You can add health care to the causes of growing wage inequality in America. There’s a largely unknown paradox at work. Companies that try to provide roughly equal health insurance plans for their workers, as many do, end up making wage and salary inequality worse. A new economic study shows how this perverse bargain works.
It’s simple arithmetic, writes Mark Warshawsky of the Mercatus Center at George Mason University, author of the study. Paying for expensive health insurance squeezes what’s left for wage and salary raises. Economic inequality increases, because health insurance typically represents a larger share of total compensation for lower-paid than higher-paid workers. Their wages are squeezed the most.
To see why, consider a simple example. Assume an imaginary company with two employees: One makes $50,000 a year, the other $100,000. Suppose that the firm has purchased a family health plan, costing $12,000, for each. So the company’s total compensation costs – wages, salaries and fringe benefits including health insurance – are $112,000 for the higher-paid worker and $62,000 for the lower-paid employee.
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