To understand the importance of the health wedge in today’s world, Finkelstein, McQuillan, Zidar, and Zwick built a model of two parallel, hypothetical worlds. In one, they tested what would have happened since 1977 if health benefits had been financed through a progressive payroll tax, where higher earners paid more. In the other, they tested what would have happened if US healthcare costs had risen more slowly, as in other countries.

In the first scenario, where the cost of health benefits was linked to earnings, “labor market outcomes would have evolved quite differently,” the researchers write. People without a college degree would have 500,000 more jobs available to them now, and the employment gap between those with and without degrees would be 20 percent smaller. The wage premium for a degree would be about 11 percent smaller. To achieve the same outcome today by raising the minimum wage, policy makers would have to jack it up by 30 percent, the researchers calculate.

In the second scenario, the researchers analyzed the effects on the labor market had healthcare costs held steady at the 1977 rate of almost 8 percent of GDP, rather than soaring to 17 percent of GDP by 2019. They find that the wage premium for a college degree would be about 11 percent lower, and pay for those without a college degree would be about 12 percent higher, or $6,000 more a year. If American medical outlays had risen even a bit more slowly, for example, matching Canada’s current 11 percent of GDP, the premium for a degree would be 5 percent lower, and earnings for those without a degree, 5 percent higher, they find.

The researchers take pains to highlight the magnitude of this effect and how it interacts with other prominent stories of the labor market’s evolution. The growth of international trade and other labor-market changes might be partly driven by health costs, they suggest. A company might outsource jobs because medical benefits for domestic workers are too expensive.

In his 2023 State of the Union address, President Joe Biden suggested that we “offer every American a path to a good career, whether they go to college or not.” One avenue for doing so might be to reexamine the current system of employer-based medical benefits.

“The uniquely American approach to financing health insurance could have a quantitatively important impact on labor market inequality,” the researchers write. “Our analysis suggests that if the cost of health care in the United States continues its rapid rise over the coming years, labor market inequality will also continue to grow in the absence of substantial reforms to how we finance health insurance.”


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