Does slower growth in the cost of health care help wage growth?

Jason Furman, the Chair of the Council of Economic Advisers, last week posted a column at the Huffington Post hailing the benefits of slower growth in the cost of health care. One of the touted benefits is that lower employer health care premiums will help boost household incomes. In other words, as the cost of health care grows more slowly than in the past employers will boost the wages of their workers.

While this trade-off is well-established in labor economics, there remains plenty of debate about how employers will in fact react to new slower growth in the cost of health care.

So let’s examine the evidence. Sarah Kliff, then of The Washington Post and now at Vox, published a review of the microeconomic (individual level) research last year. She finds agreement among economists that an increase in non-wage compensation such as health insurance, results in a decline in wages. Conversely, a decrease in these benefits results in an increase in wages.

But over at Vox, Matt Ygelsias produced a chart that causes him to question this conclusion. He points out that a decline in the growth of non-wage compensation hasn’t tracked with an increase in the growth of wage and salaries. If there is a trade-off, according to Yglesias, it isn’t showing up in the macroeconomic data.

Claudia Sahm, an economist at the Board of Governors of the Federal Reserve Board, made a different version of the same graph. In addition to smoothing the growth in sources of compensation over a three-year period and adjusting for inflation, she also breaks out the different forms of compensation. In her graph, employer contributions to insurance include contributions to private insurance (pensions and private health insurance) and public insurance (Social Security, unemployment insurance). Sahm finds that changes in private insurance are correlated with wage growth. But the correlation since 1990 has been quite weak and the relationship between wages and contributions to public insurance is stronger.

Putting it all together, it would appear that microeconomic-level studies find a trade-off between insurance and wages yet the macro picture would have you believe otherwise. This is what Sahm means when she cautions researchers not to be taken in too much by a “macro sniff test.” Her point: A graph showing a macroeconomic relationship isn’t enough to question a relationship established by many micro-level studies.

Still, Yglesias has a point. The share of income going to labor has been on the decline and employers today could use the declining cost of health insurance to further reduce total compensation growth rather than boost wage growth. The currently available microeconomic research doesn’t indicate that trade-off between wages and fringe benefits have changed in any way. But that’s not to say researchers might want to look into this question in the future.