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Researchers at the Commonwealth Fund recently asked "have escalating health care costs contributed to the huge economic gap between America’s rich and the rest?" Their conclusion? "The evidence, it turns out, is suggestive, but not definitive."
In actuality, I believe a far more definitive conclusion is possible. The best available evidence suggests that most of the lag in earnings growth for low income workers relative to high income workers can be attributed to the rapid increase in the cost of health insurance benefits provided to workers by employers. More importantly, because of its flawed design, Obamacare will aggravate this problem even further among large firm workers and create unnecessary distortions that will be particularly pronounced in the labor markets for low-wage workers.
Rising Health Expenditures and Growing Wage Inequality
A 2011 paper released by Towers Watson shows how much health benefits add onto average cash wages for typical full-time employees at various income levels. For workers in the lowest 10% of the earnings distribution, the cost to employers to provide health benefits is equivalent to a 49.5% increase in cash wages [1]. For the highest wage workers, this add-on is only one-seventh as large.
Given that low wage workers are disproportionately affected by every $100 added to employer-paid health insurance premiums, it should be no surprise to learn that the authors of this study calculated that for the lowest-paid 10% of workers, 112% of all the compensation gains between 1980-2009 were absorbed by more expensive health benefits, compared to only 8% for those in the highest decile of worker earnings.
What this means is that those in the lowest wage group experienced a negative increase in cash compensation: that is, the added cost to provide health benefits ate up every penny of any increase in compensation earned (and then some). In contrast, workers at the upper end of the earnings distribution were able to absorb the equivalent increase in employer-paid health insurance premiums while still leaving 92% of their compensation gains to be paid in the form of higher cash wages or other fringe benefits such as retirement contributions.
How Obamacare Will Aggravate This Trend
Under Obamacare, low wage workers who qualify for Exchange coverage will avoid being trapped in health plans whose ever-rising costs absorb a disproportionate share of their future compensation. But the combination of the individual mandate and employer mandate will force low wage workers in larger firms not only to have more expensive coverage than they did in the past but also to pay for it in the form of foregone wages. While their low-wage counterparts in small firms will have access to massive premium and cost-sharing subsidies on the Exchanges (subsidies amounting to upwards of $18,000 a year for the lowest-income families), those in large firms will simply continue to be eligible for the relatively meager tax subsidies they always have had (amounting to only a 15.3% premium savings for those in the lowest income group). Calculations by the Towers Watson researchers illustrate just how unevenly distributed this added burden will be over the next 15 years.
Admittedly, without reform, more than half of compensation gains for low-wage full-time workers who receive health benefits will be absorbed by the cost of these benefits. But Obamacare makes matters considerably worse for such workers. By increasing the cost of coverage through mandated benefits that low-wage workers may not necessarily need or want, Obamacare virtually ensures that the lowest wage workers will continue to experience negative cash wage growth through the year 2030.
Hard Truth: Obamacare Will be Inefficient AND Unfair
Of course, in the real world, employers and employees are going to find ways to avert the high costs of Obamacare. Millions of workers are going to move to part-time status, find an employer that doesn't offer coverage or stop working (since in each case, this would allow such workers to qualify for heavily-subsidized Exchange coverage). University of Chicago economist Casey Mulligan has toted up all the adverse consequences that will ensue:
the ACA's long-term impact will include about 3% less weekly employment, 3% fewer aggregate work hours, 2% less GDP and 2% less labor income. These effects will be visible and obvious by 2017, if not before. The employment and hours estimates are based on the combined amount of the law's new taxes and disincentives and on historical research on the aggregate effects of each dollar of taxation. The GDP and income estimates reflect lower amounts of labor as well as the law's effects on the productivity of each hour of labor.
There may be fierce disagreement over the actual magnitude of economic inequality in the U.S. and the pace at which it has grown over past decades. But both sides of the aisle ought to be able to agree that shrinking the pie is unlikely to reduce the problem of economic inequality: more likely, it will make matters much worse.
A far more sensible approach that would avoid all these economic distortions and attendant adverse effects on economic inequality is to get rid of the individual and employer mandates entirely and to make all Americans eligible for standardized tax credits. This is the approach used in the comprehensive health reform plan proposed last month by Forbes opinion editor Avik Roy. Switzerland has demonstrated that it eminently feasible to design a near-universal coverage system arranged entirely around private health insurance coverage (i.e., no Medicaid, no Medicare). Instead of blindly defending a badly flawed plan that will create havoc in employer markets, the time has come for Obamacare supporters to acknowledge its serious flaws and instead support sensible patient-centered reform.
Footnotes
[1] Note that part of this added cost is implicitly subsidized by taxpayers in that a 49.5% increase in cash wages would be subject to income and payroll taxes, whereas the equivalent cost paid in the form of health benefits avoids taxation altogether. However, the average tax benefit is much higher for high-paid workers than low-wage workers: those at the lowest end of the wage distribution would save 15.3% on payroll taxes whereas those at higher income levels might enjoy a net savings approaching 50% of the employer's premium costs. Thus, while taking such tax savings into account would reduce the net add-on to wages required to fund health benefits (from an employee perspective), it would steepen the gradient shown. That is, the relative add-on to costs would be even higher for low wage workers compared to high wage workers than shown on the chart.
