The Wage Squeeze and Higher Health Care Costs

Despite the fact that 2005 marked the fourth year of an economic expansion characterized by strong productivity growth, the inflation-adjusted wages of most workers’ fell last year. The median (or typical) worker’s wage fell by 1.3% (Figure A). The decline was even greater for those at the very bottom end of the wage scale, who saw their real wages fall by 1.9%. Only those at the very top of the wage scale had wage growth that outpaced inflation.

Some have stated that the reason for this unsettling result is that increasing health care costs are squeezing wage growth. Allan Hubbard, economic advisor to President Bush, stated in an interview with the Wall Street Journal that, “Employers are spending more money on health care, and that’s robbing people of wage increases” (January 12, 2006).

The logic of this claim is that dollars that would have gone into wage increases have instead gone to pay the increased cost of employer-provided health care. According to the view espoused by Hubbard and others, workers’ total compensation—wages plus benefits—continues to increase at a clip commensurate with the strength of the overall economy, even if their paychecks are admittedly not going as far.

The evidence presented below refutes this claim. First, nearly half (47%) of the workforce do not get health coverage through their job. Second, employers’ health care costs rose more slowly in 2005 than any year since 1999, in part because rising costs have led to less coverage (Gould 2005). Third, not only did wage growth slow last year, but overall compensation growth also slowed and by the third quarter, it too lagged inflation. Finally, the growth of corporate profits in recent years has solidly outpaced that of compensation as employers are trading away wage and benefit increases for higher profits.