Health Care, Wages, and Conservatives

by Ramesh Ponnuru

In a recent column I commented on the difference in trends in the growth of wages and in the growth of compensation. Because of rising health costs, compensation has been growing faster. Conservatives often cite the compensation trends when they are challenging claims that wages have been stagnant. This is a mistake, I argued, both because not every dollar spent on health benefits is a dollar in value to employees, and because it’s a problem when people’s increased pay is effectively hidden from them. It makes them think they’re not getting ahead. It thus probably also reduces their willingness to support such reforms as freer trade and reduced corporate taxation.

The difference between compensation and wages, I concluded, isn’t a reason to feel better about how comparatively slowly wages have grown. It’s a reason to adopt free-market reforms of health care that both slow the rise of health costs and make those costs more transparent.

Megan McArdle and James Pethokoukis have both made thoughtful (and mild) criticisms of my column.

#more#McArdle agrees with my point that take-home pay is important to most people, but she notes (correctly) that we can’t assume that we know how much health benefits are worth to people. They might be worth almost as much as their cost. She looks, for example, at the “revealed preferences” we see in union negotiations: “I don’t see them giving up gold-plated health benefits for wage gains–rather the reverse, in fact. They frequently give up other stuff in order to protect their health benefits.”

I’d respond, first, that those negotiating priorities in part reflect current tax law and the health and labor market it’s created. Second, I’d just retreat to my original point: We’ve had years where health benefits rose and wages were flat. Do we really think that in a market that was both free and transparent that people would give almost the entirety of their raises over to buying health insurance? Neither McArdle nor I assume mathematical certitude is possible in this matter, but it seems to me that people would probably be significantly better off if they had been freer to choose other goods.

Pethokoukis also makes the point that health benefits have value, which, again, I don’t contest. He also points to a study that suggests that even excluding health costs, compensation for middle-income workers increased significantly between 1979 and 2007. I don’t think that all of the methods that study uses are appropriate for the purpose of this discussion. For example, it’s fine to include government transfer payments to households if we want to find out how much purchasing power they have. If we want to find out whether we have a healthy economy that makes it possible for people to support themselves and their families and get ahead a bit, those payments are better excluded.

I think that the overall picture Pethokoukis and the study present is probably correct: median take-home pay did increase during that period. I think, though, that 1) counting compensation including health benefits overstates the gains most people made by some undetermined but probably significant amount; 2) including health benefits makes us misunderstand the politics of the economy; and 3) during certain periods these tendencies are more acute than others. (I’d bet that in the tail end of the period of the study, for example, there was little if any wage growth excluding health costs.) I suspect that Pethokoukis agrees with these points as well.

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