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Wage and Benefit Changes in Response to Rising Health Insurance Costs

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  • Dana Goldman
  • Neeraj Sood
  • Arleen Leibowitz

Abstract

Many companies have defined-contribution benefit plans requiring employees to pay the full cost (before taxes) of more generous health insurance choices. Research has shown that employee decisions are quite responsive to these arrangements. What is less clear is how the total compensation package changes when health insurance premiums rise. This paper examines employee compensation decisions during a three-year period when health insurance premiums were rising rapidly. The data come from a single large firm with a flexible benefits plan wherein employees explicitly choose how to allocate compensation between cash wages and other benefits. Under such an arrangement, higher health insurance premiums must induce changes in the composition of total compensation -- either in lower after-tax wages or in decreased contributions to other benefits. The results suggest that about two-thirds of the premium increase is financed out of cash wages and the remaining one-thirds is financed by a reduction in benefits.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11063.

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Date of creation: Jan 2005
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Publication status: published as Dana P. Goldman & Neeraj Sood & Arleen Leibowitz, 2005. "Wage and Benefit Changes in Response to Rising Health Insurance," NBER Chapters, in: Frontiers in Health Policy Research, Volume 8 National Bureau of Economic Research, Inc.
Handle: RePEc:nbr:nberwo:11063

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  1. Jonathan Gruber & Alan B. Krueger, 1991. "The Incidence of Mandated Employer-Provided Insurance: Lessons from Workers' Compensation Insurance," NBER Chapters, in: Tax Policy and the Economy, Volume 5, pages 111-144 National Bureau of Economic Research, Inc.
  2. Robert S. Smith & Ronald G. Ehrenberg, 1983. "Estimating Wage-Fringe Trade-Offs: Some Data Problems," NBER Chapters, in: The Measurement of Labor Cost, pages 347-370 National Bureau of Economic Research, Inc.
  3. Brittain, John A, 1971. "The Incidence of Social Security Payroll Taxes," American Economic Review, American Economic Association, American Economic Association, vol. 61(1), pages 110-25, March.
  4. Gerald S. Goldstein & Mark V. Pauly, 1976. "Group Health Insurance as a Local Public Good," NBER Chapters, in: The Role of Health Insurance in the Health Services Sector, pages 73-114 National Bureau of Economic Research, Inc.
  5. Woodbury, Stephen A, 1983. "Substitution between Wage and Nonwage Benefits," American Economic Review, American Economic Association, American Economic Association, vol. 73(1), pages 166-82, March.
  6. David M. Cutler & Sarah J. Reber, 1998. "Paying For Health Insurance: The Trade-Off Between Competition And Adverse Selection," The Quarterly Journal of Economics, MIT Press, MIT Press, vol. 113(2), pages 433-466, May.
  7. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, Elsevier, vol. 4(2), pages 115-145, May.
  8. David M. Cutler, 2002. "Employee Costs and the Decline in Health Insurance Coverage," NBER Working Papers 9036, National Bureau of Economic Research, Inc.
  9. Vroman, Wayne, 1974. "Employer Payroll Tax Incidence: Empirical Tests with Cross-Country Data," Public Finance = Finances publiques, , , vol. 29(2), pages 184-200.
  10. Richard B. Freeman, 1981. "The effect of unionism on fringe benefits," Industrial and Labor Relations Review, ILR Review, Cornell University, ILR School, vol. 34(4), pages 489-509, July.
  11. Michael J. Boskin, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, American Economic Association, vol. 12(1), pages 3-26, Winter.
  12. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, American Economic Association, vol. 84(3), pages 622-41, June.
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Cited by:
  1. Jessica Vistnes & Thomas Selden, 2011. "Premium growth and its effect on employer-sponsored insurance," International Journal of Health Care Finance and Economics, Springer, Springer, vol. 11(1), pages 55-81, March.
  2. Adams, Scott, 2007. "Health insurance market reform and employee compensation: The case of pure community rating in New York," Journal of Public Economics, Elsevier, Elsevier, vol. 91(5-6), pages 1119-1133, June.

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