Healthcare and Wages

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Do increases in healthcare costs restrain wage growth? Or, put another way, can we blame skyrocketing healthcare premiums for the fact that cash wages over the past three decades have been largely stagnant for the middle class?

There was some discussion of this topic while I was away, but I think it got a bit confused because there are actually two questions here. First, if employers have to pay more for healthcare, will they pay less in wages? I don’t think there’s any question that this is the case. Austin Frakt rounds up the academic evidence here, but frankly, you hardly need it. The effect of healthcare costs will vary over short-term periods thanks to economic conditions and general wage friction, but over the long term employers are plainly willing to pay only a certain amount for certain jobs. That amount includes wages, benefits, retirement, payroll taxes, and so forth. There’s just no way around that. Money paid for healthcare is not some magical source of income that doesn’t count against a company’s income statement, and every company in the world bigger than your local dry cleaner works on the basis of total burdened payroll, not just cash wages.

But the second question is quite different. Lawrence Mishel of EPI tries to argue here that healthcare premiums don’t have much effect on wages, but all he really shows is that the correlation is imperfect over short time periods. That’s not controversial. Over the long term, however, it’s simply not plausible that healthcare costs don’t affect total compensation on pretty much a 1:1 basis.

But Mishel does answer the second question: can we really blame healthcare for stagnant middle class earnings?

Health care costs were just 7.6% of total compensation and 9.4% of total wages (all wages paid, including premium pay, paid leave, and so on) in 2007. The share of health care in total wages (in nominal, non-inflation adjusted terms) grew from 7.2% in 1989 to the 9.4% in 2007, suggesting that the expanded role of health costs could have reduced wage growth by 2.2% over this entire 18-year period, or 0.12% each year.

A couple of months ago, I did a quick and dirty calculation of healthcare costs over the past decade and concluded that their overall effect was small. In pure cash terms, median wages went down about 4%. If you add in healthcare premiums, median wages went up 1%. That’s a difference of about 0.5% per year, which is nothing to sneeze at, but the fact remains that even if you count healthcare premiums, average incomes were almost completely flat. I’ve done the same rough calculation for the past three decades and come to the same conclusion over that period: There’s no question that healthcare premiums have an effect on wages, but even when you account for them, median income still grew very slowly. Healthcare simply isn’t more than a modest part of the explanation for sluggish wage growth.

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