October 6, 2014

Income Inequality and Rising Health-Care Costs

Mark J. Warshawsky

Former Senior Research Fellow

Andrew G. Biggs

Summary

A new Kaiser Family Foundation survey reports that health-insurance premiums rose by a “modest” 3% in 2013. Even more modest, however, was the 2.3% growth of workers’ earnings last year. These figures merely illustrate a long-term trend of rising health costs eating away at wages. The real story is even more dramatic: Government data show that health costs are the biggest driver of income inequality in America today.

A new Kaiser Family Foundation survey reports that health-insurance premiums rose by a “modest” 3% in 2013. Even more modest, however, was the 2.3% growth of workers’ earnings last year. These figures merely illustrate a long-term trend of rising health costs eating away at wages. The real story is even more dramatic: Government data show that health costs are the biggest driver of income inequality in America today.

Most employers pay workers a combination of wages and benefits, the most important of which is health coverage. Economic theory says that when employers’ costs for benefits like health coverage rise, they will hold back on salary increases to keep total compensation costs in check. That’s exactly what seems to have happened: Bureau of Labor Statistics data show that from June 2004 to June 2014 compensation increased by 28% while employer health-insurance costs rose by 51%. Consequently, average wages grew by just 24%.

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The research upon which this article was based: Can the Rapid Growth in the Cost of Employer-Provided Health Benefits Explain the Observed Increase in Earnings Inequality?