I feel as though I am constantly reading articles regarding the stagnant wages of American (and in particular middle class/poor) workers. However I have also seen numerous articles regarding massive annual growth rates in healthcare spending. It is my understanding that most Americans receive their healthcare through their employer (with the employer typically picking up the majority of of the costs). This creates something of a logical disconnect for me, so my question is this:
1. Do most statistics/reports of stagnant wages not take into account employer benefits such as healthcare (or employee 410k matching etc.)? Thereby painting a picture of stagnant wages when in actuality total compensation (wages + benefits) has not been stagnant?
2. Or do they take that into account, and non-benefit wage growth has actually been less than inflation, which taking into account an assumed high singe digit, low double digit growth rate in employee benefits, results in stagnant total wage/compensation?
There is a measure of wage growth that includes the cost of fringe benefits, such as health insurance. This is called compensation per hour. There is also a measure that does not include fringe benefits, which is just called wages. Because health care spending has soared, the “fringe” benefits can amount to quite a lot. Thus, the two measures have diverged, with compensation going up more than wages.
Suppose that my salary is $50,000 a year and the employer contributes $15,000 to my health insurance. The good news for me is that the health insurance benefits are not taxed. The bad news is that I might value the health insurance at much less than $15,000.
So do workers value health insurance at something like its dollar cost, or do they not? This becomes very interesting when you try to calculate a real wage, which is the nominal wage adjusted for price changes. If you look at wages excluding fringe benefits, then you are taking soaring health care costs out of the numerator. If you then use the Consumer Price Index to convert from a nominal wage to a real wage, you are including soaring health care costs in the denominator. That strikes me as an overly pessimistic way to calculate real wages.
If workers care about health care expenses, then you should look at their total compensation. If they do not care about health care expenses, then you should use a price index that just includes those goods and services that they do care about.
I have to say that when this issues is discussed in the press and in blogs, what you see is at best lacking in nuance and at worst a deliberate attempt to manipulate data to create a distorted point of view. I should add that if somebody insists on not including fringe benefits in their calculations, you might ask them why then one should consider employer-provided health insurance a good thing.
Off topic, well, on the topic of questions from readers, I have one. I don’t care about your personal views on guns. But does the three axis model explain the left/democrats anti-gun bias? Who is being oppressed and who is the oppressor? My first impulse is that in addition to the oppressed and oppressors there is a role of savior and this may still fit into the axes model.
I think your explanation is correct but I think it makes perfect sense. Take for analogy the “education” lotteries. All they basically did was funnel money to colleges raising tuitions. The expected return on playing the lottery is negative. As for where the proceeds go, this money is wasted and raises prices at no increase in value. I don’t think this is what journalists are thinking though. In fact I suspect they think the opposite, that insurance and education lotteries are great things. But if they don’t include them on the positive side of the balance sheet as benefits that is odd.
I do not use the three-axis model to explain any belief. What I say is that people frame their arguments in those terms. And on guns, the left frames it as the gun industry exploiting everyone else.
Ah. This is both a reassuring and troubling explanation. It explains the insanity of such arguments (e.g. the notion that a handful of tiny gun manufacturers who can’t even keep up with demand are oppressing anyone), but it implies their beliefs may be inseparable from their insane marketing arguments. And that is giving them the charity of assuming they believe their framing of the arguments. They are intellectual slaves to their framing orientation. Every day it seems I learn I haven’t been cynical enough.
The other problem is only about half of people, the upper half, have employer provided health care. The rest is provided by government, and this includes most of the working class. One of the reasons they may not value it that highly is a significant portion of the cost was to provide cross subsidies to the uninsured.
This is my explanation for the whole mess that dovetails with Arnold’s explanation. Back when healthcare was more amenable to insurance the value was higher than the price. You were insuring against a low probability of a large cost. Now that insurance (among other related things) has screwed it up, you are paying for a near 100% probability that your input will be squandered by other people. Thus the value has dropped well below price.
Thank you Lord! You just helped me articulate the solution. The wasteful spending is piggybacking on the positive value insurance proposition and the solution is to move in a direction of separating the two. It is a work in progress.
“If workers care about health care expenses, then you should look at their total compensation. If they do not care about health care expenses, then you should use a price index that just includes those goods and services that they do care about.”
I’m not sure I understand this. If you are receiving $15,000/year in health care cost reduction from your employer, you’re getting that benefit whether you value it or not. And it really no longer matters if you value the benefit, because you must carry health insurance, thanks to the ACA. And also thanks to the ACA, someone else will be bearing a large part of that cost, giving you a monetary benefit.
To use a different example, my employer provides a $30.00/month gym membership. I don’t value this, since I have a home gym that I’m perfectly capable of not getting around to using. But that doesn’t remove the fact that I’m receiving the benefit.
Think of it in these terms: suppose that instead of giving you a raise next year, your employer said that the cost of gym membership had gone up by $2400 a year, and you would still get your gym membership for free. Are you better off?
And don’t forget that you will be required to report to the gym for a physical fitness assessment to determine how much you will be required to use the gym. And you will receive *free* spinning and yoga classes and lots of other things you don’t want to use or don’t think actually work to reduce “fitness costs.”
If you don’t feel better off immediately, please report to human resources for an Oppositional Defiant Disorder assessment. Oh, and you might be a racist.
It seems to me that to compare wages over time, you would need to look at the full employee labor cost to the employer. This would include the wages (employee discretionary), benefits (employer paid product/services for employee benefit) and the payroll taxes/mandated payments for employee benefit (employer contribution to SS/Medicare, pro-rated workers’ comp and unemployment insurance premiums, etc.).
Then you could see if compensation has stagnated or if increases have been consumed by employee non-discretionary compensation leaving wages to appear stagnant. Many don’t like this view as an increase in required workers’ comp or unemployment insurance coverage shows the government taking or directing a larger portion of the employee’s compensation leaving the employee with less discretionary in the form of wages. Same with government mandated health insurance, vacation, leave, etc.
Much as journalists and others should be specific with respect to wages v total compensation, so too have I argued with friends that any article or essay that uses any of the terms “rich” “high income” “wealthy” “poor”* etc., should have to define the term. That is, is “rich” defined by wealth or income? What’s the threshold for “high income,” and is that gross or net, earned or unearned? Does “wealthy” include tax-deferred retirement funds, which are, after all, merely deferred income. Does “poor” or “poverty” include or exclude transfer payments or other, non-cash, government-provided benefits?
Those are the most basic financial & tax concepts, but unfortunately, I don’t think most non-financial journalists know what all that means. Or perhaps it suits their goals better to leave them undefined?
PS: FWIW, the financial institution I used to work for would give its employees a report that totaled their annual compensation, including allocations for the employer-provided benefits that DKB describes. ‘Twas most informative.
*JKB*