Wages

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Over the last 15 years, Income Inequality has decreased?

June 2, 2010 in Economics - General, Health Insurance | 6 comments

Many economists have lamented that income inequality has grown over recent decades.  Although it is true that wage inequality has increased, compensation inequality may not have.  When I mention “compensation inequality,” I refer to the total package of compensation that a worker receives.  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 in fact be shrinking.

A recent NBER working paper by Burkhauser and Simon (2010) also shows that inquality is in fact decreasing once one taking into account health insurance costs.  This chart provides information on changes in income and total income between 1995 and 2008.  Income includes only raw wages, but “total income” also takes into account workers compensation in the form of health insurance.  The authors use this evidence to claim that “…ignoring the value of health insurance coverage will substantially understate the level of economic well being of Americans and its upward trend and overstate the level of inequality and its upward trend.”

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Are all the good men married?

December 9, 2008 in Labor Economics | No comments

Does marriage cause men’s wages to rise?  This is the question addressed by UCSD professor Kate Antonovics and Robert Town in their 2004 paper in AER cleverly titled “Are all the good men married?”

It has been shown that married men earn more money than non-married men with similar characteristics.  Why is this?  A few explanations are:

  1. Married men are more productive since they specialize in non-household production,
  2. Employers could discriminate in favor of married men, or
  3. the unobservable characteristics that make men more productive in the labor market also make them more attractive in the marriage market.
A simple way to figure out the marriage wage premium is to run an OLS regression.
  • wij = βMij + γXij + μij + fj + uij   (1).
  • M: married, X: other variables, μ: individual fixed effect, f: family fixed effect, u: error term 
  • For OLS, the residual is equal to μij + fj + uij   (1).

Using OLS, the authors find that married men earn a 19% wage premium over non married men.  However, this specification does not solve the selection problem.  If it is true that unobservable factors affect wages and marriage eligibility, then the marriage dummy variable will be correlated with the residual and β may be biased upwards.  

How do the authors solve the endogeneity problem?  They use data from the Socioeconomic Survey of Twins.  For a pair of monozygotic twins, we can rewrite equation (1) as follows:

  • w1j= βM1j + γX1j + μ1j + fj + u1j  (2)
  • w2j = βM2j + γX2j + μ2j + fj + u2j  (3)

Since twins are in the same family, we know that fj in both equation is the same.  Further, we assume that the genetically determined, individual specific earnings endowment is the same across twins (i.e., μ1j = μ2j). Thus we can difference out the two equations so that we are left with:

  • w1j – w2j = β(M1j – M2j) + γ (X1j – X2j) + (u1j – u2j)  (4)
Using this specification on the twin data, the authors find that marriage confers a 26% wage increase.  Because of the similarity between the OLS and twin data, the authors claim that “men are not selecting into marriage based on unobserved heterogeneity in earnings capacity.”

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Wage inequality

November 6, 2008 in Health Insurance, Labor Economics | No comments

Many economists have noted that wage growth has not kept up with overall economic growth over the past few decades.  We observe widening wage inequality since the 1970s.  Are workers getting poorer relative to the owners of capital?  Is a communist revolution needed to equalize the playing field?

Economist Martin Feldstein thinks not.  

“Feldstein concludes that…measurement mistakes have led some analysts to conclude that the rise in labor income has not kept up with the growth in productivity. The first is a focus on wages rather than total compensation: because of the rise in fringe benefits and other non-cash payments [such as health insurance], wages have not risen as rapidly as total compensation. Feldstein feels it is important to compare the productivity rise with the increase in total compensation rather than the increase in the narrower measure of just wages and salaries.”

Since health insurance costs have been increasing more than inflation over time, overall employee compensation has risen at about historical rates.  Of the compensation workers receive, however, a larger and larger percentage is going towards health insurance.  This is especially true for low income workers. This is a point I made in a post in January 2007.

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Incidence of Healthcare Costs of Obesity

April 3, 2008 in Health Insurance, Labor Economics, Obesity | Permalink

Gruber (1994) shows that the costs of employer-provided health insurance benefits are passed on to employees through lower wages. But do employees with higher expected medical expenses have their wages reduced by a higher amount to reflect the additional medical costs to employers? This may not be the case if employers can not observe the health of employees when they hire them. On the other hand, for obese individuals, the fact that they are obese is easily observable. Papers such as Finkelstein, Fiebelkorn and Wang (2003) show that annual medical expenditures for obese individuals are $732 more than those of normal weight. Is this additional cost passed on to obese employees through lower wages?

This is what an NBER working paper by Bhattacharya and Bundorf (2005) aims to investigate. The authors compare the wages of obese and non-obese individuals in companies without health insurance. Then they compare the differences in wages of obese and non-obese employees in companies with health insurance. Since no health insurance costs will be passed on employees if no insurance is offered, the difference between the two wage gaps may be able to identify if higher health insurance premiums are passed on to employees through lower wages. If there are differences in wages between obese and non-obese workers (i.e.: due to discrimination, lower productivity, etc.) these differences are likely constant across firms with and without health insurance.

The authors find that “the incidence of obesity on wages for workers insured through their employers is -$1.68.” After controlling for a variety of covariates, this estimate lowers to -$1.44. This difference is mostly due to the fact that wages of obese workers with health insurance grew slower than thinner workers with health insurance. This may be due to the increasing price of medical care, the increasing severity of obesity–the BMI of individuals at the 95th body weight percentile has increased over time–or the aging of the population in the panel.

As a falsification test, the authors use a similar difference-in-difference estimation strategy comparing the obese vs. non-obese wage gap between employers with and without other fringe benefits (e.g.: life insurance, dental insurance, retirement benefits, child care, maternity leave, etc.). If obesity does not affect the cost of these fringe benefits, than we should see no difference in the obese/non-obese wage gap between employers who do and do not offer these benefits. The authors find that this difference-in-difference estimator is not statistically different from zero.

There are a few problems with this analysis. First the authors admit that “those with relatively low productivity due to health consequences of obesity may consume more medical care and, as a result, self select into firms offering health insurance.” Also, the data the authors have only reveals whether or not the individual has health insurance, and does not give the insurance premium paid by either the employer or the employee. Thus, these estimates are likely to be very imprecise.

Nevertheless, if this study’s results are true, then it would imply the following:

“If there are no externalities in these decisions, then “twinkie” taxes will only distort already optimal decisions. But if employer-provided insurance pools the health risk of the obese and non-obese, it will create an externality that reduces incentives to maintain a normal weight. Our evidence on the incidence of the obesity wage premium suggests that pooling of the obese and non-obese does not occur in the employer-sponsored insurance market; hence the externalities caused by health insurance on decisions about body weight are small.

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