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Compensation, Health Care Costs, and Inequality

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insurance inequality.jpg What sorts of benefits do you receive from your employer that aren't included in your take-home pay or on your income tax returns? We don't all have "free" cafeterias and laundry and fitness facilities, like Google. If you do have these kinds of amenities, how do you assess their value in terms of your overall compensation? Setting these cultural amenities aside for now*, probably most of us have health care that is covered, at least in part, by our employers.

In this week's EconTalk episode, the Mercatus Center's Mark Warshawsky talks about this "perk" of employment, and how it may be drastically affecting the way we look at income inequality. While compensation packages have long been greater than the take-home pay to which they're attached, they've also long been much less visible. But a new wrinkle has been added in recent years. Warshawsky notes that the cost of health insurance to employers has tripled in just the last fifteen years. This means that the total cost of an individual's employment to the employer has greatly increased, even if their productivity has remained flat. This means lower-income workers are receiving a greater proportion of their total compensation in the form of benefits. Warshawsky argues that when income inequality is being analyzed, studies tend to focus on income data, or take-home pay, thereby overestimating, or at least distorting, the degree of inequality.

But how are we to shift from comparisons of income to comparisons of compensation? And what's the best way to evaluate workers' level of well-being? Tricky questions- both philosophically and politically.

* One of host Russ Roberts's biggest questions is the effect of mandating benefits- whether legislatively or culturally- for employees. There's no such thing as a free lunch, after all.

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COMMENTS (4 to date)
Hazel Meade writes:

I think an interesting angle on this subject is no so much the effect on inequality measures, but that the lower income worker who receives a larger percentage of pay in the form of health insurance is effectively being FORCED to spend a larger percentage of their total compensation on health care. What would those workers spend the money on if they didn't have to buy the employer-selected health care plan?
Would they purchase a less expensive health insurance option? Would they waste the money on booze and drugs? How would ending the employer-based health insurance system change their behavior? Are we "nudging" lower-income workers into buying something they ought to have or are we paternalistically deciding what they should spend their money on?

ZC writes:


If the lower income worker wasn't 'forced' to pay for health insurance, they likely wouldn't pay for it. Then they'd still show up at the hospital when they needed healthcare while uninsured, placing themselves at financial peril and likely resulting in socialization of their unreimbursed heath care costs. Tragedy of the commons.

Silas Barta writes:

A few points:

1) If the cost of my employer-provided-health-insurance's is going up, that doesn't mean my real income is higher; it's means I'm paying more for the same care. Unless the quality of that insurance/coverage is going up, which most people do not see.

2) There are taxes that *majorly* distort which benefits make sense to provide for employees; the free company cafeteria one is a case of particularly egregious distortions.

For some reason, free company cafeterias are still deductible as an expense but don't have to be counted as employee income, so it's effectively paid for with pre-tax dollars. When you consider:

a) the high taxes on (and incomes of) Google employees,
b) the sales tax that's avoided
c) the bulk discounts
d) the inconvenience for the employee to procure it themselves

... then Google is effectively able to provide 40 cents of food to the employee, for 40 cents, when that employee would have to earn $1 to buy it on their own. Talk about incentive!

To be sure, c) and d) aren't related to taxes, but taxes sure push really hard on this one!

Sebastian H writes:

"This means lower-income workers are receiving a greater proportion of their total compensation in the form of benefits."

It doesn't mean that because a large portion of lower income workers didn't get health care benefits. Especially under the ore Obamacare rules.

You must mean middle income workers?

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