Could wage decoupling be because of health insurance?

From Scott Alexander:

There are a few lines of argument that suggest it’s not true.

First, wage growth has been worst for the lowest-paid workers. But the lowest-paid workers don’t usually get insurance at all.

Second, the numbers don’t really add up. Median household income in 1973 was about $48,000 in today’s dollars. Since then, productivity has increased by between 70% and 140% (EVERYBODY DISAGREES ON THIS NUMBER), so if median income had kept pace with productivity it should be between $82,000 and $115,000. Instead, it is $59,000. So there are between $23,000 and $67,000 of missing income to explain.

The average health insurance policy costs about $7000 per individual or $20000 per family, of which employers pay $6000 and $14000 respectively. But as mentioned above, many people do not have employer-paid insurance at all, so the average per person cost is less than that. Usually only one member of a household will pay for family insurance, even if both members work; sometimes only one member of a household will buy insurance at all. So the average cost of insurance to a company per employee is well below the $6000 to $14000 number. If we round it off to $6000 per person, that only explains a quarter of the lowest estimate of the productivity gap, and less than a tenth of the highest estimate. So it’s unlikely that this is the main cause.

I don’t agree with all of his framing (are there different deflators floating around in those estimates?  Scott does discuss that later in the post), but those points are worth considering nonetheless.  On Scott’s broader points (not discussed in my excerpt), I think he is underemphasizing the possibility that productivity may be measuring better than it really performed, and thus there is not so much decoupling at all.

For the pointer I thank Benjamin Cole.


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