Bob Herbert talks today about the downsides of the excise tax on expensive health insurance plans, and Ezra Klein does a good job of arguing the other side. There’s one thing Herbert mentions that Klein doesn’t address that betrays a pretty fundamental understanding of economics. Herbert’s argument is that lowering insurance premiums will not result in higher wages, but he’s wrong. Here’s what he says:
The rest of the $150 billion, more than 82 percent of it, will come from the income taxes paid by workers who have been given pay raises by employers who will have voluntarily handed over the money they saved by offering their employees less valuable health insurance plans. … A survey of business executives by Mercer, a human resources consulting firm, found that only 16 percent of respondents said they would convert the savings from a reduction in health benefits into higher wages for employees. Yet proponents of the tax are holding steadfast to the belief that nearly all would do so.
Of course few companies will directly convert savings on insurance costs into wages. But there are two mechanisms by which these savings will end up going to workers.
Let’s say my labor costs for a developer are $75,000. That includes their salary, their health insurance, life insurance, dental insurance, 401k match, my contribution to their FICA bill, and so on. Let’s say that a firm down the street pays $3,000 less than we do in health insurance premiums per employee. If all other labor costs are the same, they can pay the same developer $3,000 more than I can with the same impact on their bottom line. It doesn’t matter whether I pass my savings onto my employees in wages, someone is going to, gradually raising wages across the board.
The second mechanism that comes into play is annual raises. Every year companies sit down to figure out how much more they’re going to pay their employees next year. The cost of covering rising health care premiums come directly out of the same bucket that pay increases come out of. Annual raises are diminished everywhere by higher health insurance costs. Companies that try to keep the savings rather than passing it on in wages will lose employees to firms who do pass on the savings.
Rising health care costs diminish wage growth, and lowering the rate at which health care costs rise will increase wage growth, not because of charity on the part of employers but because of how markets work.