Study: Rising Health Care Costs Drive Increases in Wage Inequality

Published October 17, 2016

Rising health care costs are driving increases in wage-income inequality, as lower-paid workers’ compensation is being increasingly consumed by health care benefits—a key contributor to reported income disparities—according to a study by the Mercatus Center at George Mason University.

“While dollar earnings have grown significantly faster for higher-income workers than for lower-income workers, total compensation (including increasingly expensive healthcare benefits) has not,” wrote Mark Warshawsky, a senior research fellow at the Mercatus Center, in the study, released in June.

The rising costs associated with health care benefits disproportionally impact lower-paid employees’ wages, because benefits packages now represent a larger share of total compensation, the study states. Rising health care benefit costs decrease the potential rise in their wages.

“Surging healthcare costs have depressed the annual earnings growth rate for lower-paid, full-time workers four times as much as for the top 1 percent of workers,” Warshawsky wrote.

Obamacare Contribution

Between 2015 and 2016, health insurance premiums increased by at least 20 percent in 22 states, and deductibles increased by at least 10 percent in 17 states, the Freedom Partners Chamber of Commerce reported in March.

The Affordable Care Act’s “employer mandate” requires businesses with 50 or more full-time employees to provide health insurance.

In addition to suppressing workers’ wage increases, Warshawsky says requiring employers to provide expensive benefits packages to full-time employees dissuades them from hiring low-wage full-time workers.

“High benefit costs tied to a full-time [work] status naturally encourage the hiring of more part-time employees who do not get benefits,” Warshawsky told Health Care News.

The United States had 5.9 million “involuntary part-time workers,” or people working part-time for “economic reasons,” in July, slightly more than the 5.8 million involuntary part-time workers in June, the Bureau of Labor Statistics reported in August.

Federal Tax Distortions

Federal tax policy creates these economic distortions, says Josh Brown, a health care policy analyst and attorney who represents clients before the Ohio General Assembly.

“Compensation is highly taxed, and employee benefits are not,” Brown said. “This tax treatment has created the phenomenon of employers offering more benefits in lieu of compensation, especially health insurance benefits.”

Individual and employer-sponsored health insurance plans should receive equal tax treatment, Brown says.

“People have been advocating for giving individual health insurance the same tax treatment as employer insurance for decades,” Brown said. “In today’s market, where employees change jobs frequently, it makes little sense to continue to incentivize employer health insurance over individual.”

Suggestions for Improvement

Warshawsky says greater health care price transparency among employers would reduce lower-paid employees’ perception they are being undercompensated.

“Full disclosure of benefit costs will certainly clarify real compensation levels and identify the tradeoff between wages and benefits.” Warshawsky said.

Lawmakers should abandon policies redistributing taxpayer wealth to pay for runaway health care costs in favor of policies encouraging competition among health care providers and insurers and a variety of coverage options, which would allow for better earnings comparisons, say the study’s authors.

Paying the health benefits portion of an employee’s earnings into a health savings account, from which the employee would pay for health care costs, would allow employees to see the full dollar amount of their compensation, Brown says.

“Health care savings accounts should continue to get favorable treatment [from health care reformers] as well, and that support should increase rather than decrease as it has in recent years,” Brown said.

Ben Johnson ([email protected]) writes from Stockport, Ohio.

Internet Info:

Mark J. Warshawsky, “Earnings Inequality: The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance,” Mercatus Center, George Mason University, June 10, 2016.

Richard Ebeling, “Governments Create Monopolies and Cause Worker Exploitation, Not Free Markets,” The Future of Freedom Foundation, May 16, 2016.

Peter J. Ferrara, “Why Economic Growth Is Exponentially More Important Than Income Inequality,” Forbes, January 14, 2014.

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