Premiums and Wages

There are (at least) two issues pertaining to health care premiums and wages. I emphasized one, the one-to-one trade-off between premium and wage level. Larry Mishel focused on another, the extent to which changes in premiums can explain changes in wages over the last two decades. As Keven Drum wrote, the two questions are 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?

Mishel’s answer is “no.” That’s entirely plausible and not in contradiction with the premium-wage trade-off. Again, I agree with Kevin Drum’s interpretation:

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.

Paul Krugman also summarizes the intersection of these two issues:

[T]here’s the argument that any reductions in premiums won’t be passed through into wages. I just don’t buy that. It’s true that the importance of changing premiums in past wage changes has been exaggerated by many people. But I’m enough of a card-carrying economist to believe that there’s a real tradeoff between benefits and wages.

It is important to keep in mind why these two related issues are important. Holding down premium growth should translate into faster wage growth. To the extent that it does not come at the expense of health care quality or does not just shift costs to employees through higher cost-sharing, that is a laudable goal of health reform. But advocates of reform should not overstate the case and suggest all of the changes in wages over the past two decades are due to changes in health care costs. That’s not a plausible claim, which is Mishel’s point. And I agree with him.

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