school graduates who went on to college in the early eighties. As Harvard economist Thomas J. Kane has pointed out, costs rose more for black college students than for whites. That is because a higher percentage of blacks are from low-income families and, therefore, had been heavily subsidized by the federal government. Cuts in federal grants to them in the early eighties substantially raised their cost of a college education.

According to the 1982 "Report of the Commission on Graduate Education" at the University of Chicago, demographic-based college enrollment forecasts had been wide of the mark during the twenty years prior to that time. This is not surprising to a "human capitalist." Such forecasts ignored the changing incentives—on the cost side and on the benefit side—to enroll in college.

The economics of human capital have brought about a particularly dramatic change in the incentives for women to invest in college education in recent decades. Prior to the sixties American women were more likely than men to graduate from high school but less likely to continue on to college. Women who did go to college shunned or were excluded from math, sciences, economics, and law, and gravitated toward teaching, home economics, foreign languages, and literature. Because relatively few married women continued to work for pay, they rationally chose an education that helped in "household production"—and no doubt also in the marriage market—by improving their social skills and cultural interests.

 

All this has changed radically. The enormous increase in the labor participation of married women is the most important labor force change during the past twenty-five years. Many women now take little time off from their jobs even to have children. As a result the value to women of market skills has increased enormously, and they are bypassing traditional "women's" fields to enter accounting, law, medicine, engineering, and other subjects that pay well. Indeed, women now comprise one-third or so of enrollments in law, business, and medical schools, and many home economics departments have either shut down or are emphasizing the "new home economics." Improvements in the economic position of black women have been especially rapid, and they now earn just about as much as white women.

Of course, formal education is not the only way to invest in human capital. Workers also learn and are trained outside of schools, especially on jobs. Even college graduates are not fully prepared for the labor market when they leave school, and are fitted into their jobs through formal and informal training programs. The amount of on-the-job training ranges from an hour or so at simple jobs like dishwashing to several years at complicated tasks like engineering in an auto plant. The limited data available indicates that on-the-job training is an important source of the very large increase in earnings that workers get as they gain greater experience at work. Recent bold estimates by Columbia University economist Jacob Mincer suggest that the total investment in on-the-job training may be well over $100 billion a year, or almost 2 percent of GNP.

No discussion of human capital can omit the influence of families on the knowledge, skills, values, and habits of their children. Parents affect educational attainment, marital stability, propensities to smoke and to get to work on time, as well as many other dimensions of their children's lives.

The enormous influence of the family would seem to imply a very close relation between the earnings, education, and occupations of parents and children. Therefore, it is rather surprising that the positive relation between the earnings of parents and children is not strong, although the relation between the years of schooling of parents and children is stronger. For example, if fathers earn 20 percent above the mean of their generation, sons at similar ages tend to earn about 8 percent above the mean of theirs. Similar relations hold in Western European countries, Japan, Taiwan, and many other places.

The old adage of "from shirtsleeves to shirtsleeves in three generations" is no myth; the earnings of grandsons and grandparents are hardly related. Apparently, the opportunities provided by a modern economy, along with extensive public support of education, enable the majority of those who come from lower-income backgrounds to do reasonably well in the labor market. The same opportunities that foster upward mobility for the poor create an equal amount of downward mobility for those higher up on the income ladder.

The continuing growth in per capita incomes of many countries during the nineteenth and twentieth centuries is partly due to the expansion of scientific and technical knowledge that raises the productivity of labor and other inputs in production. And the increasing reliance of industry on sophisticated knowledge greatly enhances the value of education, technical schooling, on-the-job training, and other human capital.

New technological advances clearly are of little value to countries that have very few skilled workers who know how to use them. Economic growth closely depends on the synergies between new knowledge and human capital, which is why large increases in education and training have accompanied major advances in technological knowledge in all countries that have achieved significant economic growth.

The outstanding economic records of Japan, Taiwan, and other Asian economies in recent decades dramatically illustrate the importance of human capital to growth. Lacking natural resources—they import almost all their energy, for example—and facing discrimination against their exports by the West, these so-called Asian tigers grew rapidly by relying on a well-trained, educated, hardworking, and conscientious labor force that makes excellent use of modern technologies.

* From The Concise Encyclopedia of Economics, part of The Library of Economics and Liberty, (no date)

Original version: http://www.econlib.org/library/Enc/HumanCapital.html

Further Reading

Becker, Gary S. Human Capital. 1975.

Freeman, Richard. The Overeducated American. 1976.

Kane, Thomas J. "College Entry by Blacks since 1970: The Role of Tuition, Financial Aid, Local Economic Conditions, and Family Background." Unpublished manuscript, 1990.

Murphy, Kevin M., and Finis Welch. "Wage Premiums for College Graduates: Recent Growth and Possible Explanations." Educational Researcher 18 (1989): 17-27.

"Report of the Commission on Graduate Education." University of Chicago Record 16, no. 2 (May 3, 1982): 67-180.

About the Author

Gary S. Becker is University Professor of Economics and Sociology at the University of Chicago and the Rose-Marie and Jack R. Anderson Senior Fellow at Stanford's Hoover Institution. He was a pioneer in the study of human capital. He won the 1992 Nobel Prize in economics. (See also: Biography: Gary S. Becker.)**

**Biography of Gary S. Becker (from the same source as the above)

Gary S. Becker won the 1992 Nobel Prize in economics for "having extended the domain of economic theory to aspects of human behavior which had previously been dealt with—if at all—by other social science disciplines such as sociology, demography and criminology."

Becker's unusually wide applications of economics started early. In 1955 he wrote his doctoral dissertation at the University of Chicago on the economics of discrimination. Among other things, Becker successfully challenged the Marxist view that discrimination helps the person who discriminates. Becker pointed out that if an employer refuses to hire a productive worker simply because of his skin color, that employer loses out on a valuable opportunity. In short, discrimination is costly to the person who discriminates.

Becker showed that discrimination would be less pervasive in more competitive industries because companies that discriminated would lose market share to companies that did not. He also presented evidence that discrimination was more pervasive in more regulated and, therefore, less competitive industries. The idea that discrimination is costly to the discriminator is common sense among economists today, and that is due to Becker.

In the early sixties Becker moved on to the fledgling area of human capital. One of the founders of the concept (the other being Theodore Schultz), Becker pointed out what again seems like common sense but was new at the time: education is an investment. Education adds to our human capital just as other

 

investments add to physical capital. (For more on this, see Becker's article, Human Capital, in this encyclopedia.)

One of Becker's insights was that a major cost of investing in education is one's time. Possibly that insight led him to his next major area, the study of the allocation of time within a family. Applying the economist's concept of opportunity cost, Becker showed that as market wages rose, the cost to married women of staying home would rise. They would want to work outside the home and economize on household tasks by buying more appliances and fast food.

Not even crime escaped Becker's keen analytic mind. In the late sixties he wrote a trail-blazing article whose working assumption was that the decision to commit crime is a function of the costs and benefits of crime. From this assumption he concluded that the way to reduce crime is to raise the probability of punishment or to make the punishment more severe. His insights into crime, like his insights on discrimination and human capital, helped spawn a new branch of economics.

In the seventies Becker extended his insights on allocation of time within a family. He used the economic approach to explain the decisions to have children and to educate them, and the decisions to marry and to divorce.

Becker was a professor at Columbia University from 1957 to 1969. Except for that period, he has spent his entire career at the University of Chicago. He holds joint appointments in the departments of economics and sociology. Becker won the John Bates Clark Award of the American  Association in 1967 and was president of that association in 1987.