One main idea from the show was how income is merely one component among many that make up a total compensation package for an employee. Often, analysts treat income as if it is a perfect proxy measure for the full compensation package. From here, economists make conclusions about important considerations such as wage equality or quality of life improvements.
The most interesting portion of the discussion involved health care costs. The 'employer provided' health insurance model obscures the disproportionate impact of rising costs on lower wage earners. Consider the following example.
Two workers in a hypothetical firm are each due a raise of 10%. One worker earns $45k annually with a $5k health insurance benefits package. The other earns $95k annually with the same $5k insurance package.
In this simple model, each worker's compensation is calculated the same way- income + health benefits. So in this case, the first worker earns $50k in compensation and the second earns $100k. Now, suppose each is due a 10% raise. The total compensation due rises to $55k and $110k, respectively.
Next, 'assume' health care costs rise (ha ha, hypothetically speaking, of course). The increase is $5k per employee. The first worker will earn a 'raise', so to speak, but it will be entirely absorbed in the health care benefit- $45k income, $10k in health care.
The second worker will see the same health care cost absorb a portion of the compensation increase but still recognize an income increase, as well, since the proportions work out differently for the higher wage worker- $100k income, $10k in health care.
A measurement system that calculate well-being by looking at income alone will note the following- the low wage earner saw no change to income while the high wage earner saw an increase of a little over 5%. They conclude that inequality has just increased by a significant margin.
I have a a couple of reactions to this conclusion. One is that such misleading conclusions are avoided with better transparency in the ways employees are compensated. The potentially positive story of an economy that is progressing to allow 10% merit raises is instead lost to sensational headlines about stagnant gains for the hard-working middle class while the rich continue to get richer.
And yet, despite the potential positive benefits, firms seem...er...unwilling to do this. So I'm not keeping my fingers crossed on that one. (1)
Another reaction will appeal to those in favor of a one-payer health insurance system (universal health insurance for all tax payers) or those in favor of an open market for private insurance. Through this method, firms will be free to hand out raises to employees by merit alone. The employee would then be free to blame tax rates or market forces when large portions of those raises are sucked away by rising health care costs.
How would such a thing work out in the above model? Well, for starters, we would remove health care costs from the initial compensation package. So, the first worker would earn $50k before the raise and the second would earn $100k. All of this would be recognized as income, not as income + health benefits.
Next, we apply the 10% raise. So, in the next wage cycle, the first worker would earn $55k and the second would earn $110k. In percentage terms, this maintains income 'inequality'.
Of course, simple models oversimplify the real world. In the universal health care example, we would have to consider the taxes that pay for the coverage. So, in the second example above, the income I simply copy over from the first would be reduced by the likely higher income tax rates that would accompany such a policy.
However, with a universal health care system, the impact of rising costs is shared in proportion to income. Given the way marginal tax rates are calculated in a graduated income tax system, higher wage earners bear a greater portion of the increase than lower wage earners. So, it is possible that, were I to
That conclusion is not necessarily a statement that universal health care reduces income inequality and protects lower wage earners. But it does seem a decent rule of thumb for policy to consider proportional payment methods to fund insurance programs which cover events that are larger beyond individual control (in this case, major medical bills).
In the example that utilizes an open market for private insurance, the result is more likely to mirror the original example. Each potential subscriber would pay the same as anyone else and changes in the nominal cost would be borne as a larger share of income for lower wage earners. However, income inequality would not increase in the example since, once more, the initial idea of a raise would apply in full to both employees' incomes.
The more important thing from my non-policy oriented point of view is how this example highlights dangers in settling for oversimplified measures. Knowing that it's a seventy-five degree day implies good weather for a beach trip.
But stop there and you might regret it. What about the wind chill? What if it's raining? Do we know the air quality or if its cloudy out? All of these factors count when it comes to planning a day out.
I think it works in a similar way when making conclusions about big policy considerations. So much more goes into the answer than merely comparing values on paychecks. But the way we do it now is more or less along those lines and its flawed due to how many important factors such a primitive calculation method ignores.
I would like to see that change just because I believe its hard to fix problems that are not fully understood. So, anything that brings better clarity to a situation or problem gets my full approval, whether it be policy or just a good podcast episode.
Thanks for reading. See you again on Friday.
Tim
Footnotes / imagine complaints
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1. An idea that came up on the show...
There is the question of how people will react to a firm that announces it is giving raises through the mechanism of better health insurance, a product that usually goes unused (since unused health insurance benefits do not 'carry over' as savings or as future benefits).
