Why Better Wages Are Tied to Healthcare Costs

Health-Care Costs Ate Your Pay Raises
Take-home wages have stagnated for more than 40 years because employers shell out so much more for worker health insurance.
Bloomberg, September 28, 2016

Real, or inflation-adjusted, compensation has risen 61 percent since 1970; wages, on the other hand, have increased less than 3 percent in real terms in that period.

This is a tale that has gotten short shrift in this political season. Much of the narrative of the 2016 election is about middle-class anger over the lack of economic progress in an era of increasing financial inequality. Residual frustration with the financial crisis and bank bailouts isn’t making voters feel any better either.

As the data cited above implies, the economics of pay gains are more complex than can be presented in a sound bite or in a two-minute debate answer. A closer look at the facts reveals some surprises, and an unexpected conclusion. You may not be happy with the bottom line, but it’s rather hard to argue with the underlying data.

Start by looking the chart below. This shows two ways to measure employee compensation:

Where’s My Raise?

The gray line is real wages, adjusted for inflation. This is the number most people think of when they consider their paychecks. It is their pretax gross pay, what they negotiate when they take a new job,  and what they hope to see rise each year.

As you can see, real wages have been little changed for more than 46 years, increasing a minuscule 2.7 percent during that period.

It isn’t a stretch to surmise that most employees don’t really appreciate how substantial this non-wage compensation is; nor do they realize how much health-care costs, the biggest part of their non-wage compensation, have risen.

Workers once got a salary with health-care insurance as a nice add-on; today, they get a salary and health-care insurance that would bust most family budgets if the policy had to be purchased on the open market. And so while the total amount companies spend on compensation has increased a good deal, it sure doesn’t feel that way to many workers.

The political and policy ramifications of this are significant. Workers are unhappy with their salaries; employers are unhappy with their costs. It isn’t a big leap to conclude that so long as either health-care costs keep rising or employers are responsible for paying them that wages will be competing with compensation.

For more than 40 years, wages have lost that battle.

Given the historic conflicts between capital and labor, it is somewhat ironic that each now is on the same side of this squeeze. Both employees and employers have a huge incentive to see limits on increases in health-care costs.

It’s always worth making comparisons with other countries in cases like this. Germany, Japan, the U.K., France, Switzerland and other industrialized nations compensate labor and obligate capital differently from the U.S. Many countries guarantee basic health-care coverage for all citizens via a single-payer system paid for via an income, corporate or value-added tax (or some combination thereof).

In the U.S., of course, your health care is provided — if you’re fortunate — by your employer or in some cases by government programs like Medicare for the elderly or Medicaid for the poor. And then there were those people who were neither poor enough nor old enough for those government programs.

That brings us to Obamacare, which surprisingly hasn’t come up much in the presidential election so far. It’s hard to imagine that any political party will overturn it, sending as many as 30 million people back into the ranks of the uninsured. But the program has its problems, and finding a way to improve, reform or replace it is likely to show up on the political agenda in the coming years.

An ideal solution would free employers from the obligation to cover rising health-care costs. That would mean there is more room in corporate budgets for pay raises.

These are crucial issues, though crafting solutions to complicated problems isn’t always politically popular. But they must be raised nonetheless, hopefully spurring an intelligent conversation. That might have to wait until after the silly season ends — about Nov. 9.

Originally: Health-Care Costs Ate Your Pay Raises