What does health care have to do with the wage slowdown? Not much

David Leonhardt on the New York Times‘ Economix blog is spurring an interesting conversation about what has caused the slowdown in income growth. Though not explicit, what Leonhardt is asking people to explain is the sluggish growth in median household income since 2000, when incomes for working-age households fell over the 2000–2007 business cycle (the first time in any cycle in the post-war period) and then were battered by the great recession we’re still effectively in. This is what we are referring to in the forthcoming The State of Working America  (out on Sept. 11) as the “lost decade.”

The heart of the matter is the ongoing failure of wages and benefits for typical workers (including those with a college degree!) to see any improvements, even though productivity (the ability of the economy to provide higher pay) has grown appreciably. I want to focus on one issue raised in this discussion, the role of rising health care costs on wage growth, an issue we examine (in the new book) more thoroughly than I have seen before. The issue is the extent to which rising employer health care costs have squeezed wage growth and contributed to rising wage inequality. An earlier paper tackled this issue as well.

The relationship between employer health insurance costs and wages is that employers set the growth of compensation, and when health costs rise, there is simply less compensation available for wage growth. This assumes that higher health spending by employers offsets the possibility of higher wages dollar-for-dollar. (Although this is likely not the case, I will assume it for our purpose here; there is also the issue that there are other benefits beyond health that could provide an alternative to wages in soaking up increased health costs.)

The potential squeeze of health care on wages can be measured simply by examining employer health care costs as a share of total wages; the faster that share grows, the more there is a squeeze on wages. We have examined data from the National Income and Product Accounts to show employer costs for employee group health insurance as a share of wages back to 1948. In that year, employer health care costs were the equivalent of just 0.5 percent of total wages; in 1979 they were 4.5 percent of wages; and by 2010 (the latest year for these data), they were 8.9 percent of wages. These are data compiled prior to the late July release of revised and updated (to 2011) data.

We can conclude that rising health care costs for employers has put a squeeze on wages since 1948. Perhaps surprising to economists, however, is that the squeeze has been no greater in the 1979–2010 period than in the 1948–1979 period. This can be seen by the fact that the percentage-point change in the health share of wages grew 0.13 percentage point annually between 1948 and 1979 and a comparable 0.14 percentage point annually post-1979. This means that the very disappointing wage growth for the typical worker in the latter period, when median wages and compensation lagged substantially behind productivity growth (which did not occur in the earlier period), cannot be explained by any escalation of health care costs.

However, there is much discussion of the acceleration of health care costs in the 2000s relative to the 1990s as a potential factor in poor wage growth in the latter period, so we examine these sub-periods:

Health care costs rose slowly (by 0.07 percent annually) between 1989 and 2000, and they grew comparably in the 1980s and the 2000s. The deceleration of health care costs in the 1990s could explain a small (0.12 percent annual) acceleration of wage growth in the 1990s relative to the 1979–1989 period. Similarly, the reemergence of health care cost growth relative to wages in the 2000s can potentially explain a small (0.1 percent annual) deceleration of wage growth in the 2000s.  I would add that this result is sensitive to endpoints because the health share of wages actually grew comparably between 1996–2001 and 2001–2007.  In summary, rising health care costs have not been a major shaper of the pattern of wage growth over the post-war era through 2010—instead they have constituted a steady, quite modest, downward pull on the potential for wage growth. Health costs contribute very little to an explanation of why the real median hourly wage grew 7.7 percent from 1995–2000 and just 0.5 percent from 2000–2011.

There are other issues to consider, which I will take up at another time. For instance, do rising employer health care costs affect wage inequality by affecting middle or low-wage workers more than higher wage workers? Tune in later, or get the book.


  • benleet

    Floyd Norris at the NYTimes in Aug. 2011 said this: ” The 2010 total [compensation including wages, salaries and benefits], of 62.1 percent, is not close to the record low share of 54.5 percent, set in 1929, the first year for which numbers are available. But it is the lowest for any full year since 1965″ (See http://www.nytimes.com/2011/08/06/business/workers-wages-chasing-corporate-profits-off-the-charts.html?_r=2) This article has a graph of benefits growth and of wage and salary decline. After 1970 total benefits seems to plateau around 10 to 12% of total income, while salaries dive from an average of 57% to a new low of 49.6% of “national income”. And Andrew Sum said this about wages, productivity and corporate profits, “The median real weekly earnings of the nation’s full-time wage and salary workers rose by only slightly more than 2% over the decade [2000-2010] . . . . real output per hour of work in the nonfarm business sector increased by slightly more than 29%, its best record since the decade of the 1960s. . . . corporate profits (before tax) increased in real terms (in constant 1999 dollars) by $470 billion or 58%.” (See this — http://www.huffingtonpost.com/andrew-sum/ringing-out-the-lost-econ_b_805426.html) My comment is 2 times 29 equals 58% corporate profit growth. Here’s a quote from the CBO report Trends in the Historical Distribution of Income Between 1979 and 2007, page 18, “The study found that nonfinancial executives, managers, and supervisors made up the largest subgroup of the highest-income households, accounting for 31 percent of the top percentile. Medical professionals were the second largest occupational category, making up 16 percent, while financial professionals accounted for 14 percent and lawyers for 8 percent. No other single occupational group accounted for more than 5 percent of the top percentile.” But that doesn’t explain why the lower-earning 80% lost about 10% of their share of the income-pie between 1979 to 2007. Maybe I have to “get the book.”

  • Allen Shaw

    What
    does health care have to do with the wage slowdown? Not much | Economic

    Many words are going to be written while attempting to
    explain the wage slowdown. If we pay attention to Paul Ryan’s interest in Ayn Rand it
    is easy to see what is happening. (Corporate Greed)

    Somewhere in the late 70’s or 80’s a decision was made that
    goods could be produced cheaper in other counties were wages were held
    low. The Major American Corporations
    became Muti-National with an interest in profits, rather than in the welfare of
    the US Worker, who was being supported by a strong union. When our old factories became old and
    obsolete they were abandoned and new factories were created in the foreign
    countries. The cost of eliminating the obsolete buildings became a government
    expense.

    US workers were left without jobs because of that business
    decision. The strength of the union was
    broken. New factories that were created
    in the United States were created in the Southern state where the Unions were
    locked out and the workers were required to accept lower wages. Within the last
    20 years the businesses have completely destroyed the union and now control the
    wages. Republican State governments have created unfavorable conditions for
    unions and now are attempting to eliminate the voting power of the many mainly
    lower educated individuals and the poor who do not have the means to meet the
    registration standards. (Remember the poll tax and the literacy test of the
    south!)

    While blaming President Obama for failing to reduce the
    unemployment rate there will be no new real volume of work until the US worker
    will be willing to work for a much lower wage.

    No new money can be expected to be spent by business until
    they realize the maximum profit they can from their investment in their foreign
    investments and the wages in the foreign countries rise to a much higher level.
    Then, and only then, will business be willing to consider building new modern
    buildings in this country in a volume great enough to affect the United States
    unemployment rates.

    We need a “Buy what America Builds Standard” that really
    works, however I have no idea how it can be done.