executive summary and full report

8/6/2019 Executive Summary and Full Report

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Executive Summary

Treating Our Ills and Killing Our Prospects

By

Steven A. NyceTowers Watson

and

Sylvester J. Schieber

June 29, 2011

Sylvester Schiebers contributions to this paper were supported by the Coalition for AffordableHealth Coverage. The authors are indebted to Michael Slover of Towers Watson for hiscontributions to the statistical analyses included in parts of the paper and to Susan Farris ofTowers Watson for her editorial help in preparing the final draft. All of the conclusions andopinions stated herein are those of the authors and do not necessarily represent those of theCoalition for Affordable Health Coverage, Towers Watson or any of their associates.


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Executive Summary

Most of us are aware that health costs have been rising more rapidly than those in mostother aspects of our lives and that they seem to have accelerated in recent years. There is alsowidespread sentiment that the rewards for increasing worker productivity in the United States in

recent times have not raised all boats and that middle-class workers are increasingly being leftbehind with their rewards growing more slowly than productivity levels. Both of theseperceptions are widely reported but they are seldom linked. For most workers, the majority ofthe health expenses they incur each yearand the health cost inflation that goes with themarehidden from the naked eye because they are financed through compensation packages, seeminglypaid for by employers who actually consider them part of the cost of hiring workers. Of course,the costs of hiring workers have to be covered by their productivity or the employer cannotcontinue to offer them jobs. These health benefits costs have gotten so large in recent years andhave been growing so fast that they now are contributing to the noticeable slowdown in workerspay and income growth.

Robert Gordon has been studying the issue of growing inequality in income and pay inthe United States and has raised a cautionary note regarding the conclusions that have beendrawn in this regard. Gordon argues that productivity and income growth rates are computed onan inconsistent basis and when income is measured on a per capita basis as productivity is andboth are converted into constant dollars using the GDP price deflator rather than separatedeflators, the difference in the rates of growth in income and productivity are minimal. Despitethis conclusion, Gordons analysis shows that from 2000 to 2007, output per hour was growingat a rate of 1.39 percent per year but mean income per person of working age grew hardly at allover that period. He suggested that further research was required to ascertain what washappening to this disappearing income.1

A substantial part of the answer to Gordons puzzle is that tracking of aggregatecompensation is based on theNational Income and Product Accounts (NIPA) which includescash pay for employed workers plus employer contributions for benefits provided to them as partof their total remuneration. The benefit costs include the employers share of payroll taxes forSocial Security, Medicare and unemployment insurance plus employer contributions forretirement health benefit plans that they sponsor for their workers. In 2000 under the NIPAannual data series, benefits costs absorbed by employers were 10.6 percent their totalcompensation costs, rose to 12.5 percent by 2007 and to 13.7 percent by 2009.2 For the mostpart, the economic literature and the Census data series on the distribution of earnings andincome ignore this element of compensation paid to workers and its distribution across theearnings spectrum. The benefits are sizeable enough that they have the potential to skew any

analytical results that ignore them.

The reason that compensation grew more rapidly in the latter period while pay fell behindwas because of higher growth rates in the parts of compensation that do not show up in theregular paycheck. These are benefits costs that employers incur in behalf of workers. Thebenefit costs include the employers share of payroll taxes for Social Security, Medicare andunemployment insurance plus employer contributions for retirement health benefit plans thatthey sponsor for their workers. During the 1990s, hourly pay grew at around 1 percent per year


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across most of the earnings spectrum. Pay growth in the period from 2000 through 2009 hasbeen closer to 0.5 percent per year across the middle parts of the earnings distribution but haslagged behind the 1990s at all earnings levels (See Figure 5). The story with total compensationis somewhat different. During the 1990s, total compensation was also growing at a rate ofaround 1 percent per year over nearly 90 percent of the earnings spectrum. From the 40th to the

90

th

percentiles of the distribution, however, compensation growth during the 2000 to 2009period actually exceeded what had been achieved during the 1990s.

When benefit costs grow more rapidly than the compensation budget, wage growth isreduced. The growing share of compensation diverted to benefits, shown in Executive SummaryTable 1, explains some of the public consternation about what has been happening to disposableearnings. While the major elements of this current discussion focus on health care issues, theresults in the table are driven by more than just health care costs over the time spans reflected.During the 1980s, increases in the payroll tax acted as a drag on workers cash rewards as weimplemented the changes to the Social Security Act that were adopted in 1977 and 1983 inresponse to the financing crisis that faced us in the late 1970s and early 1980s. During the mostrecent decade, employer contributions to employer-sponsored retirement plans have increaseddramatically. The largest share of these latter increases has been directed toward defined benefitplans. While these plans have been curtailed in recent years, there is a tail of liabilities that stillmust be met from these plans that were much more prominent during the 1980s and early 1990s.These added contributions have arisen, in part, because contribution levels were reduced in the1980s in response to regulatory changes that reduced employer contributions to the plans and tothe booming financial markets in the 1990s. The funding problems that have plagued these planssince the beginning of the current century have required the dramatic increase in contributionsbecause the aging of the baby boomers is making the liabilities more immediate, because fallinginterest rates have accentuated them and because the turmoil in the financial markets had reducedthe value of asset trusts in many cases.

The sluggish growth in workers disposable income in recent years has been attributed toa variety of things including changing reward structures in the corporate world and tax policy asthe focus of many commentaries. Those factors may have played some role in developments butgrowing benefit costs were likely a much larger reason for the unsatisfactory results many peoplehave had at the pay window in recent years. The underlying factors that have affected the non-wage components of compensation over the past three decades have not played themselves outso these forces will play a continuing role in the rewards picture for the future.

In addition to the effects that growing health benefits costs have been having on workerspay and income, there is also evidence that they have been affecting labor markets as well. It isthrough a job that most workers acquire their health insurance in modern America. Health

benefits have become totally engrained in the decisions of workers about all aspects of theirworkforce choices from what job to take, when or if to leave a position and whether or not towork at all. Single mothers are more likely to take full-time employment to qualify for healthbenefits than married mothers who can qualify under their husbands insurance. Peoplereceiving disability benefits are reluctant to go back to work because they will lose valuablehealth insurance coverage once they demonstrate they can provide for themselves. Workersunhappy in their current jobs and older workers wanting to find a bridge job as entry intoretirement are trapped often in existing jobs with insurance coverage. These benefits cause


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distortions in labor supply decisions that must ultimately affect the overall efficiency of oureconomy.

Executive Summary Table 1: Share of Compensation Gains Provided in the Form of More

Expensive Benefits Paid by Employers for Full-Year Workers by Earnings Decile and forSelected Periods*

Earnings

decile 1980-1990* 1990-2000 2000-2009

1 100.0% 30.4% 35.2%

2 100.0% 23.1% 47.7%

3 90.8% 25.0% 52.3%

4 54.1% 21.3% 60.8%

5 63.9% 17.8% 55.7%

6 43.0% 18.8% 55.3%

7 48.6% 12.4% 54.8%

8 36.8% 9.6% 50.3%9 29.7% 7.8% 45.0%

10 21.4% 6.8% 37.7%

Source: Updated results of projections presented in Steven A. Nyce and Sylvester J. Schieber, HealthCare Inflation, Must Workers Bear the Brunt, Milken Institute Review (Second Quarter 2010), pp. 46-57.

*Total benefit cost increases in the 1980s for the first and second earnings decile exceeded 100 percent of

compensation growth. In both cases, benefit costs increased significantly but total compensation growthwas in the negligible first decile and negative in the second.

In Executive Summary Table 2, the isolated effects of health benefits costs increases oncompensation are shown for the analysis period. Empirical analyses, by their nature, considerthe implications of things like health cost across broad groups of the population. For example,the heart of the analysis developed here is looking at the effects of health benefit cost inflation onthe levels of pay realized by the full-time workers by earnings levels. The earnings splits that wehave chosen are deciles. When we show in Executive Summary Table 2 that health benefits costincreases have absorbed 23.6 percent of the added compensation reward paid to workers in thebottom earnings decile in the period 2000 through 2009, our result includes all workers in thatdecile even though many of them do not actually participate in a plan.

Because of declining coverage of workers, which has tended to be concentrated at lower

earnings levels, the rates at which increasing health costs have crowded dollars out of thepaycheck has been dampened. For many of these people, however, the loss of employer-provided health insurance has meant larger out-of-pocket expenditures for health consumptionout from their disposable income. It is a classic case of damned if you do or damned if youdont, in that either way, other consumption is adversely affected.

It is important to remember that the primary purpose of the analysis is to understand howhealth inflation is affecting the general rewards for broad groups of the workforce. When an


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employer is considering the addition or retention of a worker, however, the focus is morenarrowly focused on what that worker will cost in comparison to the expected value that he orshe will bring to the organization. The marginal costs of workers in the various earnings decileswho actually take health insurance are quite different than the average of all workers in thedeciles.

Executive Summary Table 2: Share of Compensation Gains Provided in the Form of More

Expensive Health Benefits Paid by Employers for Full-Year Workers by Earnings Decile

and for Selected Periods*

Earnings

decile 1980-1990* 1990-2000 2000-2009

1 285.8% 26.8% 23.6%

2 100.0% 20.8% 30.4%

3 106.9% 23.6% 30.1%

4 57.2% 21.0% 36.5%5 74.4% 19.8% 28.9%

6 45.2% 22.5% 26.7%

7 55.5% 15.5% 25.8%

8 38.7% 12.1% 20.1%

9 21.4% 9.1% 15.0%

10 12.1% 2.9% 9.1%

Source: Updated results of projections presented in Steven A. Nyce and Sylvester J. Schieber, HealthCare Inflation, Must Workers Bear the Brunt, Milken Institute Review (Second Quarter 2010), pp. 46-57.

*Health benefit cost increases in the 1980s for the second earnings decile exceeded 100 percent of

compensation growth. Benefit costs increased significantly but total compensation growth was negativein the second decile.

Executive Summary Table 3 shows how health benefits care costs have risen relative towages between 1980 and 2009 for workers who actually enrolled in the health benefit plansoffered by their own employers. In 1980, employers costs for those who enrolled in theirprograms cost single-digits relative to wages for all decile groups except the lowest with themedian enrolled employee costing about 6 percent of pay. Over the next three decades, thosecosts have grown more than threefold relative to wages and reaching more than a third ofindividuals wages among the lowest decile groups. In fact, for the lowest decile group they

have nearly eclipsed half of an employees take home pay in 2009. Likewise, these costs havebeen growing at much faster pace for the lowest paid highlighting the greater impact thatcompounding has on the lower pay groups. For example, health benefit costs relative to wagesfor the second decile were twice those of workers in the ninth decile in 1980, which by 2009 hasrisen to more than three times. Because of that, health benefits have the potential to makecertain workers uneconomical in some cases.


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Executive Summary Table 3: Health Benefit Costs as a Share of Wages for Full-Time, Full-

Year Workers Receiving Health Care Benefits through Their Own Employer

1980 1990 2000 2009

1 15.4% 30.9% 38.1% 49.5%

2 9.5% 18.7% 22.9% 30.9%

3 8.0% 15.3% 18.6% 25.5%

4 7.2% 13.3% 16.0% 22.3%

5 6.3% 11.6% 14.0% 19.4%

6 5.8% 9.9% 12.1% 16.8%

7 5.4% 9.2% 10.8% 14.8%

8 4.9% 8.2% 9.2% 12.5%

9 4.3% 6.9% 7.8% 10.2%

10 3.2% 4.9% 4.7% 6.3%

Source: Developed by the authors.

On the labor demand side, the idea that employers treat health benefits as part of thecompensation bundle suggests that increasing health premiums for their benefit plans wouldmerely be adjusted by reducing other aspects of the total package. But workers cash pay tendsto be sticky downwardit is difficult to reduce pay without causing a variety of disruptionsamong workers. If employers are forced to absorb health cost increases that exceed the addedproductivity that workers bring to the table, it is likely they will curtail employment in somecases. Katherine Baicker and Amitabh Chandra have also developed an empirical analysis ofeffects of rising health benefits costs on labor demand and estimate that a 10 percent increase inhealth insurance premiums reduces the aggregate probability of employment by 1.6 percent and

total hours worked by 1 percent.3 To put these results into context, taking the excessive rates ofgrowth in employers health benefit costs over the past decade compared to productivity growth,health costs have increased an excess of 20 percent. Extrapolating Baicker and Chandrasresults, this suggests that growing health benefit costs have added 2 percent to the unemploymentrate over the period.

No one knows for certain what the implications of the 2010 health reform law will be forU.S. workers in terms of their future health costsor even how they will acquire their healthinsurance coverage in the future. The analysis of what has occurred over the past three decadessuggests that a considerable share of the disappointment with the rewards that many workershave received in recent years is due to the voracious appetite that health benefits have brought to

bear on their productivity rewards. The extension of the trends on health benefit cost growth thathave persisted for decades now suggests that if we cannot bring excessive health care inflationunder control, workers prosperity is going to be increasingly threatened. A full-time worker inthe second earnings decile in 2009 earned around $25,000 in total compensation on average. Ifhis or her productivity goes up by the rate of growth that the Social Security actuaries estimate,by 2019 this worker will be earning around $36,600 in total compensation but nearly 75 percentof the difference from 2009 will have been consumed by rising health benefit costs. If theworker is being provided family coverage, the cost of health benefits will grow to consume all of


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Treating Our Ills and Killing Our Prospects

By

Steven A. NyceTowers Watson

and

Sylvester J. Schieber

June 22, 2011

Sylvester Schiebers contributions to this paper were supported by the Coalition for AffordableHealth Coverage. The authors are indebted to Michael Slover of Towers Watson for his

contributions to the statistical analyses included in parts of the paper and to Susan Farris of

Towers Watson for her editorial help in preparing the final draft. All of the conclusions and

opinions stated herein are those of the authors and do not necessarily represent those of the

Coalition for Affordable Health Coverage, Towers Watson or any of their associates.


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Table of Contents

Introduction .................................................................................................. 2

Background ................................................................................................... 4

Hidden Compensation Masking Workers Rewards ................................ 8

Factoring Benefits into the Rewards Picture ........................................... 13

Pay and Compensation across the Earnings Spectrum .......................... 24

Health Benefit Costs and Labor Markets ................................................ 32

Labor Supply Effects of Health Care Benefits .......................................... 33

Labor Demand Effect of Health Care Benefits ......................................... 40

The Past as Prologue .................................................................................. 51

The Prologue Is almost Past ...................................................................... 55

Health Care Dominates Our Prospects .................................................... 58

Conclusion ................................................................................................... 65

Endnotes ...................................................................................................... 68


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Introduction

When most of us were young, we played with learning books that required we draw a

series of lines along a sequence of numbers that resulted in the outline of a picture. In some

regards, those learning books can serve as an analogy to a number of evolving economic

developments that we sometimes observe as independent phenomena which are hard to

understand until we link them together to reveal a portrait of our modern lives. In recent years,

we have all read, heard about or experienced the pain of health cost inflation through higher

premiums, larger copayments and deductibles. In some cases, the situation has been made even

worse for those people who have either lost their health insurance or had it curtailed and have

subsequently faced economic ruin as they have dealt with serious illness in their families. On a

somewhat independent track, another stream of news has documented the evolving pattern of

economic advancement in recent years suggesting that the better off in our society seem to be

making steady gains in growing their incomes and gaining wealth while the middle class and

those further down the economic ladder seem to struggle harder and harder but have been losing

ground. The dual recessions that we have experienced since the beginning of the new

millennium have stolen many jobs and the new ones being generated in the sluggish recovery

now underway do not seem to hold out the promise of a good paycheck, a generous health

benefits plan and the secure retirement package that we recall the earlier generations of our

forebears enjoying.

For many of us, the growing premiums, copayments and deductibles in our health

benefits plans have been an aggravation if not painful. What many people do not realize is that,

despite some shifting of costs to workers for their health benefits, employers costs for these

benefits have consistently continued to grow more rapidly than total compensation budgets. For


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employers, health benefits costs along with their contributions for pension and retirement savings

plans and their contributions for their share of payroll taxes are all part of their compensation

costs; what it costs them to hire and maintain workers. When health benefits costs rise, they

represent an increase in compensation costs which ultimately have to be covered by the overall

productivity of the workers who receive them. Benefit costs are an element of compensation that

is generally not visible to us as workers but rising costs for these ultimately have ramifications

for workerssometimes in the form of slower growth in wages and sometimes in the form of

fewer available jobs for some who might otherwise be employed. In the case of health care

benefits, this can also manifest in the form of higher cost sharing through increased contributions

out of pay or higher out-of-pocket costs both of which intrude into individuals consumption

budgets. When we pull back the veil that hides benefits costs, it helps to explain some of what

has been happening to workers pay levels and to their jobs.

In the following discussion, we develop in some detail the linkages between benefits that

employers provide to workers, their compensation and pay packages as well as the implications

for jobs. In some research that brings benefits into the compensation picture and explores their

ramifications, the view is restricted to health benefits. As you will see in the discussion that

follows, employers contributions for their retirement plans and payroll taxes are also important.

Although we broaden the consideration of employer-sponsored benefits beyond health care, once

we explore the general implications they have for workers rewards, we step back and take a

more detailed look at the implications that excessive health benefits cost inflation has played in

recent years and explore the potential future effects they might have if we do not get health

inflation under control.


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Background

An article in the September 13, 2010 issue of theBismarck Tribune6

pointed to a report

recently issued by the Census Bureau on Income, Poverty and Health Insurance Coverage in the

United States: 2008.7 Edward Lotterman, the author of theBismarck Tribune article, tracked

the median earnings of men ages 15 and older who had year-round, full-time jobs over the past

several decades. In 1960, these workers had median earnings of $34,152 in inflation-adjusted to

2008 dollars. In 2008, nearly a half century later, the median earnings of this group were

$46,367. They had gained a little over $12,000 in 48 years, just a 0.6 percent growth rate in real

wages over the period. This track record over nearly 50 years was not particularly impressive

but the story was even worse than first implied. Lotterman reported that the median earnings in

the annual series had reached $48,452 in 1973 and hadnt gotten back to that level since. Mens

median earnings had been over $47,000 three years during the Jimmy Carter Administration and

twice during George W. Bushs first term. Lotterman found this result particularly

remarkable given that productivity as measured by output per hour of workers in the business

sector had doubled over the period from 1973 to 2009.

Pursuing the issue further, Lotterman looked at mean income instead of medians and

found a different result. Average disposable income had nearly doubled from 1973 to 2009.

Mean incomes growing rapidly when median earnings were stagnant or falling meant that the

rewards for increasing productivity were being paid to workers at the upper end of the earnings

distribution. According to Lotterman this is what happened over the last three decades: From

1979 to 2005, the mean after-tax income for the highest fifth of the population increased by 69

percent. For the poorest fifth, the change over 28 years was 6 percent. For the middle three-

fifths, the change was about 20 percent.8 Similar stories have become the centerpiece of many


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political discussions and economic analyses in recent years. There is a widespread sentiment

that the rewards for increasing worker productivity have not raised all boats.

Robert Gordon has studied the issue of growing inequality in income or pay in the United

States and raises a cautionary note regarding the measures often cited to document the

phenomenon that Lotterman and others have noted. Gordon recently dissected the reported

differences in income and productivity growth that are frequently cited.9 Since productivity

growth rates are based on individual worker output, he suggests that comparing such growth with

income growth should be done on the same basis. He shows that when income is distributed

across the whole working-age population the difference in the mean and median growth in

income over the 1979 to 2007 period is about one-fifth the level that Lotterman noted. Gordon

also notes another methodological problem with the conventional comparisons of income and

productivity, namely the common practice of using inconsistent deflators to put nominal earnings

and product on a consistent dollar basis across time. To put them on a consistent basis, Gordon

uses the GDP deflator. Finally Gordon notes that the hourly productivity measures generally

used in these sorts of analyses are based on worker productivity growth rates for the nonfarm,

private business sector. Of course, this leaves out the farm sector as well as government and

domestic workers who, between them, account for a significant share of American workers. In

considering economy-wide comparisons of growing pay compared to growing productivity

levels, there is no justifiable reason to include them in computing pay growth over time but then

leave them out of the comparative improvement in productivity rates. The various adjustment

factors that Gordon develops in his analysis are presented in Table 1.

Under the conventional measure of the gap between income and productivity growth,

based on the rate of growth of median household income minus the rate of growth in productivity


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in the private, nonfarm business sector, the income-productivity gap for the period 1979-2007

was 1.46 percent per year as shown in line 13 in Table 1. Under Gordons adjusted alternative,

the difference in the rates of growth in income and productivity measured only 0.16 percent per

year for the period as shown in line 14.10

Table 1: Annual Growth Rates, Median and Mean Income and Productivity for Selected

Periods1979-

2007

1979-

1995

1995-

2007

1995-

2000

2000-

2007

1. Census median household income 0.49 0.31 0.73 1.87 -0.09

2. Census mean household income 0.93 0.96 0.90 2.50 -0.25

3. Mean minus median (line 2 minus line 1) 0.44 0.65 0.17 0.63 -0.16

4. Census median income per person (15+) 1.15 1.00 1.34 2.68 0.39

5. Census mean income per person (15+) 1.25 1.21 1.29 2.90 -0.05

6. Mean minus median (line 5 minus line 4) 0.09 0.21 -0.05 0.22 -0.44

7. Deflator used by census (CPI-RS) 3.50 4.24 2.51 2.30 2.65

8. PCE deflator 3.27 4.16 2.09 1.76 2.32

9. GDP deflator 3.15 3.87 2.19 1.64 2.58

10. Median income per person (15+)

with GDP deflator 1.50 1.37 1.65 3.34 0.4611. Total economy output per hour 1.66 1.28 2.17 2.30 2.08

12. Nonfarm private business sector

output per hour 1.95 1.43 2.64 2.71 2.59

13. Conventional income-productivity

gap (line 12 minus line 1) 1.46 1.12 1.91 0.84 2.52

14. Alternative income-productivity

gap (line 11 minus line 10) 0.16 -0.09 0.52 -1.04 1.62

15. Alternative gap as percent of

conventional gap 11.0 -8.0 26.9 -123.8 76.0

16. Mean income per person with GDP deflator 1.60 1.58 1.60 3.56 0.02

17. Hours per person 0.20 0.41 -0.08 0.76 -0.69

18. Output per person (line 11 plus line 16) 1.86 1.69 2.09 3.06 1.39

Source: Robert J. Gordon, Misperceptions about the Magnitude and Timing of Changes in AmericanIncome Inequality, (Cambridge, MA: National Bureau of Economic Research, 2009), NBER WorkingPaper 15331, Table 1.


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Despite Gordons evidence that the skewing of income toward higher earners since the

1970s has been exaggerated, there is significant economic literature documenting the dispersion

of earnings toward the end of the twentieth century. There had been considerable wage

compression during the 1940s, in part due to the structure of wage and labor market controls

during World War II and the effects of war requirements on the relative demand for various

types of workers. As labor market controls were relaxed after the war, the narrower earnings

distribution persisted for some time.11 The earnings and income distributions remained stable

into the early 1970s to the extent that Henry Aaron remarked that tracking the changes in these

measures was like watching the grass grow.12

From the early 1970s through the 1980s,

something changed and male wage rates and family income inequality increased sharply.13

Gordon points to evidence that the decline in unionization, the shift in our balance of payments

from being a net exporter to becoming a net importer and the dramatic increase in immigration

rates and levels since the end of World War II have each contributed somewhat to wage and

earnings inequality in recent decades.14

Whether measured by total income or earnings, the evidence that those in the upper end

of the income distribution gained relative to those lower down the distribution, beyond the mid-

1970s, has resulted in a fairly widely embraced conventional wisdom that the haves in our

society have been gaining steadily compared to the have nots and that the process continues

unabated. Richard Burkhauser and three colleagues have recently published a number of studies

attempting to sort out some of the conflicting evidence from various studies of the earnings

distribution. In one of them, they focused on the period 1975 through 2004 and concluded that

for the poorest 99 percent of the income distribution, the increase in inequality since 1993 has


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income across the population over time. Gordon suggested further research was warranted to

find out what was happening to this income.

Figure 1: Growth of Productivity as Measured by Output per Hour of Labor Input andGrowth of Total Compensation Paid to Workers as a Multiple of Base Values in 1980

Source: Derived from unpublished data from the Office of the Actuary, Social Security Administration

which was derived by the actuaries using Department of Labor information on employment and hours of

work by U.S. workers and information from the Bureau of Economic Analysis,National Income andProduct Accounts . Wages and benefit costs were converted into constant dollars using the GDP deflator.

A substantial part of the answer to Gordons puzzle is that tracking of aggregate

compensation is based on theNational Income and Product Accounts (NIPA) which includes

cash pay for employed workers plus employer contributions for benefits provided to them as part

of their total remuneration. The benefit costs include the employers share of payroll taxes for

Social Security, Medicare and unemployment insurance plus employer contributions for

retirement health benefit plans that they sponsor for their workers. In 2000 under the NIPA

annual data series, benefits costs absorbed by employers were 10.6 percent their total

compensation costs, rose to 12.5 percent by 2007 and to 13.7 percent by 2009. For the most part,

the economic literature and the Census data series on the distribution of earnings and income

0.8

0.9

1.0

1.1

1.2

1.3

1.4

1.5

1.6

1.7

1.8

1980 1983 1986 1989 1992 1995 1998 2001 2004 2007

Producvity

Compensaon


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ignore this element of compensation paid to workers and its distribution across the earnings

spectrum. The benefits are sizeable enough that they have the potential to skew any analytical

results that ignore them.

Most wage and income inequality research has used either the Current Population Survey

(CPS), data developed on individuals from a representative sample of households in the United

States, or annual federal income tax filing data. Virtually all of the early economic literature that

documented the accelerated growth of earnings and income levels for those at the upper end of

the spectrum relative to those at lower levels considered only cash wages and salaries as the

rewards paid for work. The press articles that describe the growing income disparity

phenomenon also focus solely on cash income when considering earnings. In recent years, there

has been an evolving series of studies that have incorporated estimates of employers benefits

costs in analyzing pay dispersion among workers.

Brooks Pierce at the Bureau of Labor Statistics (BLS) has developed two analyses

evaluating the earnings inequality phenomenon using survey data collected to produce the BLS

Employment Cost Index (ECI). The survey source of the ECI data is a sample of jobs within

employing establishments that are surveyed quarterly. The survey solicits information on the

pay and benefits costs associated with incumbents in the sampled jobs. In the first study Pierce

developed, covering the period from 1982 through 1996, he found that dispersion measures

including employer-financed benefits were larger than those using wages alone.16 In a

subsequent effort, he concluded that wage inequality grew over the two decade period from

1987 to 2007 The ECI data also indicate that benefits costs to employers rose more in high

than low wage jobs. The differential growth was great enough so that inequality in

compensation more broadly defined grew at least as much as did inequality in wages.17


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Wankyo Chung used survey data from the U.S. Chamber of Commerce estimates of

benefits costs as a percentage of pay across private employers to impute benefit costs to workers

surveyed in the CPS who reported being covered by a health and/or retirement benefit plan and

concluded that ignoring benefits results in exaggerations of inequality among skilled workers but

underestimates of the phenomenon among the unskilled.18

This latter conclusion would arise if

coverage rates were lower for low earners even if they received proportional benefits to those

higher up the earnings distribution. Helen Levy studied the prevalence of employer-sponsored

health insurance on various segments of the workforce broken out by gender, race and immigrant

status and how it affected the distribution of rewards across the earnings spectrum. She allocated

health benefits costs on a constant basis across workers covered by employer-sponsored plans

who were in the CPS. She concluded that considering the provision of such insurance

narrow[s] the compensation gap (compared to the wage gap) for women, blacks and

Hispanics.19 In a recent analysis, Richard Burkhauser and Kosali Simon have imputed the value

of health benefits to CPS respondents indicating they were covered by employer-sponsored plans

based on estimates derived from the Medical Expenditure Panel Survey Insurance Component

which has been conducted each year since 1996. They concluded that, Adding the value of

employer health insurance payments to income reduces measured income inequality and reduces

increases in measured income inequality over time.20 In a paper that the current authors

published in 2010, we distributed reported aggregate health costs incurred by employers as

estimated from the annualNIPA data differentiating health costs by whether single, couple or

family coverage was being provided based on actuarial estimates of such differentials for typical

employer-sponsored plans. In addition, we also distributed the costs associated with Social

Security and Medicare payroll taxes paid by employers and estimates of retirement plan costs


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incurred by employers that skewed the distribution of benefits among those covered by such

plans at increasing rates as workers moved up the earnings distribution. We found that

employers benefits costs as a share of compensation rose more rapidly for lower earners in the

1980s and 1990s than for those at higher earnings levels with a reversal in that trend between

2000 and 2007.21

One likely explanation for the differences in findings is that the units being analyzed vary

from one study to the next. The ECI data that Pierce uses is based on a sampling of one to eight

jobs within private employers establishments so the unit of observation is a job. The data is

collected on wages and other compensation costs for incumbents in the sampled jobs. Often the

respondents cannot break down the various costs at the specific job level and report them on a

broader group of workers. In the case of health benefits, there is no controlling for variations in

costs associated with single, couple or family coverage. There is considerable variance from one

establishment to the next and one job to the next in terms of part- versus full-time workers, take

up rates on benefits, and so forth.

The remaining studies mentioned here have been based on micro data, primarily from the

CPS and augmented with information to allow estimation of costs associated with employer-

financed benefits to specific workers. Chung restricts the analysis to white men ages 25 to 54

who work full-time and full-year in the private sector. Levy includes women and minorities but

restricts her analysis to workers employed 35-hours per week or more in the private sector.

Burkhauser and Simon adjust reported household income to include the imputed value of health

benefits provided by employers, Medicare or Medicaid but then adjust the derived variable based

on the number of individuals in the household. Other than Pierce, none of these other analyses

include benefits beyond health care. Pierce includes paid time off which has the potential of


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13

being double counted, especially for cases where earnings levels are reported on some sort of

annualized rate rather than a specific hourly rate for an actual hour of work. In our earlier

analysis, we focused on full-time, full-year workers but included those in both private and public

sector and allocated employer costs for benefits as described earlier.

Factoring Benefits into the Rewards Picture

The disparate results in the earlier analyses discussed here raise a number of issues. First

of all, the size and relative rates of growth in non-wage compensation suggest that employers

benefit costs cannot be ignored in considering workers rewards. Second, the role that employer-

sponsored health benefits plays in the compensation story is important, but the studies that have

added it alone to cash pay have generally admitted that this component of non-cash rewards is

one-third or less of the benefits package. Third, the segmentation of the workforce may be a

significant factor in explaining the differences in the results that have been noted.

In order to explore the underlying dynamics of what is happening to workers rewards,

the following analysis uses the CPS data from surveys done between 1981 and 2010 to distribute

workers by their earnings level each year into 10 groups (deciles) ranked by earnings level. The

income supplement questionnaires used to gather the income data in the CPS are administered

each March and look retrospectively at income over the prior year so the analytical period

includes annual income from 1980 through 2009.

The top 1 percent of the earnings distribution was excluded in developing the analysis.

The Census Bureau has a policy not to disclose any information that has the potential to allow

data users to identify specific respondents to its surveys and thus limits the reporting of

extraordinarily high income levels reported on the CPS because doing so could make the few

people who received the incomes identifiable. In practical terms, the way this is accomplished is


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14

by simply coding all earnings responses above a certain level at their break off point in the

earnings portion of their survey, a practice referred to as top coding. We eliminated all

instances of top-coded earnings by excluding the top 1 percent of reported earnings in each

year because we could not determine their actual pay. Given the concerns that some income

segments have been getting ahead of others and that higher-income workers have been gaining

the most, we segmented the population into 10 income categories. The first nine groups include

10 percent each of the population studied each year, and the tenth group includes the next 9

percent.

The top 1 percent of the earnings distribution is of particular interest from a cash income

perspective but we do not believe it has such important implications from the perspective of the

distribution of the benefits elements of compensation. Thomas Piketty and Emmanuel Saez have

analyzed federal income tax filing data from 1913 forward to document the shares of total

reported income in that context that has accumulated to the top 10 percent of tax filers and

subcomponents of the group including the top 1 percent.22 They found that the share of income

reported by the top 1 percent of the tax filers dropped from 15 to 17 percent of the total in the

decade prior to World War II to around 11 percent by the end of the war and then declined

somewhat lower to around 8 or 9 percent after the war and remained around that level until it

started to rise again in the early 1980s climbing back to 16 percent by the late 1990s. Robert

Gordon concludes that the sources of rising inequality in the bottom 99 percent of the income

distribution and the top 1 percent should be treated as separate topics with separate

explanations.23

The top 1 percent of earners clearly receive more than 1 percent of cash salaries but their

share of compensation paid in the form of payroll taxes, health benefits or contributions to tax-


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15

qualified retirement plans cannot be nearly so skewed. Employers Social Security payroll taxes

are capped well below the earnings level of the top 1 percent. The limits on income considered

for tax-qualified retirement plans are also well below the top-coded amounts. In most cases,

highly compensated individuals are included in the same health benefit plan as other workers in

establishments where they are employed. Because of the limitations on the various benefits

considered, their role in compensation and employment decisions relative to the top 1 percent of

the earnings distribution becomes increasingly trivial as cash earnings levels increase. The

employers cost of a group health benefit for a 50-year old executive with a wife and two

children covered by a plan will be exactly the same as that for a 50-year old rank-and-file worker

with similar characteristics. A health benefit plan costing an employer $10,000 per year for a

worker earning a salary of $40,000 per year is a totally different consideration than the same

health benefit being provided to an executive who is being paid $2 million per year. Excluding

the top 1 percent of the earnings distribution should not distort an analysis of the implications of

employer-sponsored benefits on compensation and hiring practices to any substantial degree.

Estimating the effects of employer-sponsored benefits on compensation costs required

that we impute the costs of these benefits to individual workers in the CPS annual samples. In

allocating employers health benefits costs, we varied the imputed compensation to workers

based on the size of their employer, as suggested by existing survey evidence to that effect,24

whether individuals were actually participating in a health insurance plan offered by their

employer and whether they were provided individual, couple or family coverage.25 In addition,

we estimated employers payroll tax contributions for Social Security and Medicare based on

workers reported earnings and the contribution rates stipulated in law and added imputed

employers contributions for retirement plans as in our earlier work. We ignored the employer


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costs for unemployment and workers compensation and life insurance in our analysis which are

trivial compared to the costs that we have incorporated and would have little practical effect on

the results if included.

In order to explore the differences between Pierces results suggesting that the addition of

employer-sponsored benefits accentuated the disparity in cash pay and its growth over time, we

began with an allocation of benefit costs across the total workforce. Figure 2 shows the

estimated share of compensation that paid in the form of benefits, on average, within each of the

earnings deciles for 1980 and 2009. While the package of benefits that we included in our

analysis is somewhat more restricted than Pierces, the pattern of benefits paid to workers as a

share of total compensation in the figure has a similar profile to his results. In 1980, benefits

were an increasingly larger component of compensation at each higher earnings decile up until

the eighth. If pay rates were skewed toward higher earners, this pattern of benefit rewards would

have accentuated pay disparities. Between 1980 and 2009, benefits increased more steeply as a

share of compensation from the bottom up through the sixth earnings decile suggesting that

increasing benefits costs would have also contributed to any increased skewing of rewards

toward earners in the middle part of the distribution relative to those at the bottom. Beyond the

sixth decile, the growth in benefits costs relative to total compensation gradually trailed off

toward the top end of the distribution.

While we could not link our results directly to Pierces, his results showed that health

benefit costs as a share of compensation reached a plateau around the 30th percentile of the

compensation distribution, held constant until around the 60th percentile or so and then declined

over the remainder of the distribution. The earnings cap on wages subject to the Social Security

payroll tax suggest that the employer costs associated with this benefit also declines at higher


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pay rates. Pierce found that retirement plan costs increased as a share of compensation fairly

steadily across the compensation spectrum from nothing at the bottom of the distribution to about

6 percent of compensation around the 95th percentile of the distribution. At the median of the

compensation distribution, health benefit costs were about 2.5 times retirement plan costs and

even at the 80th

percentile employers health benefit costs were 50 percent larger than retirement

benefits costs.26 Given the relative magnitude of employers health benefits and Social Security

payroll tax costs, total benefits costs as reflected in Figure 2 are consistent with the results that

Pierce presented. He also found that the differences in the compensation growth rates compared

to wage growth between 1987 and 2007 were larger between roughly the 20

th

and 70

th

percentiles

of the compensation distribution than at either end of that distribution27

which is consistent with

our results.

Figure 2: Share of Total Compensation Paid in the Form of Benefits by Earnings Decile in

1980 and 2009.

Source: Derived from tabulations of the Current Population Survey augmented by data from theNational

Income and Product Accounts for various years.

.

0%

5%

10%

15%

20%

25%

1 2 3 4 5 6 7 8 9 10

1980

2009

Earnin s decile


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The results in Figure 2 occur to a large extent because the prevalence of being in an

employer-sponsored health or retirement benefit plan is much lower at lower earnings levels than

for workers at higher points on the distribution. To a certain degree, this result arises because the

offer of benefits at the bottom of the earnings distribution is less common but also because many

workers who are offered benefits do not take advantage of them.

One consideration in explaining the pattern in Figure 2 is that workers at the bottom end

of the earnings distribution tend to work part time to a greater extent than those further up the

spectrum. In our summary estimates of hours worked in 1980, 2.6 percent of total hours were

worked by those in the bottom earnings decile and 5.1 percent by those in the second. This

climbed a bit to 3.2 percent and 6.8 percent of total hours worked in 2009 in the bottom two

earnings deciles respectively. In many cases, employers do not extend benefit offers until

workers are working some significant threshold of hours, often at least 20 hours per week and

then may require a worker contribution that is proportionately larger as a share of hourly wages

than for full time workers.28

Table 2 provides considerable detail in regard to the extent to which full-time, full-year

workers were covered by health insurance and the sources of that insurance in 1990, 2000 and

2009. The various categories of workers considered as shown in the column headings are not

mutually exclusive. Many of the students and pensioners are included in other columns and each

of the right-hand four columns of the table is a subset of the all workers column. The latter

includes single and married men who are not included in the other columns. The table indicates

that even among workers who are fully engaged in full-time work, many are either covered by

health insurance from sources other than their own employers or have no health insurance

coverage at all.


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Table 2: Percentage of Full-Time, Full-Year Workers and Health Insurance Status by

Source and Year

All workers Married women Single women Students Pensioners

Percentage of all full-time, full-year workers with health insurance

1990 88.8% 94.1% 85.6% 79.8% 94.2%

2000 86.8% 91.9% 83.4% 82.5% 92.8%

2009 84.8% 91.9% 80.4% 77.2% 93.5%

Percentage of workers with insurance from their own employer

1990 70.2% 62.9% 76.3% 44.1% 69.4%

2000 69.0% 61.3% 74.7% 43.0% 71.4%

2009 65.5% 61.7% 70.2% 35.5% 70.0%

Percentage of workers with employer insurance as a dependent

1990 9.9% 24.1% 0.9% 18.5% 8.1%

2000 11.9% 26.2% 2.0% 20.8% 9.0%

2009 11.8% 24.2% 2.1% 20.2% 8.5%

Percentage of workers with insurance from non-employer source

1990 8.7% 7.0% 8.5% 17.2% 16.7%

2000 5.9% 4.4% 6.8% 18.7% 12.5%

2009 7.5% 5.9% 8.1% 21.5% 15.0%

Percentage of workers uninsured

1990 11.2% 5.9% 14.4% 20.2% 5.8%

2000 13.2% 8.1% 16.6% 17.5% 7.2%

2009 15.2% 8.1% 19.6% 22.8% 6.5%

Source: Tabulations of the Current Population Survey.

A significant majority of all workers were covered by some sort of insurance over the

years shown in Table 2 although the percentages dropped moderately in each column between

1990 and 2009. Other than the students, the majority of each of the classes of workers acquired

their health insurance through their own employer although substantial numbers of married

women and students acquired their coverage as a dependent of someone else claiming them as a

dependent under another employers health benefits program. Substantial numbers of the


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20

students and pensioners acquired health insurance from some non-employer sourcemany of

the former likely through insurance programs sponsored for students at institutions of higher

learning and the latter were likely covered under some form of retiree health benefit program or

through insurance that they acquired in the private markets themselves. Substantial numbers of

students and single women were uninsured and the percentages of those without generally

increased over the 1990 to 2009 period.

Table 3 is similar to Table 2 except that it summarizes the results for the same

components of the workforce which worked less than full time for the full year referred to in the

various rows. Still the vast majority of workers indicated that they were covered by health

insurance in the various years but the sources of coverage were dramatically different than for

the full-time, full-year workers. For these workers, one-quarter to one-third reported being

covered by health insurance through their own employers. Few of the students received health

insurance through their own employers but about half of the individuals reporting that they were

receiving a pension did so. Nearly half of the students and married women in Table 3 acquired

their health insurance in 1990 as a dependent of another worker in their families although the

percentage of married women acquiring their health insurance this way dropped off by 2009.

One-quarter to one-third of the single women, students and pensioners had health insurance

through some non-employer source. For the single women, many likely qualified for public

benefits through state-sponsored insurance programs for low-income families. Many of the

students again were likely acquiring their health insurance through group programs run by their

academic institutions and the pensioners were likely covered by retiree health plans from prior

employers, individual insurance or Medicare.


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Table 3: Percentage of Workers Who Worked Less Than Full-Time and Full-Year and

Health Insurance Status by Source and Year

All workers Married women Single women Students Pensioners

Percentage of workers who worked less than full-time, full-year with health insurance

1990 76.0% 88.3% 72.7% 85.1% 86.3%

2000 76.8% 86.5% 73.7% 85.6% 88.7%

2009 70.3% 84.4% 67.7% 82.2% 88.9%

Percentage of workers with insurance from their own employer

1990 27.7% 24.8% 24.6% 5.9% 47.1%

2000 29.8% 27.9% 27.8% 6.8% 48.4%

2009 26.0% 26.5% 22.9% 6.4% 45.8%

Percentage of workers with employer insurance as a dependent

1990 27.6% 48.7% 16.8% 47.4% 14.3%

2000 30.3% 48.3% 19.9% 54.1% 16.8%

2009 24.6% 43.4% 16.7% 49.2% 16.7%

Percentage of workers with insurance from non-employer source

1990 20.8% 14.8% 31.3% 31.8% 24.9%

2000 16.7% 10.2% 26.0% 24.7% 23.4%

2009 19.7% 14.5% 28.2% 26.7% 26.4%

Percentage of workers uninsured

1990 24.0% 11.7% 27.3% 14.9% 13.7%

2000 23.2% 13.5% 26.3% 14.4% 11.3%

2009 29.7% 15.6% 32.3% 17.8% 11.1%

Source: Tabulations of the Current Population Survey.

Figure 3 clearly shows that, in the aggregate, the workers employed on a full-time, full-

year basis were consistently more likely to be covered by their own employers health benefit

plans across the earnings spectrum than those working less during the year. Even for workers

who were working full time, health benefits coverage at lower earnings levels were quite low in

the bottom part of the earnings distribution.


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Figure 3: Percentage of Workers with Health Insurance Provided by Their Own

Employers Based on whether They Worked Full or Part Time and Full or Part Year in

2009 by Earnings Decile

Growth rate

Earnings decile

Source: Derived from tabulations of the Current Population Survey augmented by data from theNationalIncome and Product Accounts for various years.

Figure 4 shows the prevalence of workers covered by health insurance provided by

someone other than their own employer. For full-time, full-year workers at the bottom of the

earnings distribution, coverage rates being garnered from sources other than their own employers

is about twice those from their own employer. But for the part-time workers in the bottom two

earnings deciles, coverage from other sources is five or six times the rates at which the workers

are getting coverage through their own employers. There is no dispute that employers

contributions for benefits represents a labor cost and that economic theory suggests such costs

would have some moderating effect on the cash wage payable to workers. It makes sense then,

that workers in households where health insurance is already available might seek out

employment where the rewards for work did not include redundant coverage of little added

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

1 2 3 4 5 6 7 8 9 10

FTFY

PTFY

FTPY

PTPY


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23

marginal value especially if such redundant coverage has the potential to reduce the wages that

such workers might earn.

Figure 4: Percentage of Workers with Health Insurance Provided by Someone Other thanTheir Own Employers Based on Whether They Worked Full or Part Time and Full or Part

Year in 2009 by Earnings Decile

Growth rate

Earnings decile


Undoubtedly, some of the people who are employed less than full time and full year are

underemployed, especially during periods with sluggish economic growth. However, many part-

time workers may prefer to work less than full time. For example, students might work full time

during their summer vacations and part time during the school year but do not desire or are not

able to work full time while carrying a full academic load. Many parents with younger children

also coordinate their work outside the home with childcare and homemaking obligations and

prefer something less than full-time employment. Many pensioners maintain their attachment to

the workforce for economic or social reasons but prefer the flexibility of part-time or seasonal

0%

10%

20%

30%

40%

50%

60%

70%

80%

1 2 3 4 5 6 7 8 9 10

FTFY

PTFY

FTPY

PTPY


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24

employment. Given the concentrations of part-time workers toward the bottom of the earnings

distribution and the fact that many more of them are gaining most of their health insurance

through other means than their own employment, we have chosen to focus the remainder of the

analysis on the full-time, full-year workers where the tradeoffs between wages and benefits in

the compensation package are more straightforward.

Pay and Compensation across the Earnings Spectrum

Figure 5 shows the compound annual growth rates in inflation-adjusted average hourly

pay rates across ten pay deciles from 1980 to 1990, 1990 to 2000, and 2000 to 2009 for full-time,

full-year workers. In this case, our pay deciles have different income breaks than those reflected

in Figures 3 and 4. In the earlier cases, we distributed all workers across the ten categories

whereas the analysis in Figure 5 and subsequent discussion redistributes them across nine

categories each made up of one-tenth of the of the full-time, full-year workforce with the tenth

category having the remaining 9 percent of all such workers with reported earnings below the

CPS top coded income amounts. The hourly wage growth patterns vary considerably over time

as might be expected given the evidence on pay dispersion over the past few decades.

During the 1980s, there was negative wage growth at the bottom of the earnings

spectrum, modest but flat growth across the middle-income segments and progressively higher

growth across the top 30 percent of the distribution. This was a decade that started with a hard

recession and the elimination of many manufacturing jobs. During the decade, there was a

realignment of economic activity as imports and global completion increased. This is the period

when virtually all analyses of the pay and income dispersion phenomenon agree that the growth

in rewards was disproportionately concentrated toward the upper end of the earnings spectrum.

In the 1990s there was significant wage growth across all earnings categories but wages grew


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considerably more at the top than at lower levels. The most significant growth was concentrated

in the top earnings decile. During this period, many middle and upper level managers in private

firms were included in pay-for-performance plans and, with rapid economic growth during the

mid to late-1990s, earners at the top of the distribution did disproportionately well. The rate of

growth in pay clearly fell back during the 2000s and was not as flat across the earnings

distribution as it had been during the 1990s.

Figure 5: Compound Annual Growth Rates of Inflation-Adjusted Hourly Pay for Full-

Time, Full-Year Workers by Earnings Decile and for Selected Periods

Growth rate

Earnings decile

Source: Derived from tabulations of the Current Population Survey, various years.

Considering the net combined effects of slower wage growth after the turn of the century

and the higher unemployment, David Leonhardt summarized the effects on median household

income in theNew York Times. He found that it had fallen from $51,295 in 1998 to $50,303 in

2008 in inflation adjusted dollars. His assessment of what was happening is that: Its a

combination of two trends. One, economic growth in the current decade has been slower than in

any decade since before World War II. Two, inequality has risen sharply, so much of the bounty

from our growth has gone to a relatively small slice of the population.29

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1 2 3 4 5 6 7 8 9 10

1980-1990

1990-2000

2000-2009


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26

In order to expand Leonhardts cash income perspective, we estimated employers

contributions for payroll taxes and employer-sponsored benefit plans adding them to workers

wages. We did this by relying on CPS respondents indications that they were covered by an

employer-sponsored health benefit plan and/or a retirement plan. We used the reported

aggregate totals for the cost of these programs from the BEAsNIPA files. Employers payroll

tax contributions were estimated based on prevailing law governing contribution rates in each

year. Employer contributions to retirement plans were based on reported coverage and a

progressive structure of benefits across the earnings distribution. We allocated health benefit

costs using reported coverage using differential rates for single and family coverage within those

earnings levels.

In Figure 6, employer costs for retirement plans including employer-sponsored plans and

social insurance benefits, as well as those for employer-sponsored health plans, are added to cash

pay. While wage growth in the 2000s falls short of that achieved during the 1990s, there was

more compensation growth across almost all the earnings spectrum in the early 2000s than in

either of the prior two decades. Figure 6 doesnt support the conclusion that it is only the top end

benefitting from added productivity in recent years. Those in the eighth earnings decile and

above did somewhat better than those at lower levels, but generally workers did much better than

the cash only perspective suggests. The results here do not support the conclusion that the 2000s

were much worse for middle-America than the prior decade. If people are generally dissatisfied

with their cash rewards from work during the 2000s but compensation growth was more robust

across most of the earnings spectrum than it had been in the prior 20 years, it is important to

understand what the other elements of compensation are and how they are affecting the actual

and perceived welfare of workers.


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Figure 6: Compound Annual Growth Rates of Inflation-Adjusted Hourly Compensation

for Full-Time, Full-Year Workers by Earnings Decile and for Selected Periods

Growth rate

Earnings decile



Figure 7 shows the compound annual growth rates of employer contributions for Social

Security and Medicare. In the early 1970s, the automatic indexation of Social Security benefits

made benefit growth particularly susceptible to high inflation at a time when inflation was

abnormally high. This resulted in a financing crisis that led to further legislative changes in 1977

fixing the indexing problem and increasing tax rates and the levels of earnings covered under the

payroll tax. This legislation proved insufficient to deal with the short-term financing crisis and

additional legislation was adopted in 1983 that further increased the payroll tax rates. The

legislative remedies to the problem affected high earners somewhat more than middle and lower

earners. These increases were largely absorbed by the early-1990s but the extension of the

Medicare payroll tax rate to all earnings enacted by the Omnibus Budget Reconciliation Act of

1993 resulted in a higher growth rate for higher-wage workers during the decade. The increases

in contribution rates in the 2000s are largely attributable to increases in real earnings levels.

-0.5%

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

3.0%

1 2 3 4 5 6 7 8 9 10

1980-1990

1990-2000

2000-2009


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Figure 7: Compound Annual Growth Rates of Inflation-Adjusted Hourly Payroll Taxes

Paid by Employers for Full-Year Workers by Earnings Decile and for Selected Periods

Growth rate

Earnings decile


The growth rates in employer contributions to their retirement plans are shown in Figure

8. Regulatory policies reduced contributions to retirement during the 1980s and 1990s and the

booming financial markets during the latter 1990s also resulted in further reductions of employer

contributions to their retirement plans. The saying that the sons have to pay for the sins of their

fathers could not ring truer, however, than it does in this case. The long spell of low

contributions to the retirement system changed dramatically at the beginning of the new

millennium as the maturing of obligations with the aging of the baby boom and the downturn in

financial markets necessitated much larger employer contributions. The even steeper financial

market declines in 2008 and 2009 will require continuing higher contribution requirements for

retirement plan sponsors for several more years.

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

1 2 3 4 5 6 7 8 9 10

1980-1990

1990-2000

2000-2009


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29

Figure 8: Compound Annual Growth Rates of Inflation-Adjusted Hourly Employer-

Sponsored Retirement Benefit Costs Paid by Employers for Full-Year Workers by

Earnings Decile and for Selected Periods

Growth rate

Earnings decile


The last major benefit cost, employer-provided health insurance for workers and

dependents, has grown at higher rates for the duration of the period being analyzed than any

other compensation element. As Figure 9 shows, these costs have outpaced inflation over

virtually the entire study period. There was a brief respite during the mid-1990s, when the

combination of managed care practices and health providers reaction to the Clinton

Administrations attempt at health care reform slowed the growth of health benefit costs. They

still grew by an average of 2.5 percent more per year than inflation for the bottom two-thirds of

the earnings distribution, while wages grew by only about 1 percent per year. By the end of the

1990s, pent-up anger at managed care programs among the provider community, consumers, the

media and policymakers forced insurers to curtail various aspects of managed care. In the new

millennium, costs escalated again, although not at the furious pace of the 1980s.

-6%

-4%

-2%

0%

2%

4%

6%

8%

1 2 3 4 5 6 7 8 9 10

1980-1990

1990-2000

2000-2009


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30

Figure 9: Compound Annual Growth Rates of Inflation-Adjusted Hourly Health Benefit

Costs Paid by Employers for Full-Year Workers by Earnings Decile and for Selected

PeriodsGrowth rate

Earnings decile



An aspect of the story not depicted in these figures is that many employers reacted to

escalating costs by curtailing or, in some cases, eliminating their plans. Reductions in employer-

provided coverage shift more costs to workers. The analysis here simply distributes employer

costs for workers benefit plans, as reported in theNational Income and Product Accounts,

across the covered workforce for each earnings decile based on those workers in the CPS who

reported they were covered by benefits programs. For workers who lost employer-sponsored

health insurance coverage, such an outcome appears as a cost reduction in Figure 9. The lower

growth rate of hourly health benefit costs shown in the figure for workers in the lowest earnings

decile for the 2000 to 2009 period compared to the 1990s was driven by a smaller share of the

workers at this earnings level having employer-sponsored coverage. The slower growth in

hourly health benefit costs for workers in the lowest earnings decile is misleading; it is a result of

the transfer of these costs from some workers compensation budgets to their consumption

0.0%

1.0%

2.0%

3.0%

4.0%

5.0%

6.0%

1 2 3 4 5 6 7 8 9 10

1980-1990

1990-2000

2000-2009


40/80


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32

Health Benefit Costs and Labor Markets

Anyone who has ever taken a course on the principles of economics has learned that

market prices affect both the supply of goods or services that will be available in the marketplace

as well as the demand for them. The equilibrium that is established in a market is determined

where the supply and demand curves intersect establishing the point at which suppliers will offer

the same quantity of the market item as the demanders are willing to buy. Generally, when

economists study how the supply and demand for labor interact, the price they tend to consider

as affecting how much labor is offered or hired is the cash wage. By failing to take into account

benefits costs associated with hiring labor, such analyses miss some of the important

determinants of labor market activities.

In recent years, there have been a number of studies that have analyzed the implications

of employers provision of benefits on both labor supply and demand decisions. In the current

context, we are going to focus solely on the provision of health insurance and how it has

potentially been affecting labor market outcomes. On the labor supply side, the availability of

employer-sponsored health benefits provides a set of incentives, rewards and costs that vary

considerably from one segment of the potential workforce to the next and are affecting who even

enters the workforce in some cases, where they work in many others, often influencing decisions

on whether to seek and take alternative employment opportunities or to enter retirement late in

the working career. On the demand side, the excess inflation that has persisted in health benefits

costs in combination with stickiness limiting offsetting reductions in other components of

compensation may be affecting how jobs are structured or even offered at some points in the

earnings distribution.


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Labor Supply Effects of Health Care Benefits

The vast majority of working age adults and their dependents in the United States cover a

substantial amount of their health needs through health insurance. For most of them, the

insurance has not been available through any sort of public health insurance programs. The

primary way that most of these people have acquired their health insurance, in recent decades,

has been through employer-sponsored health benefit programs. The reasons for this include the

relative efficiency of joining a group benefits plan versus buying individual insurance in private

markets, the tax incentives favoring these plans and the perceived role employers play in helping

to finance the benefits. As a result, these benefits have become engrained in the decisions of

workers about all aspects of their workforce choices from what job to take, when or if to leave a

position and whether or not to work at all. In fact, when employees are asked about the most

important factors that influence their decision to join an organization, employees consistently

respond that health care benefits is one of the most important factors in making that decision

behind only base pay and vacation time. For many older workers, health benefits are second

only to base pay in ranking of considerations regarding their job choices.30

However, in order to qualify for coverage under an employer-sponsored health plan the

individuals covered must have an employment link to the firm sponsoring the plan. In many

cases the employment linkage is not direct in that most employer-sponsored plans cover not only

workers employed under them but their dependents as well. For single workers, the way to be

covered by an employer-sponsored plan is to take a job with the employer. For couples, the

potential of being covered under a spouses employer-sponsored insurance creates added

flexibility in acquiring health insurance.


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Jonathan Gruber and Brigitte Madrian have summarized the results of a number of

empirical studies completed up to around 2000 that compared the labor force participation rates

and hours worked by married women whose husbands had employer-sponsored health insurance

to those of married women whose husbands did not have such coverage.31 They cite several

studies which estimated that married women who had health insurance under their husbands

employer plans had labor force participation rates 6 to 20 percent lower than married women

without such coverage. These same studies also generally found that women who were covered

by their husbands health insurance were more likely to work part time than their counterparts

without health insurance.

32

Some more recent studies have raised questions about the results of

the earlier analyses because there may be some sorting characteristics between spouses that are

unrelated to husbands employer-provided health insurance status that is exaggerating some of

the earlier results. Merve Cebi poses the prospect that it is possible that women with strong

preferences to be homemakers may tend to marry men who have labor market traitshigh skills,

inclination to work long hours, and the likethat lead them to jobs with health insurance

coverage. If that is the case, then it is these other factors that account for some of the measured

relationship between husbands with health insurance coverage and the lower labor force

participation of their wives. When Cebi controls for the sorting and selection among married

couples, the estimated reduction in wives labor force participation rates is 7.7 percent compared

to 14 percent under the methods used in the earlier studies. Among married working women,

Cebis estimate when controlling for the sorting between spouses is that when husbands are

covered by health insurance the probability of their wives being employed fulltime is reduced by

15 percent as opposed to 28 percent without such controls. Finally, when controlling for the

sorting phenomenon, working wives estimated working hours are reduced by 6.5 percent


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and the prospects of finding jobs with expensive health benefits are low. But TANF or SSI

eligibility are subject to strict income limits so those qualifying for them face the prospect of

losing their Medicaid coverage if they take jobs that pay meaningful income. Likewise,

individuals qualifying for Social Security Disability Insurance (DI) benefits also qualify for

Medicare if their disability persists for two years or more. Once an individual qualifies for these

benefits, substantial earnings lead to the suspension of the Medicare coverage.

The TANF program is aimed at low-income single mothers. Brigitte Madrian cites a

number of empirical studies that have found little or no effects on the labor supply decisions of

potential workers who qualify for these benefits.

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Partly this may be the result of the time-

limited nature of TANF benefits meaning that recipients know they ultimately must find

alternative income and take the opportunities when they arise. Another consideration is that the

dependent children under the program are likely to continue to receive publicly financed health

insurance even if their mothers find employment. In the case of the individuals qualifying for

Social Security disability benefits under both SSI and SSDI, the Social Security Advisory Board

has studied the operations of these programs and found that the prospects of losing health

insurance has resulted in a strong reluctance to take jobs once people get on these programs

because of the potential loss of the insurance.36 In the case of the cash benefits those qualified

are receiving, they drop gradually as earnings rise, but at a certain threshold the health insurance

benefits are lost and most people on the programs are not willing to take that risk. The recovery

rate for those who qualify for SSDI benefits is quite low historically. Among beneficiaries who

entered the program from July 1980 through June 1981, only 2.8 percent of them had their

benefits terminated because of work within 10 years of program entry.37 Among those

qualifying for SSDI in 1996, 6.5 percent eventually had their benefits suspended due to work


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over the subsequent 10 years but many returned to the rolls. The average time off the rolls

among this group was 42 months. Only 3.7 percent of this group of beneficiaries had their

benefits terminated due to work.38

There is no doubt that public health insurance plans covering low-income individuals are

expensive and stressing government budgets but most of the workers or potential workers

affected by them are not as significant in terms of diminishing the productive capacity of the

economy as the loss of comparable numbers of workers who can command higher earnings. One

of the more important groups of individuals that includes many potentially higher earners are

individuals who are nearing retirement age and qualify for retiree health benefits of one sort or

the other. Here the factors potentially affecting the labor supply decisions of older workers may

cut one direction at certain ages and then the other subsequently. For individuals who are not

offered retiree health insurance by their employers, the high cost of securing coverage in the

individual insurance markets may act as a substantial disincentive to retirement until Medicare

eligibility is attained at age 65. Some relief from having to go to the individual insurance market

for terminating workers is provided under COBRA benefits mandated under the Consolidated

Omnibus Budget Reconciliation Act of 1986 which required that employers offer terminating

workers the option to buy extended coverage under their plans for up to 18 months at the cost of

the insurance to the employer plus a 2 percent surcharge. This means that anyone reaching age

63 has been able to acquire health insurance at group rates as a bridge to Medicare eligibility

in recent years.

There have been a variety of empirical studies assessing the implications of employer-

sponsored health benefits on retirement behavior of workers. Alan Gustman and Thomas

Steinmeier estimated that workers covered by these benefits compared to those not covered


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tended to delay retirement until they reached eligibility age and then accelerated their retirement

patterns once they became eligible for the benefits but that the effects were quite moderate.

They concluded the offer of such benefits only reduced male workers retirement age by an

average of 1.3 months.39 Lynn Karoly and Jeannette Rogowski focused on workers ages 55 to

62 over a two-year period, in the mid-1980s, and found that those covered by employer-

sponsored retiree health benefits had a predicted probability of retiring of 24 percent during the

study period compared to 12 percent by those who did not have such coverage.40 In a subsequent

paper using a different data set, the Health and Retirement Study (HRS), and focusing on the

early 1990s period, these latter authors estimated that employer-sponsored retiree health benefits

increased the probability of early retirement by 4.3 percentage points relative to that of persons

with health insurance while working but no employer-sponsored coverage once they left their

jobs.41 David Blau and Donna Gilleskie, using the HRS, estimated that among men who were

working at age 51 and covered by health insurance, 74.5 percent of them were still employed at

ages 55 to 59 if they were not covered by employer-sponsored retiree health benefits compared

to 65.8 percent if they had such coverage.42 Jonathan Gruber and Brigitte Madrian have

analyzed the effects of continuation of coverage mandates of the sort that are now part of

COBRA based on state level mandates during the 1980s. They concluded that the 18-month

continuation of coverage requirements under COBRA reduced the labor force participation rates

of men between the ages of 55 and 64 by 3.3 percentage points.43

When we look at what has been happening with labor force participation rates in the

United States over the last decade for people near retirement age, there is clearly a confluence of

factors at play. Over the last decade, labor force participation of workers, ages 55 to 64,

increased from 59.2 percent to 64.9 percent and among those 65 and older rates rose from 12.8


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percent to 17.4 percent. There are numerous factors that expla

executive summary and full report

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