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One of the most dramatic policy developments of the past several years has been the major slowdown in health care spending growth. This has been great news for the long-term federal budget outlook because of the importance of Medicare. And it's great news for Obamacare, because it indicates that the law's key goals of making the health care system more humane and more efficient are possible. But what about those of us who get our health insurance through employer subsidies (and the federal tax subsidies to employers that encourage them to provide the subsidies)? How does the slowdown affect us?
Well economic theory had a pretty happy answer. It said that if insurance premium costs became less burdensome, that would free up money for higher cash wages. And, indeed, the Kaiser Family Foundation is out today with new reporting on employer benefit costs that reveals the slowdown is visible in this slice of the market. Premium costs rose by just 3 percent, a number much lower than they routinely rose by in the recent past.
So how about those wage rises? Well — let's just say there's no evidence that they're happening. This graph plots nominal growth rates for wages (red) and for non-wage compensation (blue):
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(St Louis Federal Reserve)
You can see that rather than the blue slowdown leading to a red speedup, both are simply slowing down. It's entirely possible that wage growth would have been even more miserable had the health cost slowdown not happened. But this is still a disappointing result relative to wonks' lofty hopes five or 10 years ago for a huge worker dividend if America got its health care costs under control.
And to be clear, it's no mystery why this is happening. The labor market has been very weak for over five years now, so in the absence of other strong institutions, like powerful labor unions, employers have had all the leverage, and there's been no pressure to pass savings on to workers. Corporate profits are at an all-time high instead.
But this is a reminder that while academic economists are often obsessed with seeking microfoundations for macroeconomics, oftentimes, microeconomics rests on shaky macro-foundations.
In this case, a lot of ideas about how the labor market works are based implicitly on the assumption that there will be full employment almost all the time, or else that periods of labor market weakness will be offset by countervailing periods of inflation. The real world, however, doesn't work like that. Over the past 30 years, central banks have been extremely good at nipping inflation in the bud but willing to endure years of elevated unemployment, rather than to try unorthodox approaches to goosing the economy.
Consequently, the benefits of building a more cost-effective health care system don't flow down to middle class workers the way they're supposed to. And that raises questions about the political sustainability of the policies and trends that are driving the slowdown. A lot of the cost gains, for example, seem to be coming from limiting patients' choice of doctors. The good news is that this isn't hurting the quality of care patients are receiving. But it's still an annoyance. An annoyance people would probably be a lot more willing to put up with in exchange for cold hard cash, than in exchange for higher profit margins for shareholders.
