Seeds of Hope for Higher Wages

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"Real Median Wages Haven't Grown for Over a Decade."

I see headlines like this a lot. You probably do, too. The latest came from the Bureau of Labor Statistics last week. Median household wages adjusted for inflation were lower last year than they were in 2000. "No wonder so few Americans seem to think their economy is in recovery: They keep getting poorer," Mark Gongloff of the Huffington Post wrote.

But if you're an employer, you know there's another side to the story. Total real compensation costs grew nearly as much in the last decade as they did in the previous one -- up nearly 10% since 2000. During a time when real wages declined, real compensation grew. 

What explains the difference? Health insurance premiums, and basically nothing else:

Source: Bureau of Labor Statistics.

Since peaking in 2000, wages as a percentage of compensation have declined by 3 percentage points, and employer-paid health insurance premiums increased 2.5 percentage points. The average employees actually received a raise over the last decade. It just came in the form of higher insurance premiums.

But here's what I find interesting: Health care spending growth is at a 50-year low. The share of the economy devoted to health care has been flat for the last three years. Some of that is because of a weak economy, but the trend actually began before the recession started. As Harvard health economist David Cutler said last year, "The recession just doesn't account for the numbers we're seeing. I think there's much more going on."

A new report by PricewaterhouseCoopers has a similar take. "Defying historical patterns -- and placing added tension on the health industry -- medical inflation in 2014 will dip even lower than in 2013," it wrote. "Aggressive and creative steps by employers, new venues and models for delivering care, and elements of the Affordable Care Act (ACA) are expected to exert continued downward pressure on the health sector." 

Consumer behavior is noticeably shifting as costs becoming more of a limiting factor, which could explain a lot of the fall. Doctor visits declined 4.7% last year, according to the IMS Institute for Healthcare Informatics. "We're reaching a tipping point where patients will actually take that increased cost and use less medicine," the group's director of research told The New York Times.

This is exactly what you'd expect to happen after decades of ballooning prices. 

What if this trend of falling health-care cost growth continues? One outcome may be that the weight that has held wages down over the last decade begins to lift. Not dramatically, and not overnight. But if slower growth in health costs leads to slower growth in insurance premiums, employers could have more flexibility to increase wages without increasing compensation. After a decade of stagnation, there's hope yet for the struggling U.S. consumer.

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