The Hidden Costs of the Health Care Wage Cut

April 27, 2005

A year ago, health care facilities in BC were behind picket lines. At issue was a new collective agreement, unilaterally imposed by the BC government, that cut wages and increased work hours for the lowest paid workers in health care.

Most of the striking workers were from the Hospital Employees’ Union, or HEU. The vast majority are women, and many are from visible minority of immigrant backgrounds. HEU workers include licensed practical nurses, care aides, lab technicians, clerical and support occupations, and tradespeople.

What was unusual was the depth of public support, considering that the strike became illegal and disrupted Canada’s most treasured social program. It was this public support that forced the government to cut a deal with the union, brokered by the BC Federation of Labour. In the end, the union wrought some modest concessions from the government but had to live with a 15% hourly wage cut.

Looking back, it is worth pondering why many people were sympathetic to the strikers, and what the consequences of the wage cut have been for the health care system. A body of economic research on wage cuts finds that employers almost never impose them on workers. The reason? Any cost savings from wage cuts tend to be outweighed by the negative consequences on workplace morale.

Wage cuts hurt workers twice: in their pocketbooks, and because they are perceived as an insult. For organizations, the accompanying drop in morale means staff turnover goes up and productivity falls. All of this is costly to organizations, particularly if it is the best workers who feel the slight more acutely and are more likely to leave.

This research has some strong implications for the health care system. The justification for the wage cut was to save $200 million in operating costs, funds that would be allocated to other health care needs. But the hidden costs of the wage cut may swamp the intended savings.

To get at these hidden costs, we commissioned the McIntyre and Mustel Group polling firm to conduct a survey of over 500 HEU workers six months after the wage cut. Our survey results show that the remaining HEU workers have indeed taken a major hit to their morale. Job satisfaction has plummeted. Much of this is rooted in the ripple effects of the wage cut at a personal level.

The vast majority of workers and their families have cut back on household expenditures. Most of these are discretionary expenditures like eating out and entertainment, but some workers have had to move, refinance a mortgage or sell their car in response to lower wages. Others have gone deeper into debt or have reduced their savings. Still others have increased their hours of work to compensate for lost income (spouses and children are working more as well).

The financial impacts have been harder to deal with for workers at the lower end of the pay scale, those who have multiple dependents, or those who have a spouse in an insecure job. But the morale impact is not just about money. Workers with higher levels of formal education, such as technicians, were more likely to report negative effects on morale.

For health care organizations, a key concern is that some 44% of the workers polled responded that quality of care had been affected in some way. Substantial percentages reported seeing increased frictions between workers, increased absenteeism, decreased productivity, and increased staff turnover. In terms of recruitment and retention of workers, almost half of all respondents and almost two-thirds of technicians said they have considered quitting as a result of the wage cut (and this number, by definition, excludes those who have already left).

These results raise concerns about how the wage cut and related policies such as contracting out will affect the quality of service in the health care system. We recommend that the Auditor General, who has already raised concerns about the quality of the work environment in the public sector, conduct a more thorough evaluation based on administrative data.

This episode in public policy should also be viewed in the context of rising inequality in BC. Within the health care system budgets were increasing and already higher-paid doctors and nurses had received wage increases. So the question arises: Why were we willing to cut the wages of workers already at the low end of the income ladder?

What is striking is that a government so focused on improving the business climate nevertheless threw aside business wisdom in this case. The government may have launched a boomerang that will come back to hurt organizational performance and quality of care.

Marc Lee is an economist in the BC Office of the Canadian Centre for Policy Alternatives. This article draws on a new CCPA report, The Hidden Costs of Health Care Wage Cuts in BC, co-authored with Marcy Cohen.