Rising health care costs explain money income inequality

From Mark Perry.

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In today’s Wall Street Journal, AEI’s Andrew Biggs and co-author Mark Warshawsky explain how rising health care costs have accounted for almost all of the recent increases in money income inequality. As the chart above helps to illustrate, that’s because non-monetary fringe benefits (because of rising employer costs for health care coverage) have increased much more (60.2% for the 2001-2014 period) than monetary wages and salaries (less than 37%). To offset higher costs for their employees’ health insurance, employers reduce increases in monetary wages and salaries, ceteris paribus. But every dollar lost in higher wages/salaries has a disproportionately larger effect on low-paid employees than high-paid employees, and results in higher money income inequality. Here’s an excerpt of “Income Inequality and Rising Health-Care Costs“:

Most employers pay workers a combination of wages and benefits, the most important of which is health coverage. Economic theory says that when employers’ costs for benefits like health coverage rise, they will hold back on salary increases to keep total compensation costs in check. That’s exactly what’s happened: BLS data show that from June 2004 to June 2014 compensation increased by 28% while employer health-insurance costs rose by 51%. Consequently, average wages grew by just 24%.

But here’s what the news headlines miss: Rising health costs don’t affect every employee the same. An average family health policy today costs employers nearly $12,000 per year, up from only $4,200 in 1999. Had employer premiums not risen, average salaries today would be around $7,800 higher. For a lower-income worker who today makes $30,000, that could have meant a 26% salary increase. By contrast, a “one percenter” making $250,000 today would have seen his earnings rise only by 3.1%. Health costs are a bigger share of total compensation for lower-wage workers, and so rising health costs hit their salaries the most. The result is higher income inequality.

Health costs are by no means the only factor affecting income inequality. But it is shocking that health costs are seldom mentioned with regard to income inequality when the BLS data show that rising health costs can fully account for the increasing inequality of workers’ salaries from 1999 through 2006.

These data give us a different perspective on the inequality debate. Most people think of income inequality as money “redistributed” from the poor to the rich. In reality, much of what we’re seeing is more of low-income workers’ compensation going toward their health benefits and less ending up in their pockets. That’s a different problem and points toward different solutions.

MP: It’s an interesting and important point that you can observe rising money income inequality even though there’s no (or significantly less) increase in “total compensation inequality.” According to the analysis by Biggs and Warshawsky, the increasing share of fringe benefits in total employee compensation explains much of the increase in money income inequality."