Do Premiums Affect Wages?

[ProSense]

Do Premiums Affect Wages?

January 7, 2010 · by Austin Frakt

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But neither MacGillis nor Mishel cite evidence from peer-reviewed studies to support their claims. (I wouldn’t expect MacGillis to do so in a Washington Post article, but it would be customary in Mishel’s medium.) Let’s take a look at what some of that literature says.

In a 2006 article in the Journal of Labor Economics titled The Labor Market Effects of Rising Health Insurance Premiums, Katherine Baicker and Amitabh Chandra

estimate that a 10% increase in health insurance premiums reduces the aggregate probability of being employed by 1.2 percentage points, reduces hours worked by 2.4%, and increases the likelihood that a worker is employed only part time by 1.9 percentage points. For workers covered by employer provided health insurance, this increase in premiums results in an offsetting decrease in wages of 2.3%.

Since health insurance premiums are plausibly a factor of five or so less than wages (annualized), the 10% increase in the former leading to a 2.3% decrease of the latter is close to a one-to-one trade-off.

But we don’t have to take just Baicker’s and Chandra’s word for it. Others cite similar findings. In a 2008 article in JAMA (link to a full access, low resolution version) Ezekiel Emanuel (yes that one) and Victor Fuchs write that “the health care cost–wage trade-off is confirmed by many economic studies.” In support of this claim they cite the following (extracted from their references):

• Eberts R, Stone J. Wages, fringe benefits, and working conditions: an analysis of compensating differentials. South Econ J. 1985;52:274-280.
  
  
• Sheiner L. Health Care Costs, Wages, and Aging. Washington, DC: Federal Reserve Board of Governors; April 1999. http://www.federalreserve.gov/pubs/feds/1999/199919/199919pap.pdf. Accessed February 6, 2008.
  
  
• Royalty AB. A Discrete Choice Approach to Estimating Workers’ Marginal Valuation of Fringe Benefits. Indianapolis: Indiana University–Purdue University; June 2003. http://liberalarts.iupui.edu/~anroyalt/wfdiscch_j03.pdf. Accessed February 6, 2008.
  
  
• Madrian BC. The US Health Care System and Labor Markets. Cambridge, MA: National Bureau of Economic Research; January 2006. NBER Working Paper No. 11980. http://www.nber.org/papers/w11980. Accessed February 6, 2008.
  
  
• Gruber J. The incidence of mandated maternity benefits. Am Econ Rev. 1994; 84(3):622-641.
  
  
• Miller RD. Estimating the compensating differential for employer-provided health insurance. Int J Health Care Finance Econ. 2004;4(1):27-41.
  
  
• Gruber J. Health insurance and the labor market. In: Culyer AJ, Newhouse JP, eds. Handbook of Health Economics. Vol 1. New York, NY: Elsevier Science; 2000.

Clearly the notion that premiums and wages offset one another has an impressive pedigree. One would have to do far more than MacGillis or Mishel did to convince me (and I would suspect most health or labor economists) to set it aside.

[PBS Poll-435]

1. I Rec'd

Back to 0.

:(

[Hello_Kitty]

2. That increased premiums tend to drive wages down a bit does not mean the opposite is true

Frakt himself acknowledges this in the comments section. Also many of these analyses fail to include important factors like unemployment and productivity. But the Senate is not only claiming definitively that this will increase wages, it is claiming a specific, and large, dollar amount on these increased wages.

[ProSense]

4. "Frakt himself acknowledges this in the comments section." No,

"My thinking on this one is that it is a short-run/long-run question. In the short-run, wages will stick as you suggest, in the long run, they’ll go up."

Still, the studies make the case clearly.

[Hello_Kitty]

6. The Senate is claiming 83% of the revenue raised will come from increased wages by 2019.

That is 6 years after the tax goes into effect. That's an awfully ambitious projection considering how there's no guarantee of any kind that employers would pass any savings onto their workers.

[ProSense]

7. "That's an awfully ambitious projection"

It's a projection they feel confident making. On the other hand, the point of the OP is to debunk the counter argument that claims wages will not go up.

[stray cat]

3. Of course - as an employer I pay someone 40,000 but benefits cost an extra 16,000

For a budget the money that counts is 56000 and not 40000

[ProSense]

5. True. A lot of employers hire you and hand you

a paper stating how much you're being compensated, and it's often thousands more than your paycheck, with health benefits comprising the biggest chunk of the additional compensation.

[seaglass]

8. And when they drop the insurance, do you give them the 16K? n/t

[johnaries]

9. Yes, definitely. And having worked closely with HR on wage and

salary issues I can explain it very simply.

Employee wage and compensation is the largest single expense for all but a handful of companies. Therefore, employers want to make sure they hire quality employees to get the most productivity or "bang for their buck" as it is often called. Further, employee retention is very important because the process of hiring and training is very expensive with no return value until the training is completed.

Every company is competing with every other company for many of the same employees. To effectively compete, HR departments have to track the employee market and what other companies are paying and what benefit packages they are offering. Most "quality" employees seeking long-term employment are looking for a good benefits package as well as good wages.

Like everything else, employee compensation has to be budgeted. If the benefits cost less, then there is more in the budget for wages. In order to compete with other companies in attracting potential employees, with benefits being more or less equal the company will increase wage offerings. Other companies will increase their wage offerings in turn to compete.

Unfortunately, these wage increases usually begin with new hires rather than existing employees. But, as other companies "woo" existing employees away with the increased wage offerings the company will then increase existing wages in order to maintain employee retention.

Therefore, yes, lowering the costs of benefits definitely results in increased wages.

[Hansel]

10. And increased retirement benefits.

Many employers have cut back on retirement benefits because of the high cost of health insurance. Our defined benefit plan has been frozen and the employer's match for the 401k is less generous for newer employees, but they have said that when things improve in the future that they will revisit this. So I think we will see our retirement plans restored before we see much in wage increases.

Companies tend to increase co-payments and the employee's share of premiums while keeping pay increases flat to try to lessen the demoralizing effect of decreasing pay. It never works though because employees are smart enough to know that, in effect, they've gotten a pay decrease or a very nominal increase. So employers should be happy when they have some wiggle room to actually increase the amount of pay increases. The interesting thing will be to see if they lower the employees' share of premiums and co-payments at the same time. Maybe that decision is already baked into the legislation.

[johnaries]

11. My company actually took a very progressive approach to rising

premiums.

Our home office had a small "work-out" room. The company expanded it, enhanced it, hired two full-time Physical Trainers (we affectionately call one of them the "Work-out Nazi" because she is so strict, but everybody loves her and she gets results), and began multiple Health programs.

It not only got us huge discounts on Health Insurance, it increased productivity and overall employee satisfaction. It was so successful Gov Bredesen came for a tour and encouraged other TN companies to follow suit.