Romer: It’s ‘A Genuine Worry’ That Insurance Premiums Will Push Wages Into A Decline

Today, Council of Economic Advisers (CEA) Chair Christina Romer appeared at the Center for American Progress to discuss how health care reform is essential if we want to get the nation’s budget deficits under control. During her speech, Romer explained how rising premiums have contributed to the current three-decade long stagnation in wages for American workers, and said that if premiums are not controlled, wages will actually be pushed into a decline. This not only lowers the standard of living for workers, but also contributes to a loss in revenue (and thus less ability to address deficits), as taxable income disappears.

During an interview with The Wonk Room, Romer said she believes that if premiums come down, workers will actually see an increase in wages, as employers redirect savings:

We do know that what’s been happening to median income, to wages for workers in this country, is we have seen them stagnate…We do know that a bigger and bigger fraction of people’s compensation is taking the form of that health insurance benefit, as health insurance has been getting more and more expensive…Our projections, actually very reasonable projections for what might happen to the growth rate of health insurance costs, does say that take home wages — or that part of compensation net of insurance costs — would start to go down in the not so distant future. So that is a genuine worry. […]

I do think that competition is a really important part of making sure that workers get their fair share and I think the fact that firms have to compete for workers is the main thing that helps to make sure that, if firms are spending less for health insurance, it does show up in people’s take home wages.

Watch it:

Here’s a chart from the CEA showing how wages will be affected if health care reform doesn’t occur. The top line is total compensation (in 2008 dollars) inclusive of insurance premiums, while the bottom line takes the premiums out. As you can see, even as compensation goes up and up, take home wages actually begin to decline in the next few decades.

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But it’s not as if companies are just going to cough up savings in the form of higher wages instantly. In the short-term, it’s more likely that companies will just pocket the difference, particularly given the weakness of today’s labor market, which removes bargaining power from the worker. I’m not as optimistic as Romer that competition will be enough to boost wages in the short-term (though that would likely occur over the much longer-term).

Of course, simply getting back to a 1990’s style strong labor market, in which workers have more leverage, would help in this regard, but so would better collective bargaining abilities for workers — possibly in the form of a higher rate of unionization — which is what helped workers earn their fair share of productivity gains pre-1980.