Home Insurance Despite What You Might Think, Health Insurance Does Not Shrink the Gap in Pay

Despite What You Might Think, Health Insurance Does Not Shrink the Gap in Pay

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BAY POINT, CA – MARCH 28:  (Photo by Justin Sullivan/Getty Images)

The janitor and the chief executive are miles apart in pay. The ratio of CEO pay to the average workers’ pay has soared from 20 to 1 in 1965, 123 to 1 in 1995, and 271 to 1 in 2017. But, in firms where the janitor is not outsourced – an increasingly common phenomenon called fissuring —  the janitor and CEO are covered by the same health insurance plan and the employer premiums for each could be very similar. Based on an expanded measure of pay, researcher, Mark Warshawsky, at the conservative-based Mercatus Center at George Mason University, has asked and answered the sensible question: has the drastic growth in pay inequality been somewhat mitigated by the fairly equal distribution of employer-provided health insurance?

Warshawsky confirms top earners have moved away from middle class and low earners in the years he studied, 1992 to 2010. The growth in cash wages and paid time off for workers in the top 10% was 80 percent while the earnings for the middle 50th percentile has only increased by 60%. But he wonders, since unionized workers have sacrificed cash wages explicitly in collective bargaining, to maintain their health insurance and we assume rising health care costs have suppressed non-unionized workers’ cash wages as well, the lack of pay increases for the workers at the bottom of the income distribution may be overstated and so inequality may be overstate. Therefore, he assumes, if all workers, regardless of pay, are assumed to be given pay equal to what the employer, on average, pays for health insurance, say $15,000 per year, then Warshawsky reasons, the total compensation gap is not so big. But, in reality, the story is not that easy and the pay gap is still high and growing.

High Income Workers Have More and Use More Health Insurance Than Low Income Workers

Even though the long-standing policy of the Internal Revenue Service going back to the 1920s and strengthened in 1978 and by the ACA in 2010 is aimed at equity, making sure employers aren’t avoiding taxes by giving tax deductible fringe benefits just to high income workers, there are still many ways a firm can favor high income over low and middle income workers.

High income workers are much more likely to have access to health insurance at work and use it when they have it. But even if every worker is covered by the employer’s medical plan at work the $1,000, $2,000, $5,000 deductible is charged to every worker regardless of pay and so is the, say $50, copay. Using the health insurance plan is much more expensive for the low income worker than the high income worker. Assuming that every worker is paid the value of the average employer health premium hides key differences in the value of the benefit. Warshawsky assumes that the medical plan is equally valuable for high and low earners, but the health insurance benefit is increasingly adding  more and more  regressive elements.

Bottom line: even if people are covered by health insurance recent studies show that rising costs of copays and deductibles discourages lower income workers from ever using their insurance.  Also, this study did not consider that low income workers are likely to have periods of unemployment and have longer waiting spells to be on health insurance.

Also, a startling finding in this study is that the cost of health insurance per hour of work for high income people is much higher than for low income people. This gap reflects the fact that low income people work for firms that pay less and also have inferior health insurance. In 2008, the cost of health insurance per hour work for the lowest paid worker was $2.38 per hour. But, for workers in the top 95th percentile, the cost per hour of help insurance was over five dollars per hour.

  Cost of Health insurance per hour worked in 2010
  Earnings including paid leave but not stock options
Middle class (50th percentile) $2.38
Highest income (95th percentile) $5.14

Mark Warshawsky, The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance for Earnings Inequality Benefits Quarterly, Third Quarter 2017

The growth of earnings and growth in total compensation became more unequal between 1992 to 2010. For workers in the 50th percentile earnings growth was 60% and total compensation grew 65%. Workers in the 95th percentile enjoyed earnings growth of 81% and their total compensation growth was 84%.

The growth of earnings and total compensation, which includes health insurance (assuming every worker has same premium and uses the same amount of health care) is still unequal.

  Growth of Earnings and Compensation 1992 to 2010
Place in Earnings Distribution Earnings including paid leave but not stock options Total Compensation including health insurance
Middle class (50th percentile) 60% 65%
Highest income (95th percentile) 81% 84%

Mark Warshawsky, The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance for Earnings Inequality Benefits Quarterly, Third Quarter 2017

Warshawsky argues an appropriate political policy response to pay inequality should include reducing the rate of increase of healthcare costs. Who can argue with that recommendation. Reduced health care costs will help employers be able to pay more cash to their workers.

But the more important thing to remember in examining these studies is that health insurance premiums is not the same thing as pay. On paper, the employer may be paying – on average – more in health insurance premiums; but, that doesn’t close the important material gaps between workers. In this country, workers need cash money to pay for housing and adequate food – the important elements of living standards. The inequality of living standards between people in American who work hard for their living is still on the rise and higher than in any rich nation.

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