Employer-sponsored healthcare aggravates US inequality

Many theories attempt to explain the widening college wage premium in the United States. The pay gap between those with and without a college degree has grown in recent decades; degree holders earned 47% more than non-degree holders in 1977, and 90% more by 2019. Amy Finkelstein, scientific director of the Abdul Latif Jameel Poverty Action Lab (J-PAL) North America, along with Casey McQuillan, Owen Zidar and Eric Zwick, posit that employer-sponsored healthcare may be a contributing factor.

The US healthcare model, by which private health benefits are provided through employers who then write off the costs, results in a federal tax revenue reduction amounting to $300 billion a year. The impact is felt disproportionately on workers without college degrees.

Researchers studied the historical effect of what they refer to as a 'health wedge.' They modeled two parallel hypothetical scenarios. The first scenario examined the impact of health benefits financed through a progressive payroll tax, while the second scenario tested the effect of healthcare costs rising more slowly as they have in other countries. In the US, healthcare costs have risen from 8% of GDP in 1877 to 17% of GDP in 2019.

In the first scenario, the researchers found that non-degree holders would have 500,000 more jobs available to them and that the college employment gap would be reduced by 20%, while the wage premium would be 11% lower. In the second scenario, the wage premium would be 11% lower while pay for non-degree holders would increase by about 12%.

The researchers note that this effect has implications for labor market dynamics. International trade and other labor market changes may be at least partially an effect of sharply rising health costs, particularly if outsourcing jobs reduces the cost-burden of providing medical benefits.

'The uniquely American approach to financing health insurance could have a quantitatively important impact on labor market inequality,' the researchers write. 'Our analysis suggests that if the cost of healthcare in the United States continues its rapid rise over the coming years, labor market inequality will also continue to grow in the absence of substantial reforms to how we finance health insurance.'

Chicago Booth