Wednesday, October 21, 2009

Health Care Costs and Wages

Ezra Klein discusses the oft overlooked relationship between health-care costs and wages with MIT economist Jon Gruber:

"There are a few things economists believe in our souls so strongly that we have a hard time actually explaining them," he said. "One is that free trade is good and another is that health-care costs come out of wages." To put it another way: Economists are pretty united on this point. A firm's compensation for its workers is pretty static, and if relatively more goes to health-care costs, relatively less will go to wages, and vice-versa. But this isn't just a matter of theory. The following graph charts the percent growth in the median household income versus the percent growth in health-care costs since 1990. The correlation is striking:


The correlation between the two data sets is -0.8, which is incredibly high for this sort of thing. To give you an idea, I also ran the correlation between GDP growth and median wages over the period: It was 0.7, which is to say that there was a weaker connection between economic growth and median wages than between health-care costs and median wages.

There is, in other words, very good evidence that employers pass health-care savings onto employees. A Rand study by Dana Goldman, Neeraj Sood and Arleen Leibowitz examined a particular firm's response to a period of premium increases and found that "about two-thirds of the premium increase is financed out of cash wages and the remaining one-thirds is financed by a reduction in benefits." Another study by Katherine Baicker and Amitabh Chandra found that a 10 percent increase in premiums "results in an offsetting decrease in wages of 2.3 percent," which is fairly impressive given that income is much higher than health-care premiums.

There's good reason to think that if health-care costs can be tamed, wages will rise. But one of the big problems in health-care reform is that workers don't understand this connection. They think of health-care coverage as a "benefit," rather than a form of compensation engaged in a fairly zero-sum competition against their wages.

Double shame then that Congress seems unwilling to pass something that actually lowers cost--i.e. closing the tax loophole for employer-sponsored insurance or moving doctors away from their current fee-for-service compensation.

Performing nip-tucks with Medicare and being stingy with subsidies doesn't really get to the heart of cost-cutting.
Good point, Bryce about people not knowing. I think that is a big problem for a lot of reforms, peoples knowlege of how the system actually works. I'm sure that if you did a study looking at whether people think that higher premiums affect their wages negatively and whether they support a public option to increase competition and lower insurance premiums, you would see that the majority of people who are aware of this pattern would be in support of reform as it has such a large effect on personal income. It would also be very interesting to study political affiliation or income level as determinants of insurance reform opinions since I think there is this capitalism-rules stigma that prevents people from seeing any validity in a government role in health care. And then there's the whole if you don't see the costs why should you care factor for people with higher incomes for whom health care "benefits" are such a small portion of their overall income. I'm assuming here that health care costs do not increase at the same rate as income.
This is an obvious problem with the employer sponsored system that the majority of the population with health care has. An employer sponsored system has many negative effects on small businesses on their employees who often don't have coverage.
So workers are opposed to/concerned about real health care reform because they don't realize that lowering the cost of health care would most likely make wages rise. That's a fairly straightforward issue, with what appears to be a fairly straightforward solution: explain it to them. It's not even that difficult a concept; it requires no background in economics beyond living on one's own budget to realize that if businesses have a fixed amount of money to spend on labor and two things to spend it on (wages and health care), lowering the cost of one will raise the amount they're willing to pay for the other. So what I want to know is, now that we know that there's an information gap, why isn't somebody (the president, liberal congresspeople, any of dozens of groups with an interest in passing health care reform) launching a massive public education/advertising campaign to fill it?
The problem might be inherent in the word; benefit implies a side perk, not, as you put it, an actual zero-sum competition with wages. This reminds me of other words that give people the wrong idea about social problems, such as "food-insecure" instead of "hungry." Since healthcare has had such a long history as a "benefit," I'm not sure the benefits of an advertising campaign would outweigh the costs, especially since it would probably just be considered by many as a political scheme, rendering it an ineffective message.
It is indeed an interesting graph. And the correlation is certainly not surprising.
Do we have any studies showing a drop in insurance costs followed by bigger-than-usual raises for the staff?
Have the airlines' extra baggage fees disappeared now that gas prices are down?
OR maybe it is all just wishful thinking.
Post a Comment

Subscribe to Post Comments [Atom]

<< Home

This page is powered by Blogger. Isn't yours?

Subscribe to Posts [Atom]