Unbiased Analysis of Today's Healthcare Issues

Inequality and Health Benefits

Written By: Jason Shafrin - Jan• 05•07

Many politicians and economists worry over the growing wage inequality which has arisen in the last few decades in the United States. On Wednesday, the New York Times published a story on this very topic (“…Paychecks“); Greg Mankiw also commented on the subject as well.  Statistics show that real wages grew 30% for those in the 90th income percentile between 1973 and 2005 while real wages grew only 10% for those with the median income during the same time period. For those in the bottom lower decile, real wages only increased 5%. The Economist’s View blog reports that inequality is increasing based on the type of education received (i.e.: college graduates are earning more than ever before, while high school dropout’s real income has been declining for decades).

The Big Picture blog, however, notes that while real wage inequality may be increasing, inequality in total compensation may not be growing as fast. According to the Bureau of Labor Statistics (BLS) Consumer Price Index (CPI) website, health care costs were rising at 6.8% to 7% per year while total inflation for the entire economy was only 4.7% per year. This means that real medical care costs doubled [I defined the real medical care costs to be the increase in the cost of medical care over the relevant time period divided by the CPI increase over the same time period]. This fact is an important matter to take into consideration in the inequality debate since lower wage individuals have a higher percentage of their total compensation taken up in the form of health insurance paid by the employer. Let us look at an example:

Let us say that there are three individuals. In 1973, the Poor Paul earns $10,000, the Median Mike earns $30,000 and Rich Rich earns $100,000 (all figures are in 2005 dollars). Paul, Mike, and Rich represent individuals at the 10th, 50th and 90th percentiles. Each individual receives health insurance from their employer which is valued at $2000. Thus we have the following scenario.

Wage Ins Total Comp Wage vs Med Comp vs Med
Paul 10000 2000 12000 0.33 0.38
Mike 30000 2000 32000 1 1
Rich 100000 2000 102000 3.33 3.19

We see that Poor Paul only earns 1/3 of the Median Mike’s wage, but his total compensation is 38% of Mike’s. Rich Rich earns 3.33 times as much as Mike, but only 3.19 as much once we take into account that they have the same insurance. According to the Economist View article, Poor Paul’s real income increased 5% between 1973 and 2005, Median Mike’s increased 10% and Rich Rich’s increased 30% over that time period. The real cost of medical care doubled in this period. Thus, in 2005 we have the following scenario:

Wage Ins Total Comp Wage vs Med Comp vs Med
Paul 10500 4000 14500 0.32 0.39
Mike 33000 4000 37000 1 1.16
Rich 130000 4000 134000 3.94 3.62

When we look at simple wage data, it seems that Poor Paul is doing worse and Rich Rich is doing better compared to Median Mike. When we take into account total compensation, however, Poor Paul is actually doing better—compared to Mike—than he was doing in 1973. Rich Rich is still doing better than he was in 1973, but the differential is smaller when we use total compensation rather than wage compensation.

The point of this exercise is not to claim that inequality is not increasing; I believe it is. One must take into account, however, that as employers are paying more and more for health insurance and these expenses should be treated as implicit wages for workers. A side effect of the increase in medical care costs is that it has become increasingly likely that Poor Paul does not have any insurance, since the employer may not be able to afford to pay for these benefits. Still, wages alone do not adequately explain the entire inequality story.

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  1. I understand that this is only supposed to be a toy example, but in the workforce how many people with incomes of $10k have health plans comparable to those with incompes of $100k? There are also significant inequalities in healthcare coverage; whether total compensation inequality is growing faster or slower than income inequality depends on whether healthcare inequality is growing faster or slower than income inequality. That seems like a relatively easily answered question.

  2. Jason Shafrin says:

    People who make more money likely have better health plans, but these differences are likely to be not as large (proportionally) as the differences in income. For instance, it is unlikely that if Poor Paul and Rich Rich both have health plans, Rich’s plan will not be valued at 10x that of Paul’s even though Paul has one-tenth of Rich’s income. On the other hand, it is much more likely that Paul has no health insurance at all. The main point of the post is not that inequality does not exist, but that we must take into account all forms of compensation when we are looking at income inequality.

  3. I think you misunderstood my post: It wasn’t at all about wage inequality — thats an obvious given; I put it to rest in2005 ( The Disconnect and Economic Classes http://bigpicture.typepad.com/comments/2005/09/recovery_bypass.html)

    The key point of my comments was that health care costs — insurance, medical care, dental, hospital, drugs, etc. — has been rising much much faster than inflation. Additionally, as co-pays and deductibles go up and coverage and employee subsidies go down, many people find themselves paying more for less.

    Becuase Health care costs are going up so much faster than inflation, the impact on those with the least discretionary income (lowest decile) feels the impact much more than the upper income heath care consumer.

  4. Becuase Health care costs are going up so much faster than inflation, the impact on those with the least discretionary income (lowest decile) feels the impact much more than the upper income heath care consumer.

    This is clearly true, but even the sign of the effect, much less its magnitude, is unclear until the question of `is employer-provided health care inequality growing faster or slower than wage inequality’ is asked. Certainly for the uninsured, the effect is to increase total-compensation inequality, not decrease it as your example shows.

    As to Jason’s remarks, the variation in premiums for (say) Blue Cross plans from top of the line to bottom of the line even given a fixed health status (which is far from a given as one crosses an order of magnitude in income) well exceeds a few factors of 10, so I don’t think that your assertion that `’Rich’s plan will not be valued at 10x that of Paul’s” is justified.

  5. Tom Keesling says:

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    Offering a Global Healthcare Option to subscribers has also been demonstrated to lower the annual cost increases faced by employers located in certain communities, especially those with fewer competitive local offerings. IndUShealth programs have also begun to result in a reduction in stop-loss insurance claims, thereby reducing premium increases associated with their annual policy renewal. It is estimated that within two to three years of launching their IndUShealth Global Healthcare Option programs, these two forms of additional savings related to access to care in their local communities rival in magnitude to the hard-dollar savings achieved by those plan participants who elect to travel overseas for care.

  6. […] This includes wages, health insurance, 401(k) benefits, and other non-wage forms of compensation.  In previous posts, I have mentioned that once health insurance is taken into account, inequality may […]