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Wage and Benefit Changes in Response to Rising Health Insurance Costs

Author

Listed:
  • 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.

Suggested Citation

  • Dana Goldman & Neeraj Sood & Arleen Leibowitz, 2005. "Wage and Benefit Changes in Response to Rising Health Insurance Costs," NBER Working Papers 11063, National Bureau of Economic Research, Inc.
  • Handle: RePEc:nbr:nberwo:11063
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    References listed on IDEAS

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    1. Woodbury, Stephen A, 1983. "Substitution between Wage and Nonwage Benefits," American Economic Review, American Economic Association, vol. 73(1), pages 166-182, March.
    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. David M. Cutler, 2003. "Employee Costs and the Decline in Health Insurance Coverage," NBER Chapters,in: Frontiers in Health Policy Research, Volume 6, pages 27-54 National Bureau of Economic Research, Inc.
    4. 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.
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    7. Gruber, Jonathan, 1994. "The Incidence of Mandated Maternity Benefits," American Economic Review, American Economic Association, vol. 84(3), pages 622-641, June.
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    10. 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.
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    12. Vroman, Wayne, 1974. "Employer Payroll Tax Incidence: Empirical Tests with Cross-Country Data," Public Finance = Finances publiques, , vol. 29(2), pages 184-200.
    13. Michael J. Boskin, 1998. "Consumer Prices, the Consumer Price Index, and the Cost of Living," Journal of Economic Perspectives, American Economic Association, vol. 12(1), pages 3-26, Winter.
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    Citations

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    Cited by:

    1. Adams, Scott, 2007. "Health insurance market reform and employee compensation: The case of pure community rating in New York," Journal of Public Economics, Elsevier, vol. 91(5-6), pages 1119-1133, June.
    2. Jessica Vistnes & Thomas Selden, 2011. "Premium growth and its effect on employer-sponsored insurance," International Journal of Health Economics and Management, Springer, vol. 11(1), pages 55-81, March.
    3. DeVaro, Jed & Maxwell, Nan L., 2014. "The elusive wage-benefit trade-off: The case of employer-provided health insurance," International Journal of Industrial Organization, Elsevier, vol. 37(C), pages 23-37.
    4. St├ęphanie Lluis, 2009. "The Structure of Wages by Firm Size: A Comparison of Canada and the USA," LABOUR, CEIS, vol. 23(2), pages 283-317, June.

    More about this item

    JEL classification:

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

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