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. 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. 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. 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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