Arnold Kling  

Health Care and Real Wages

Voters As Mad Scientists... Health Insurance Puzzle...

Terry Lierman, the Chairman of the Maryland Democratic Party, forwarded me a link to an article in the Los Angeles Times about declining real wages.

With benefits factored in, workers' total compensation did outpace inflation in 2004, even if they didn't see it in their paychecks. But employers also are requiring workers to pay a greater share of their premiums.

"Healthcare has eroded the wage base," said Janemarie Mulvey, chief economist with the Employment Policy Foundation, a business-funded think tank in Washington.

"In the long run, we can't continue like this. If healthcare keeps crowding out wages forever, something's got to give."

Lierman forwarded the article in the context of an email soliciting support to override a possible veto by the governor of the bill that would force Walmart to pay at least 8 percent of its payroll in health care benefits.

In other words, the Maryland Democrats want to enforce the cutback in take home pay described in the article.
For Discussion. I read the article as boosting the case against the Democrats' legislation. Can it be read otherwise?

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The author at Catallarchy in a related article titled Correct Measures writes:
    Me: So which is a better measure - wages, which represent only a fraction of workers compensation, or total compensation, which represents the whole damn thing? Honest answers only, please. If total compensation is rising, the labor market is no... [Tracked on April 11, 2005 7:58 PM]
COMMENTS (13 to date)
Mcwop writes:

Lierman is dead wrong if Wal-Mart now forces all MD employees to enroll in health coverage to meet their 8% target. If that happens, then the employees forced into coverage will have to pay the employee portion of premiums thus reducing their pay. So all those employees that don't have coverage (many for good reason - covered by a spousal plan, Medicare or parents plan) may be taking a pay cut. But this depends on how Wal-Mart repsonds to the legislation, as there are other possible outcomes.

Patrick writes:

In today's NY Times, PAUL KRUGMAN also had a column of "Ailing Health Care"

I quote the third problem (or answer) he provided in that article:

"Finally, the U.S. health care system is wildly inefficient. Americans tend to believe that we have the best health care system in the world. (I've encountered members of the journalistic elite who flatly refuse to believe that France ranks much better on most measures of health care quality than the United States.) But it isn't true. We spend far more per person on health care than any other country - 75 percent more than Canada or France - yet rank near the bottom among industrial countries in indicators from life expectancy to infant mortality."

So my question is how the US health care system can be so INEFFICIENT. The author didn't elaborate on this point. I'm looking for more details where this astonishing inefficiency comes from.

Brad Hutchings writes:

It would be really neat if a business reporter for a major daily paper actually knew something about how a business operates.

At the same time, the cost of health premiums has skyrocketed, eating into the pool of corporate cash set aside for raises. Although pay rose only about 2.4% last year, benefit costs jumped almost 7%.

I may just not have ever worked for the right business, but never, ever, ever have I seen a pool of cash set aside for raises. I have seen total costs of payrolls, and hiring or raises or cuts or layoffs used as mechanisms to change the total cost of payroll. This is done with cashflow, earning, and investment numbers in mind. Where this article seems focussed -- lower income workers -- there are bound to be union contracts that are negotiated and applied over a term, and not subject to some pool of cash set aside.

This story reads like a bad Dick and Jane novel. If your good friend Terry Lierman is sending this to you and his other friends in Maryland, well, either he is dumber than a rock or he thinks all of you are :-).

nathan writes:

Sheesh, if only I had a nickel for every time somebody pushing some silly agenda said "If X keeps crowding out Y forever, something's got to give!"

Tim writes:


For starters, try a little critical thinking. Krugman states that the American healthcare system "rank[s] near the bottom among industrial countries in indicators from life expectancy to infant mortality."

Are those two stats entirely, or even primarily a function of the healthcare system? Americans' poor diet and exercise and other lifestyle habits no doubt play a huge role in our shorter life expectancy. And America's higher poverty rate (again, poor diets) and substance abuse probably plays a central role in the infant mortality disparity.

You [and Krugman] should consider some real HEALTHCARE stats, both general ones like the number of doctors and specialists per 100k population, and specific ones like survival rates following cancer diagnosis. Or look at things like number of MRI machines per 100k population or percentage of patients receiving beta-blockers following heart attacks. You'll find America does very well in such comparisons, suggesting we might be getting our additional money's worth after all.

Jason Ligon writes:

The American healthcare system is remarkably efficient ... at creating surplus for Canada and France to hand out like candy.

John Thacker writes:


Well, Professor Kling strongly disagrees with Prof. Krugman's claims. The US does have demonstrably better survival rates for all serious diseases. The two statistics that Krugman cherry picks ("ranging from lifespan to infant mortality" indeed) happen to be extremely poor statistics for saying something about health care. They are extraordinarily popular, however. I could say more, but you should start with the linked essay of Prof. Kling's.

Franco writes:

Isn't it possible that Walmart's demand for labor is inelastic while labor attaches little or no value to better health insurance? In the extreme, employees would have the same take-home pay and better health benefits. That seems to be the goal of the legislation and it is certainly possible that the legislation will in fact achieve that goal.

Patrick writes:


I agree that infant mortality and life expectancy might not be good stats for health care efficiency. The distribution of these stats can be seriously skewed according to social and economic status. However, number of doctors, specialists, MRI, expensive machines doesn't represent good stats for "efficient" health care either, if they are only accessible to the wealthy or well insured.

What stats to accurately measure the efficiency in such a complex health care system is a worthwhile topic.

I just wonder with health care premiums skyrocketing every year, where does all those extra money go? Do they fall into the pockets of drug companies, into doctors' payroll, into insurance companies, into lawyer's pockets (medical malpractice suits), etc? There is no stat or comprehensive study to address that issue.

Many would blame drug companies, but the general public has no idea of the difficulty and risk of developing a new drug. FDA regulation is the toughest in the world. The average of developing a new drug is in the range of billion dollars in capital and 10 years in time. And the failure rate is >99% if you count from the very beginning to marketing. So this is an extremely cash swallowing and risky business. Therefore the reward must be dearly otherwise nobody is going to do the business of drug development. However, in other countries of the world, they use hardly developed American drugs but they have price regulations (ceilings). The American drug companies are left with no choices but charge a high premium on domestic drug market to make ends meet and profit. So in my view, the situation is like the American public is financing the world's health welfare.

The health care system is extremely complex and dynamic. I believe a simple or single variable hypothesis won't be able to address the problems in that system.

Lawrance George Lux writes:

The Health insurance issue is relatively innane in the Wage debate. The Maryland legislation is probably backed by the Health Care industry, who fear rising nonsubscription rates by Employees that cannot pay for insurance. Employers can push premium costs off on Employees, and Employees drop Coverage. The actual effect on Wages in minimal.

Employers are unaffected by rising health care costs, as they shunt off those Costs. What they can't rid themselves of is rising Operations Costs, especially Oil, Distribution, and Transportation Costs. lgl

simon writes:

Some great points made in this thread. Krugman is cheery picking in selecting stats that are influenced by a number of factors other than health care. In addition, systems need to be measured as systems. Car makers are measured against their outputs and inputs. Likewise healthcare must be measured against what it is directed at addressing.

The point that health care is not available in the US is NOT true. Even illegals have realized this fact and behave accordingly.

I think that article goes against the point they are trying to make.

Patrick writes:

Simon did make a good point that healthcare must be measured like a system for its performance.

What are the inputs? Money of course, time lost in the doctors' office, etc.

What are the outputs? What are our expectations of a healthcare system? Few episodes of diseases (prevention), fast recovery from diseases (low morbidity); in this sense the mortality rate, infant death rate, life expectancy are justified as good stats. Actually I just found out that WHO uses these stats as standard to compare among countries. With the advent of so-called "life style" drugs, we also expect the healthcare system to improve our life quality. But this is difficult to quantify our "happiness" (or utility) out of the healthcare system. Maybe depression rate, suicide rate can be used. The profits of pharmaceutical companies may not be our expectation out of the healthcare; or may be.

Well, it seems you can measure the system's performance by modeling these variables, adding some modifiers like diet style to normalize the background. You don't need to care about how the black box system works. Just like cost/benefit analysis, look at the inputs and outputs only.

Of course, by adding other factors like politics into the picture, it becomes more unpredictable and complex.

Steve writes:

Patricia Danzon argues persuasively here that many of the costs in the Canadian system are not calculated when comparing spending between the US and Canadian system.


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