Rising health insurance costs are dragging down wage growth

Nearly two-thirds of Americans — something like 154 million people under the age of 65 — get their health insurance through their job. Insurance costs are up sharply this year, so that's yet another pressure point for people that feel an affordability crunch. But there's also recent research that points out higher insurance costs can put downward pressure on the kinds of pay raises that people get at work.

For more, “Marketplace Morning Report” host Sabri Ben-Achour spoke with Marketplace's senior economics contributor Chris Farrell.

Sabri Ben-Achour: American health care is already the most expensive in the world. What exactly is driving up health insurance costs even more right now?

Chris Farrell: So, there's several factors at work. And just to list some of the most important: higher wages for health care workers, consolidation among hospitals and clinics, new medicines and prescription drugs, the demographics of an aging population, and an increase in mental health claims.

Ben-Achour: We know that people buying their own health care insurance are paying more, but just how much have costs gone up for health insurance people get through their jobs?

Farrell: OK, so costs have climbed by close to 20% over the past five years. So, let's put that in dollar terms: The average annual premium for employer-sponsored family health insurance was about $27,000 last year, and that's roughly equivalent to the wage of a full-time worker paid $15 an hour. So, according to KFF — that's the health research nonprofit — health insurance costs rose by some 6% last year and are projected to increase by another 11% this year. So, both are well above the current rate of inflation.

Ben-Achour: If employers are paying more for health insurance, is that money that we employees are not getting in the form of paychecks?

Farrell: Researchers at the Federal Reserve Bank of New York asked firms in their regional business survey whether wage-setting decisions were influenced by higher health insurance bills, and respondents reported an average increase in such costs of more than 13% in 2026 — so that's in line with the national projections of 11%. Absent those cost increases, businesses say they would have raised wages by roughly an additional percentage point on average.

Ben-Achour: So, if businesses didn't have to spend so much on health care, they might have given us more money and wages. Can you put some numbers on that?

Farrell: Sure. So, the average wage increase by the firms in the survey was 3.8%. And so, they say the average wage hike would have been about 4.7% if health insurance costs had held steady. So that's the equivalent of a 20% drag on wage growth, say the Fed economists.

Ben-Achour: Wow, a 20% drag. So, employers are paying more, and our raises are smaller and slower than they would be because of the rising cost of health care.

Farrell: That's it. And there was a survey by KFF. It was published earlier in the year, and it notes that two-thirds of the public worry about paying for health care, including the cost of health insurance and out-of-pocket costs. But here's what really stood out to me: concerns about the cost of health care ranked higher as a financial worry than other household expenses, like utilities, food, rent, mortgage. So, the combination, just as you said — this slowing wage growth and higher health insurance bills — it’s contributing to this widespread sense that living costs are too high.