Increasing health costs can’t explain earnings dip for low-wage workers

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Snapshot for April 12, 2006.

Increasing health costs can't explain earnings dip for low-wage workers
President Bush's Council of Economic Advisors has argued that rising health insurance costs have squeezed workers wages across the income scale.  As a practical matter, however, health insurance costs cannot explain the recent decline in wages for the lowest-paid workers because so few of them are covered by health insurance. 

The chart below illustrates the fact that workers in the bottom 20% of the wage scale suffered a 1.9% decline in real wages between 2004 and 2005.  It also shows that only 24% of those workers were covered by employer-provided health insurance in 2004. Health costs would have had to increase by 39% to explain the decline in wages for these workers, when, in reality, they increased only 9.2% from 2004 to 2005. 1

This week's Snapshot was written by EPI economists  Sylvia A. Allegretto and  Elise Gould.

Sources: Author's analysis of Bureau of Labor Statistics data, and the Kaiser Family Foundation and Health Research Educational Trust's Employer Health Benefits 2004 Annual Survey and 2005 Annual Survey.

Notes
1. The average wage of workers in the bottom quintile is $6.90, or an annual full-time wage of $14,352.  The average employer share of premiums for covered workers in individual plans was $3,137 in 2004 (Kaiser Family Foundation (2004)), or 21.9% of the average wage for workers in the bottom quintile.  Since only 24.4% of these workers have coverage, health costs for the whole group average 4.9% of total wages.  Dividing the wage loss (1.9%) by the health share (4.9%) finds that health costs would have had to increase by 38.7% to lower wages by 1.9%.  The over-simplified analysis by the Council of Economic Advisors also neglects to take into account the productivity gains of 2.9% over the year that could have translated into higher worker compensation.