Earnings Inequality: The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance

By Mark J. Warshawsky of Mercatus. Excerpt:

"In a recent research for the Mercatus Center at George Mason University, I analyzed the link between earnings inequality and rising healthcare costs using unpublished data from the Bureau of Labor Statistics. I found that the increasing cost of employer-provided healthcare benefits accounts for a significant portion of rising earnings inequality.

This can be explained by looking at the share of healthcare costs relative to total compensation, which are much higher for low earners than for high earners. Rapidly growing healthcare costs, therefore, increasingly eat away at wage growth and non-health benefits—particularly for low-wage earners. To get some idea of the scale of escalation in healthcare costs, data from the 2015 Kaiser Family Foundation Survey highlights how employer costs for family healthcare coverage have exploded in recent years from around $4,200 in 1999 to nearly $12,600 in 2015. When we account for this increase in healthcare costs as a share of earnings for low-income workers, it becomes clear why the wages of low-income workers have stagnated in recent years.

Looking at data from 1996 to 2008, I found that unlike earnings, overall compensation (which includes healthcare benefits) did not become more unequal. In fact, overall benefits grew more quickly during this period for low-paid workers than for the top 1 percent. Thus, without rising healthcare costs, there would have been virtually zero change in earnings inequality.

Both economic theory and empirical findings indicate a clear tradeoff between wages and benefits: as benefits become more expensive, employers tend to hold back on salary increases, and so wage growth ultimately suffers. In fact, according to simple regression analysis, for every one percentage point increase in the healthcare cost share of compensation, the annual rate of growth in earnings declines by 0.23 percentage points. Over the period of 1990 through 2014, surging healthcare costs depressed annual earnings growth for low-paid workers more than twice as much as for the top 1 percent of workers."