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How employer-sponsored health insurance can widen economic inequality

David Brancaccio, Chris Farrell, and Erika Soderstrom Apr 24, 2023
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A recent study looks at the role of employer-sponsored health insurance in exacerbating inequality in the job market. Getty Images

How employer-sponsored health insurance can widen economic inequality

David Brancaccio, Chris Farrell, and Erika Soderstrom Apr 24, 2023
Heard on:
A recent study looks at the role of employer-sponsored health insurance in exacerbating inequality in the job market. Getty Images
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What is behind the widening gap in the job market between those with college diplomas and those without them?

Scholars have offered several different explanations, including technological change, globalization, and the decline in private sector unions. A recent study looked at the role of health insurance that often comes with a job.

For more on this Marketplace’s David Brancaccio spoke with our senior economics contributor Chris Farrell. The following is an edited transcript of their conversation.

David Brancaccio: I mean the data are clear college grads, you know, get better jobs, tend to be paid more than those who have a high school diploma or less. Harder to prove cause and effect. But let’s first get this baseline, college degree does help you in the job market?

Chris Farrell: Oh, absolutely. I mean, the wages of college graduates, I mean, they’re nearly twice as high as non-college educated workers. And, you know, as you know, David, college educated workers they enjoy higher employment rates and they’re more likely to get jobs that come with benefits, such as health insurance.

Brancaccio: We do live at a time of enormously quick technological change. And it may be that to deal with that you need the skills that you tend to acquire in college. But you mentioned employer sponsored health insurance. How does that play out here?

Farrell: OK, let me give you three key pieces of information. First, about half the population and all those with private health insurance get it through their employer or a family member’s employer and that is unique to the U.S. Now second, any contributions employers make to their employees health insurance premiums, that’s excluded from employees taxable income, and by the way, the tax exclusion is the single largest federal tax expenditure, it’s about $300 billion annually.

Brancaccio: Alright, there’s a third factor?

Farrell: OK so here’s the real key, the cost of providing health insurance, it’s a fixed cost per employee regardless of wages or earnings. The wage penalty is the same for, say, a clerical worker, as it is for a highly compensated executive. So this drives up the prices of hiring lower wage workers relative to higher wage workers.

Brancaccio: So the college educated people are paid more. So the cost of giving them health insurance is proportionately less. Maybe we should think of like the remedy to understand this better?

Farrell: Yeah. So that’s one of the aspects of this study, “The Health Wedge and Labor Market Inequality” paper by several economists. What if health insurance came through a proportional national payroll tax on firms? They calculate that the college wage premium would have been about 11% lower in 2019 and non-college employment some 500,000 jobs higher.

Brancaccio: It’s dramatic the magnitude being suggested here, like the effects of globalization and the decline of unionization?

Farrell: Yes. So one takeaway from this study, David, is that with the rising cost of health insurance, boy, it’s going to be increasing pressure pushing toward even greater income inequality. And the second conclusion that I take away is look, this is yet one more piece of compelling evidence, the U.S. health insurance system is just deeply flawed.

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