AS LABOR DAY approaches, you can count on seeing a spate of news stories saying that "real wages" in the United States haven't grown since the 1970s. That's true, more or less, but the reason for the stagnation might surprise you. It's a complex story, but it boils down to this: Blame health care costs.
According to the Federal Reserve Bank of St. Louis, inflation-adjusted wages have grown by just 2.7 percent in the last 40 years. But inflation-adjusted total compensation--wages plus fringe benefits, such as health insurance, disability insurance, and paid vacation, along with employer-paid Social Security and Medicare taxes--increased by more than 60 percent in the same period.
Wages still make up a significant share of your total compensation: 68.3 percent, according to 2017 data from the Bureau of Labor Statistics, vs. 31.7 percent that goes to benefits. But that latter piece has grown significantly, in no small part due to the rising cost of health insurance. And that trend is only going to get worse.
This has political consequences, since most workers don't appreciate how hefty the non-wage share of their compensation is, nor do they generally realize just how much of the money their employer is shelling out on their behalf gets eaten up by health care. As a result, they demand that politicians intervene to deliver more raw pay.
To control health care costs, Americans will have to stop relying on third-party payers to cover small, routine expenditures (as opposed to large and unforeseen ones). According to the U.S. Department of Health and Human Services, out-of-pocket spending--copays and the like--was only 11 percent of all health care spending in 2015, down from 43 percent in 1965.
It's an economic truism that if someone else is covering the bulk of the cost of something, you're likely to use more of it--especially if you don't realize that you're paying for it with foregone wages and higher taxes. This increases the overall demand for health services, which in turn increases the cost. It also creates an incentive for whoever is paying, be it the government or your insurance company, to start putting constraints on which services you can and cannot consume. The end result is that patients have become minor players in many of...