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Wage and Benefit Changes in Response to Rising Health Insurance Costs

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Author Info
Dana Goldman
Neeraj Sood
Arleen Leibowitz

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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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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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Handle: RePEc:nbr:nberwo:11063

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J33 - Labor and Demographic Economics - - Wages, Compensation, and Labor Costs - - - Compensation Packages; Payment Methods

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  3. Woodbury, Stephen A, 1983. "Substitution between Wage and Nonwage Benefits," American Economic Review, American Economic Association, vol. 73(1), pages 166-82, March. [Downloadable!] (restricted)
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  5. Robert S. Smith & Ronald G. Ehrenberg, 1981. "Estimating Wage-Fringe Trade-Offs: Some Data Problems," NBER Working Papers 0827, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  6. Diewert, W. E., 1976. "Exact and superlative index numbers," Journal of Econometrics, Elsevier, vol. 4(2), pages 115-145, May. [Downloadable!] (restricted)
  7. Vroman, Wayne, 1974. "Employer Payroll Tax Incidence: Empirical Tests with Cross-Country Data," Public Finance = Finances publiques, , vol. 29(2), pages 184-200.
  8. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-41, June. [Downloadable!] (restricted)
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  12. Richard B. Freeman, 1981. "The effect of unionism on fringe benefits," Industrial and Labor Relations Review, ILR Review, ILR School, Cornell University, vol. 34(4), pages 489-509, July.
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