Earnings Inequality: The Implications of the Rapidly Rising Cost of Employer-Provided Health Insurance

Abstract

Health insurance for a high-paid employee costs an employer the same amount as health insurance for a low-paid employee. At the same time, healthcare costs, and therefore health insurance premiums, are growing much more rapidly than earnings. Therefore, it is reasonable to expect that—while earnings will indeed become more unequal over time—total compensation will not become more unequal, or, when considered over the entire labor force, at least will not become as unequal. Direct empirical evidence supports this hypothesis, based on unique, unpublished survey data about employers’ compensation costs collected by the Bureau of Labor Statistics. The supporting results hold both for the period 1996–2008 and for the period 1992–2010. A regression estimated over the period 1990–2014 also bolsters the understanding that the rising cost of health care is a major cause of increasing earnings inequality. This finding suggests that the best policy to reduce inequality would be to effectively control the rate of growth in the cost of health care.