Responding to Ramesh Ponnuru on health care benefits and wage stagnation

Ramesh Ponnuru in Bloomberg:

Academic studies and news media regularly report that in recent decades the middle class has been stagnating economically. Conservative and libertarian analysts often downplay these stories by saying that while wages for people in the middle of the economic spectrum may look flat, their total compensation has been rising steadily. …

Conservatives are right that trends in total compensation look better than trends in wages. But that’s not a reason for complacency. It’s a problem. What the numbers mean is that increases in health-care costs have depressed wage growth, and sometimes kept wages from rising at all.

If there’s a consensus among health economists about anything, it’s that employer-provided health benefits come out of wages. If health insurance were cheaper, or the marketplace were structured so that most people bought health coverage for themselves rather than getting it with their jobs, people would be paid more and raises would be higher.

1. The study I refer to most is one by Richard Burkhauser of Cornell. He takes the data of economists Thomas Piketty and Emmanuel Saez — which show only 3% growth in median market income between 1979 and 2007 — and makes a few tweaks:

– He adjusts for the rise in cohabiting couples and adult children living with parents who can share resources. The 3% is now 21%.

– He takes into account cash transfers from government. The 21% is now 24%.

– He takes into account taxes. The 24% is now 29%.

Then Burkhauser takes into account health care benefits, which pushes the 29% to 37%.

And here’s his explanation:

The most important employer provided non-cash compensation is the exante value of employer contributions to employee health insurance premiums. Since we consider post-transfer income, in addition to including the ex-ante value of employer provided health insurance we also include the ex-ante value of government provided health insurance via Medicaid and Medicare. If these health insurance policies were not provided and individuals opted to purchase coverage on the open market, the cost would be higher now than it was 30 years ago. Thus, it is appropriate to view the value of these benefits as increasing over time even if some individuals would prefer to receive additional cash compensation or transfers rather than receiving increasingly expensive health insurance benefits. It is for this reason that we include the ex-ante value of these non-cash benefits in this final income series.

2. So there is some value to the benefit, right? Yet, even without it, adjusted incomes still rose 30% (and that does not take into account the likely understating of real incomes due to poor inflation measurement).

3. But Ponnuru makes a valid point about total compensation reflecting our inability to control health care costs or provide more value at current prices. And I would much rather a system that turned the tax code’s current health care exclusion into a cash-out that employees would use to buy their own health insurance (with the tax exemption eventually extended to all individual buyers of health insurance.)

4. In addition, the P&S median market income number, even adjusted, probably does reflect a rise in inequality due to globalization, technology, and the failure of the US education system. So no reason to be complacent, even if average Americans benefited more from the Long Boom than what the “wage stagnation” argument suggests.

One thought on “Responding to Ramesh Ponnuru on health care benefits and wage stagnation

  1. Oh man. Junior is back living with mom and dad after earning his college degree so his wages at McDonalds are actually 21 percent higher than the headline number! I’m sure mom and dad are thrilled too.

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