• Do Premiums Affect Wages?

    There seems to be a bit of a debate going about the extent to which health insurance premiums relate to wage levels. This question has current salience as it relates to the predicted effects of the Cadillac tax on high premium insurance plans. Will reductions in premiums translate into higher wages? In a prior post I argued, as many economists have, that they will since employees really pay the full cost of all benefits through lower wages.

    Yet, in the Washington Post Alec MacGillis writes, “Some economists also doubt that employers would shift savings from health care into wages, given how slack the labor market is likely to be for the foreseeable future.” And in an EPI issue brief Lawrence Mishel argues that the notion that premium decreases cause wage increases is faulty (*). He writes,

    The recent claims that trends in employer health care expenditures explain the beneficial wage growth of the late 1990s and the disappointing wage growth since 2000 does not hold up to any careful scrutiny. Health care expenditures are relatively small compared to overall wages, and an examination of the actual trends shows that health care cost increases do not correspond to the major movements in wages or compensation.

    But neither MacGillis nor Mishel cite evidence from peer-reviewed studies about the connection between premiums and wages. (I wouldn’t expect MacGillis to do so in a Washington Post article, but it would be customary in Mishel’s medium.) Let’s take a look at what some of that literature says.

    In a 2006 article in the Journal of Labor Economics titled The Labor Market Effects of Rising Health Insurance Premiums, Katherine Baicker and Amitabh Chandra

    estimate that a 10% increase in health insurance premiums reduces the aggregate probability of being employed by 1.2 percentage points, reduces hours worked by 2.4%, and increases the likelihood that a worker is employed only part time by 1.9 percentage points. For workers covered by employer provided health insurance, this increase in premiums results in an offsetting decrease in wages of 2.3%.

    Since health insurance premiums are plausibly a factor of five or so less than wages (annualized), the 10% increase in the former leading to a 2.3% decrease of the latter is close to a one-to-one trade-off.

    But we don’t have to take just Baicker’s and Chandra’s word for it. Others cite similar findings. In a 2008 article in JAMA (link to a full access, low resolution version) Ezekiel Emanuel (yes that one) and Victor Fuchs write that “the health care cost–wage trade-off is confirmed by many economic studies.” In support of this claim they cite the following (extracted from their references):

    • Eberts R, Stone J. Wages, fringe benefits, and working conditions: an analysis of compensating differentials. South Econ J. 1985;52:274-280.
    • Sheiner L. Health Care Costs, Wages, and Aging. Washington, DC: Federal Reserve Board of Governors; April 1999. http://www.federalreserve.gov/pubs/feds/1999/199919/199919pap.pdf. Accessed February 6, 2008.
    • Royalty AB. A Discrete Choice Approach to Estimating Workers’ Marginal Valuation of Fringe Benefits. Indianapolis: Indiana University–Purdue University; June 2003. http://liberalarts.iupui.edu/~anroyalt/wfdiscch_j03.pdf. Accessed February 6, 2008.
    • Madrian BC. The US Health Care System and Labor Markets. Cambridge, MA: National Bureau of Economic Research; January 2006. NBER Working Paper No. 11980. http://www.nber.org/papers/w11980. Accessed February 6, 2008.
    • Gruber J. The incidence of mandated maternity benefits. Am Econ Rev. 1994; 84(3):622-641.
    • Miller RD. Estimating the compensating differential for employer-provided health insurance. Int J Health Care Finance Econ. 2004;4(1):27-41.
    • Gruber J. Health insurance and the labor market. In: Culyer AJ, Newhouse JP, eds. Handbook of Health Economics. Vol 1. New York, NY: Elsevier Science; 2000.

    Clearly the notion that premiums and wages offset one another has an impressive pedigree. One would have to do far more than MacGillis or Mishel did to convince me (and I would suspect most health or labor economists) to set it aside.

    (*) An important update: Mishel’s EPI paper does not contradict the notion supported by the literature I cite in this post. It is about a different though related issue about the extent to which premium changes caused wage changes. He finds that they cannot explain all of the changes seen in the 1990s and 2000s, as some have claimed. See the comments to this post, Kevin Drum’s post, and Paul Krugman’s. Or, simpler yet, just see my follow-up.

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    • Arthur’s point may be reenforced by the fact that the US lacks private sector unions or any way to really force employers to share their wealth gains. Even when employers made lots more money at various points in the past 30 years, there was little shared. That is why Mischel is so skeptical, too.

      The sad truth is my wife’s school district PPO comes brushing up against the limit already set forth in the proposed legislation. That Obama embraces this tax on a decidedly middle class person but not the public option speaks volumes about the failure of Obama and the Congressional Dems to stand up to the Republicans, Scorpion Democrats (unfortunately called Blue Dogs) and the insurance industry.

    • Glad you’re interested in my research. I wish you had read it.

      First, your critique is of a straw man, emphasizing that there is a trade-off between heath care costs and wages. My paper does not address whether there is a trade-off between health care costs and wages and explicitly says so:
      “One claim for the Senate excise tax has recently surfaced: that health care cost increases have been a major driving force in constraining wage growth and that wages will grow more strongly by curtailing employer health costs via the excise tax. This claim boldly asserts that health care costs are large enough (and the tradeoff with wages is large enough) to drive major changes in overall wages. This is a much stronger claim than saying that there is some tradeoff between higher health costs and wages in the total compensation package.” (underlining added).

      I present evidence directly drawn from my book, The State of Working America (published by Cornell Press). Simply, the acceleration of wages in the 1990s reflects the acceleration of overall compensation and not any shift in the composition of compensation between health care and wages. I note that health care is just 7% of total compensation and can’t drive overall wage trends. And, I point to the fact that the wages of low and middle-wage workers accelerated the most and they’re the ones with the least health care coverage. The same applies to the deceleration in the 2000s.

      Too bad you didn’t read the actual paper and respond to my evidence.

      I think saying the work does not appear in peer-reviewed research is a bit silly, too, since the claims I’m responding to were not made in journals but in recent journalistic blogs and an op-ed. The evidence I present did appear in an academic press book.
      Larry Mishel

      • @Larry Mishel – I wasn’t questioning your work or methods. I was merely pointing out that there is a vast body of work that shows a close tie between premium increases and wage decreases, one you didn’t cite. One reason it may not have seemed important to reference that literature is that you are addressing a slightly different though related issue, as you point out. Nevertheless, there is a danger that individuals reading your work who are not aware of that literature would conflate the two issues. I think Kevin Drum parsed them well in his post: http://motherjones.com/kevin-drum/2010/01/healthcare-and-wages

        In closing, I emphasize that isn’t evident that we actually disagree about anything. I wasn’t refuting your work and you’re not claiming that of the economists I cited is suspect. I see no reason for strong words of suspicion about who might have read what. But let me ask, is there something in my post you disagree with?

    • Where we disagree is that you cite my paper where I say: “The recent claims that trends in employer health care expenditures explain the beneficial wage growth of the late 1990s and the disappointing wage growth since 2000 does not hold up to any careful scrutiny.” Then you suggest I’m wrong by citing evidence that there’s a trade-off between health care costs and wages. Yet, the evidence of a trade-off hardly proves that the tremendous acceleration of wages in the mid-90s had anything to do with health care costs or that moderating health costs caused the wage acceleration. I presented evidence to the contrary which you do not try to address. And, the common interpretation is that productivity acceleration led to the wage acceleration.

      So, what do you think of Gruber’s claim that health cost trends explain the faster wage growth in the late 1990s and the slower wage growth in the 2000s? I think it is simply untrue.

      • @Larry Mishel – I agree with you up to but not including the claim that I’ve directly contradicted what you say or said that you’re wrong. That’s why I pointed to Kevin Drum in my last reply, who made the distinction between the issue you address and my point quite clear. I am willing to accept that I wasn’t as accurate and careful with all my words as I might have been or to the extent you would have liked me to have been. It was not my aim to confuse. I will insert a note in the post itself pointing to our exchange in the comments and to Drum’s post (can we agree that he parsed the issues well?).

        As for whose claim is more credible, based on what I know now I am inclined to believe that what you suggest is true. It doesn’t strike me as credible that premium changes are responsible for the degree of wage changes in the 1990s and 2000s. Yet I also believe there is likely a one-to-one premium-wage connection, which is really what’s relevant in the current policy debate. That doesn’t excuse individuals from exaggerating the role of premium changes. To the extent you’re correcting the record on that, I applaud it. But it is important also to make it clear that premiums do affect wages. That’s all I was trying to do, though perhaps with an unwarranted degree of “flair.”