ObamaCare Makes Income Inequality Worse

 

President Obama rails against income inequality. In my last post, Obama Doubles Down On Failed Policies for the Middle Class, I pointed out the negative impact of his economic policies. These include the following:

  • stimulus package of 2009
  • increased unemployment benefits to 99 weeks
  • massive increases in food stamps
  • increase in the minimum wage
  • monetary policies that benefit more the wealthy
  • higher taxes he now proposes that will only make it harder for small business owners to hire low and middle class workers – and harder to save to put children through college

On the same day, that post received unexpected support from an article in The Wall Street Journal called Solving the Puzzle of Stagnant Wages by former chairman of the Council of Economic Advisers, Edward P. Lazear. In the summary of his analysis, Lazear says:

“The labor market has improved in recent months, with employment rising at a decent pace and unemployment continuing to fall. But the good news is tempered by the changing mix of jobs. Evidence supports the view that stagnant wages are a result of government policy.”

Today I want to address the largest of those government policies, ObamaCare, and its impact on income inequality.

The Kaiser Family Foundation Survey

The Kaiser Family Foundation is a left-leaning think-tank concerned with healthcare in America. They reported that health insurance premiums rose by a “modest 3%” in 2013. However, even more modest was the 2.3% growth of workers’ earnings last year. This tells us that healthcare costs are rising faster than wages. In fact, government data show that healthcare costs are the biggest driver of income inequality in America today.

Mark J. Warshawsky and Andrew G. Biggs, writing in The Wall Street Journal, analyzed this data. They say that when employers’ costs for benefits like health insurance rise, they will hold back on salary increases to keep total compensation costs in check. The Bureau of Labor Statistics (BLS) confirms that’s exactly what is happening. BLS data show that from June 2004 to June 2014 compensation increased by 28% while employer health insurance costs rose by 51%. Therefore, average wages grew by just 23%. But the impact is felt more severely by low to moderate-income workers.

Let’s put some real numbers on the table to make it clearer. An average family health policy today costs employers nearly $12,000 per year, up from only $4,200 in 1999. That’s about a 200% increase in only 15 years or nearly triple the cost in 1999. If employer health insurance premiums had not risen, average salaries today would be around $7,800 higher.

Consider a lower-income worker who makes today $30,000 per year. If he made $7,800 more that would be a 26% salary increase. By contrast, a high-income worker who today makes $250,000, would have seen his earnings rise by only 3.1% if he got the same salary increase. Therefore health costs are a bigger share of total compensation for lower-wage workers, so rising health costs impact their salaries much more. This contributes to income inequality.

The Bureau of Labor Statistics (BLS) National Compensation Survey confirms this is what is happening. For low-income workers, total pay and benefits rose by 41% from 1999 through 2006. But because of the high cost of healthcare benefits, their wages rose only 28%, which barely outpaces inflation. During this same period, employer costs for healthcare benefits nearly doubled from 6.5% to 12.2% of compensation.

In contrast, the BLS data show that compensation for workers earning $250,000 or more per year rose by 36% from 1999 through 2006. That’s actually less than the 41% growth in compensation experienced by low-income workers over the same timeframe. But healthcare benefits costs for this group rose from 4% of compensation in 1999 to only 4.3% in 2006.

Since healthcare costs are a much smaller part of their total pay and benefits, the salaries of these high-income workers grew by 35%, a faster rate than for low-wage workers. The inequality of total compensation barely changed from 1999-2006, but rising healthcare costs held back the growth of low and middle-class earnings.

Therefore, the take-home message is this: The more we spend on health care the greater the income inequality between low-income and high-income workers.

The Impact of ObamaCare on Inequality

Left out of this discussion, so far, has been the role of ObamaCare in contributing to income inequality. You might assume that it has improved the situation for low to moderate-income workers since ObamaCare was designed to provide “free” health care to millions of these Americans. If nothing else, ObamaCare is really a “wealth re-distribution” vehicle that transfers wealth from high-income Americans to low-income Americans.

But it’s really much more complicated than that. Chris Conover, healthcare analyst writing in Forbes, suggests ObamaCare may actually be making the income inequality situation worse. But first some background information is needed.

The Cost of Health Benefits

To understand the impact of ObamaCare we must first discuss the impact of healthcare benefits on workers’ wages. A 2011 study released by Towers Watson states the following:

  • For workers in the lowest 10% of the earnings distribution the cost to employers to provide health benefits is equivalent to a 49.5% increase in cash wages.
  • For the highest income workers, the cost of this same benefit is only one seventh as large or 6.3%.

From the chart in Figure 1 we see how health benefits represent a much higher percentage of wages for low-income workers than those with higher incomes. That means low wage workers are disproportionately affected by every $100 added to employer-paid health insurance premiums. The authors of the study calculated that for the lowest-paid 10% of workers, 112% of all the compensation gains between 1980-2009 were absorbed by more expensive health benefits, compared to only 8% for those in the highest decile of worker earnings.

Health Benefits Costs

Figure 1 – Health benefits as a percentage of wages.

 

What do these numbers really mean? They mean that those in the lowest wage group actually experienced a negative increase in cash compensation (their take-home wages went down). The added cost to provide health benefits ate up every penny of any increase in compensation earned – and then some!

In contrast, workers at the upper end of the earnings distribution were able to absorb the equivalent increase in employer-paid health insurance premiums while still leaving 92% of their compensation gains to be paid in the form of higher cash wages or other fringe benefits such as retirement contributions.

To be clear, the employers are compensating both groups of workers with the same increase in benefits. Both are getting healthcare benefits that cost about the same. However, because of the differences in their wages, the relative cost to the low-income worker is much higher and the net take-home wage actually goes down.

How ObamaCare Will Aggravate This Trend

Conover explains that under ObamaCare, low-wage workers who qualify for insurance exchange coverage will avoid being trapped in health plans whose ever-riding costs absorb a disproportionate share of their future compensation. But the combination of the Individual Mandate and Employer Mandate will force low-wage workers in larger firms not only to have more expensive coverage than they did in the past, but also to pay for it in the form of foregone wages.

In other words, if you work for a large company that must provide health benefits (due to the Employer Mandate) you will be ineligible for the taxpayer subsidies that are only available on the insurance exchanges. The value of these subsidies can be as much as $18,000 a year for the lowest-income families. Not only will you lose these subsidies, but your wages will be blunted by the employer’s high cost of keeping you on the company health insurance plan. Both you and your employer will be adversely impacted.

The cost of health benefits, admittedly, will always be higher for low-wage workers than high-wage workers. But ObamaCare has greatly exaggerated this difference – and therefore contributed adversely to income inequality. Conover summarizes:

“By increasing the cost of coverage through mandated benefits that low-wage workers may not necessarily need or want, ObamaCare virtually ensures that the lowest wage workers will continue to experience negative cash wage growth through the year 2030.”

 

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