Employee Benefits Are Wages Too

A recurring theme heard frequently these days is that employee wage growth is stagnant. By some measures employee wages are up only 9% since 1973.

However, if you look at employee compensation through a wider lens, and factor in the cost of employee benefits, the total cost of hiring an employee has grown much faster. For example, just the annual cost of insuring a single employee through an employer health group policy has risen almost 200% since 1999 (from $2,196 per employee to $6,345 per employee).

Employee benefits are wages too!

From the employer's perspective the total cost of an employee includes wages, payroll expenses/taxes, and employee welfare benefit programs. And this total cost has grown considerably, largely driven by health benefit inflation.

Unfortunately this trend is difficult to reverse because there are several powerful interests that benefit significantly from continued employee benefit cost inflation including most employers.

Since 1943, when the IRS first ruled that employer-provided insurance wasn't subject to income taxes, the value of the employee benefit tax exemption has grown to over $300 billion a year (one of the biggest loopholes in the tax code). This means that health benefits provided by the employer, unlike cash wages, are not subject to income or payroll taxes.

This exemption ends up hurting employees and is also the root cause for the dysfunction in the health care industry because it creates a third-party payment problem and fosters a disconnect between the consumers of health care and the payers of health care. Over many decades the third-party payer system in health care has been a primary driver of out-of-control health care cost inflation.

The tax exemption gives employers an incentive to offer bigger and better health benefits to employees instead of higher cash compensation. And of course insurance carriers and health care providers are completely on board with this decision.

The tax exemption also adds friction when an employee is considering changing jobs because their current job is tied to their health insurance and most likely their preferred doctors.

And because the employer contributes to employee's premiums, while employees also contribute to premiums, the employee doesn't see the full cost of the health care they are consuming. The employee is implicitly picking up the whole tab through lower cash compensation, but they only see the dollar value of what they contribute.

Going forward the only way for employees to begin to see their cash wages grow significantly again is for employers to get the cost of employee benefits, especially the cost of the health plan, under control. Fortunately, the rising costs of most health plans have now reached a point where employers are starting to take notice.

However, most proposed solutions are still being created in the political domain and as Eisenstein was fond of saying: "we can't solve our problems with the same thinking we used when we created them."

Maybe it's time to try a free enterprise approach again? After all, we haven't had a free market in health care since 1943.

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