What does health care have to do with the wage slowdown? Not much

David Leonhardt on the New York Times‘ Economix blog is spurring an interesting conversation about what has caused the slowdown in income growth. Though not explicit, what Leonhardt is asking people to explain is the sluggish growth in median household income since 2000, when incomes for working-age households fell over the 2000–2007 business cycle (the first time in any cycle in the post-war period) and then were battered by the great recession we’re still effectively in. This is what we are referring to in the forthcoming The State of Working America  (out on Sept. 11) as the “lost decade.”

The heart of the matter is the ongoing failure of wages and benefits for typical workers (including those with a college degree!) to see any improvements, even though productivity (the ability of the economy to provide higher pay) has grown appreciably. I want to focus on one issue raised in this discussion, the role of rising health care costs on wage growth, an issue we examine (in the new book) more thoroughly than I have seen before. The issue is the extent to which rising employer health care costs have squeezed wage growth and contributed to rising wage inequality. An earlier paper tackled this issue as well.

The relationship between employer health insurance costs and wages is that employers set the growth of compensation, and when health costs rise, there is simply less compensation available for wage growth. This assumes that higher health spending by employers offsets the possibility of higher wages dollar-for-dollar. (Although this is likely not the case, I will assume it for our purpose here; there is also the issue that there are other benefits beyond health that could provide an alternative to wages in soaking up increased health costs.)

The potential squeeze of health care on wages can be measured simply by examining employer health care costs as a share of total wages; the faster that share grows, the more there is a squeeze on wages. We have examined data from the National Income and Product Accounts to show employer costs for employee group health insurance as a share of wages back to 1948. In that year, employer health care costs were the equivalent of just 0.5 percent of total wages; in 1979 they were 4.5 percent of wages; and by 2010 (the latest year for these data), they were 8.9 percent of wages. These are data compiled prior to the late July release of revised and updated (to 2011) data.

We can conclude that rising health care costs for employers has put a squeeze on wages since 1948. Perhaps surprising to economists, however, is that the squeeze has been no greater in the 1979–2010 period than in the 1948–1979 period. This can be seen by the fact that the percentage-point change in the health share of wages grew 0.13 percentage point annually between 1948 and 1979 and a comparable 0.14 percentage point annually post-1979. This means that the very disappointing wage growth for the typical worker in the latter period, when median wages and compensation lagged substantially behind productivity growth (which did not occur in the earlier period), cannot be explained by any escalation of health care costs.

However, there is much discussion of the acceleration of health care costs in the 2000s relative to the 1990s as a potential factor in poor wage growth in the latter period, so we examine these sub-periods:

Health care costs rose slowly (by 0.07 percent annually) between 1989 and 2000, and they grew comparably in the 1980s and the 2000s. The deceleration of health care costs in the 1990s could explain a small (0.12 percent annual) acceleration of wage growth in the 1990s relative to the 1979–1989 period. Similarly, the reemergence of health care cost growth relative to wages in the 2000s can potentially explain a small (0.1 percent annual) deceleration of wage growth in the 2000s.  I would add that this result is sensitive to endpoints because the health share of wages actually grew comparably between 1996–2001 and 2001–2007.  In summary, rising health care costs have not been a major shaper of the pattern of wage growth over the post-war era through 2010—instead they have constituted a steady, quite modest, downward pull on the potential for wage growth. Health costs contribute very little to an explanation of why the real median hourly wage grew 7.7 percent from 1995–2000 and just 0.5 percent from 2000–2011.

There are other issues to consider, which I will take up at another time. For instance, do rising employer health care costs affect wage inequality by affecting middle or low-wage workers more than higher wage workers? Tune in later, or get the book.