The $750 Billion Hole in Your Pocket

If you want the clearest example of the downfall in workers' pay, you'd have a hard time coming up with a better one than this:

Source: St. Louis Fed.

Former White House budget director Peter Orszag recently explained in Bloomberg: "If labor compensation hadn't fallen so much as a share of national income, American workers would be enjoying about $750 billion more in take-home pay."

Where did that $750 billion go? Some of it transferred to corporate profits as the balance between labor and capital shifted. But that doesn't explain everything. Wages as a percent of GDP have declined by 9 percentage points since 1970, while corporate profits have increased about 6 percentage points of GDP.

A big part of the decline is linked to the rise in health-care costs. And we're not getting much out of it. "Estimates suggest we are currently spending about that much [$750 billion] each year on health-care costs that don't improve health outcomes -- and this unnecessarily depresses take-home pay," Orszag writes. 

He was referring to a recent study by the Institute of Medicine, which tallied up $750 billion in annual health-care costs it deemed "excessive." The report wrote: "There is evidence that a substantial proportion of health-care expenditures is wasted, leading to little improvement in health or in the quality of care." It breaks excess down into six categories:

Source: IOM.

Now, a lot of these assumptions can be picked at. It's easy for an analyst crunching numbers to tally up what he or she thinks is "unnecessary" care. But tell that to people worried about their health. Motley Fool analyst Seth Jayson wrote last year: "If you or a loved one finds a lump in a breast, you don't want to be told it's probably OK. You want it out, or taken care of -- even if there's no concrete proof that this will bring better health." James Surowiecki of The New Yorker put it another way: "Markets work only when consumers have the power to say no if the price isn't right. Yet it's very hard for people to say no in the case of things like end-of-life care or brain surgery."

Regardless of what's waste and what's necessary, we know the price of medical care has surged. We also know that surge has taken a nasty bite out of wages. The decline in wages as a percent of total compensation over the past 12 years has been matched almost perfectly by the rise in employer-provided health-insurance premiums:

Source: Bureau of Labor Statistics.

But here's what I find interesting.

Growth in health-care costs is now near the lowest levels of the past 50 years. It's happening across the spectrum -- in per-enrollee Medicare growth, and with private insurance premiums. Over the past 30 years, Medicare costs per enrollee have grown an average of 2 percentage points above growth in per capita income. In the past year, costs per enrollee have been roughly flat, while income per capita has risen about 3% -- one of Medicare's best cost containments ever. According to the Kaiser Family Foundation, private insurance premiums grew 4.4% last year, which is half the 12-year average. "Premium growth is at historic lows, which greatly benefits workers," said Maulik Joshi of the American Hospital Association.

Some of the biggest cost-growth improvements have come from states that weren't hit hard by the recession, so it's unlikely the slower growth is entirely due to a weak economy. Much of it, fingers crossed, is a long-last reduction in waste and unnecessary treatment as cost becomes more of a limiting factor. If that trend continues, the weight that has held wages down over the past several decades -- a $750 billion weight -- may begin to lift.