As the latest jobs report shows, growth in employment in the health care sector continues to be, well, healthy. Others have pointed out that this may not be a good thing, especially if it crowds out jobs in other industries, taking up resources that would otherwise go to producing more valuable goods and services.

This issue is central to cost containment efforts, as a large part of health care spending is devoted to labor costs. As economist Uwe Reinhardt notes, “Every dollar of health care spending is someone else’s health care income.”

The basic question, then, concerns the opportunity cost of higher spending on health care. If growth in spending comes from an increase in health care jobs, its opportunity cost depends on what those workers would otherwise be doing. In a recent paper, Mark Pauly and Vivek Nimgaonkar take a 20-year look back to describe the relationship between growth in the share of the workforce in medical care and changes in the unemployment rate, and offsetting effects on jobs in other [supposed] high-value sectors such as education or public services.  

Using state data from 1990-2010, they find that when economy-wide unemployment is high, growth in medical employment reduces the unemployment rate significantly, without crowding out jobs in other services or government. They also find that when the share of medical jobs grows, so does the rest of the services sector. These effects are large: they estimate that about a quarter to a third of the growth in medical employment reduces the unemployed share.

When the unemployment rate is low, however, growth in medical sector jobs does not reduce unemployment. It draws jobs away from other industries, but does not draw disproportionately from education or public services.

This challenges the prevailing notion that increased medical spending is undesirable because it diverts resources from other goods and services that we value more than the marginal health benefits we gain. Instead, it argues that sometimes, if medical jobs growth creates jobs for workers who are unemployed, the real opportunity cost may be quite low—low enough to be justified even by modest additional health benefits.

The study looks at data prior to the enactment of the ACA in 2010, but we can see its continued relevance. As Dan Diamond notes, health care jobs grew even as the economy sank, a trend the ACA likely accelerated, as 20 million people gained health care coverage and increased the demand for health care services.

What does this mean for cost containment efforts? Pauly and Nimgaonkar issue a cautionary note to policymakers:

The clearest message is that efforts to lower health spending and employment growth should ideally be matched by reassurance that there will be other good and valuable jobs available elsewhere in the local economy for those erstwhile health care workers. This reassurance is less likely to be possible in periods of economic stagnation, suggesting that (despite the higher budgetary pressures in such periods) cost containment efforts might best be delayed until the macroeconomy is more robust, while countercyclical programs to expand employment in providing high value public services should be enacted. Just cutting health employment growth and then letting the chips fall where they may is not sensible policy.

So where are we now, macroeconomically speaking? The most recent numbers on employment growth indicate that the employment growth in the health care sector continues even as the unemployment rate has dropped below trend and stabilized: in the first six months of 2016, nearly a quarter of all new hires were in health care, representing workers that might have been expected to find jobs in other sectors of the economy. This raises concern that the sector may now be displacing output elsewhere in the economy, especially in other areas needing more highly skilled workers. Interestingly, however, this disproportionate employment growth has yet to turn into a dramatic increase in growth in spending on medical services.