• Total compensation math, ctd.

    This shouldn’t be hard. Imagine unemployment is high. There are many more people who want to work than there are jobs. Meanwhile, the premium for your employer-sponsored health care plan is scheduled to go up 20%. However, the overall inflation rate is low (call it 0%). Welcome to 2010.

    As in my last post, suppose your wage is $1,000 per week and your current health insurance premium cost $100 per week, half paid by your employer directly and half deducted from your paycheck. Thus, your total compensation is $1,050. That’s where it had been set last year when the unemployment rate and health insurance premiums were both lower. It was set at that level because that’s the equilibrium market price of labor for workers of your type. (Puzzled? Read my prior post.)

    Next week your premiums will go up to $120 (the anticipated 20% increase). What will your employer do? (In thinking about this, let’s make life simple and ignore taxes.) Well, your boss has very little fear you’ll quit if your total compensation does’t go up, even if you’ve done a great job over the past year. Good luck finding a job in this market! That is, the price for labor is no higher, and is likely lower, than it had been.

    Consequently, your employer is certainly not going to increase your total compensation. He (it) sticks you with the entirety of premium increase. Your contribution toward premium goes up from $50 (half of the prior, $100 premium level) to $70 (the $50 plus the additional $20). Now what’s your total compensation?

    It’s still $1,050. Your employer pays you $1,000 and contributes $50 toward your premium. Or, another way to compute it is: You get $1,000 minus $70 you pay in premium contribution plus an insurance policy worth $120, for a total of $1,050.

    If your employer absorbs any of the premium increase and leaves wages unaffected then your total compensation would have gone up. That’s true even if you are paying more in premiums too. For instance, suppose your employer splits the increase: $10 paid by you, $10 paid by your employer (both in addition to the $50 each already pays). Then your total compensation would be $1,060 (by now you can work that out for yourself).

    Or, your employer could throw in the towel and get out of paying for insurance entirely and stick you with the full $120 premium. In that case your total compensation would go down to $1,000. Still, in this labor market, are you going to quit? Not likely. That’s a reflection of the fact that $1,000 is closer to the new equilibrium price for your labor.

    Share
    Comments closed
     
    • Shouldn’t purchasing power of total compensation be taken into account? In your first example the entire $20 increase in monthly premium is put on the worker, i.e., total health care inflation is 16.6 percent and the workers inflation for that item is 40 percent. The expendable income left to the worker for other goods and servces is reduced from $950 to $930,

      Is this increase in insurance cost inflation or does this reflect increased value? I’d argue the value of health insurance doesn’t go up simply because it increases in price. In fact, most people have the worst of both worlds — rising prices (higher co-pays and co-insurance) and reduced value (less coverage). Most people understand that what is happening to them. Incessant health insurance cost shifting is robbing them of purchasing power for other goods and services.

      • @Merrill – The consideration you raise is important, but it pertains to a different question. Total compensation is something that is invariant to that on which it is spent. If an individual spends 20% of his income on housing and house prices skyrocket, is that a change in total compensation? No. But it is a change, as you point out, in purchasing power, a different concept.

        Employers are not responsible for the effect of inflation of housing prices or health care costs on the purchasing power of the compensation they provide. The health care cost problem is an important one for the reasons you raise, but it’s not a problem pertaining to total compensation. That’s established in the labor market and employers can’t skimp or over compensate without becoming uncompetitive.