I’ve often cited America’s health care industry as a factor in the slow growth of real wages for unskilled workers.  In a recent Bloomberg interview, Anne Case (AC) and Angus Deaton (AD) make a similar point:

AC: One thing that hasn’t come up so far is the role that the health care industry plays in the low-skilled labor market. We tie people’s health insurance to their employment in a way almost no other rich country does. As health care costs have skyrocketed, employers look at a low-skilled worker and think, I really don’t want to pay my share on a $20,000-a-year policy for a working-class family, because this worker is just not worth that plus what I have to pay him or her in wages. We think the healthcare industry has a lot to answer for as well here in terms of destruction of good jobs for less-skilled people. . . .

AD: If you think of a $10,000 a year policy, which is for a single person, if that person works 2,000 hours a year, it’s an extra five bucks an hour on the wage. Think of all the fuss around the minimum wage. People don’t talk about this to the same extent, but it’s a horrible drain. It’s like tying dead weight to the less-skilled labor market.

So exactly what does the health care industry “have to answer for”?  It’s not price gouging in the ordinary sense of the term.  Rather their actual sin is lobbying for a set of subsidies and barriers to entry that make health care much more expensive than in a free market.  Today, health care spending in the US has risen to roughly 17% of GDP.

This might not be a problem if everyone bought health care in proportion to their income.  But that is not the case.  As an analogy, in a free market, lower income Americans might buy a 3-year old Chevy compact car, whereas more affluent Americans might buy a brand new Mercedes.  But that sort of rational behavior is heavily restricted in the health care industry, where regulation tends to prevent the provision of cheap and effective alternatives to our very expensive mainstream health care.  Thus health care costs are an especially large share of the budget for lower wage workers, which reduces their living standards.  Some of this is mitigated by various government subsidies, but not all.

As always in economics, don’t “follow the money”; you need to “follow the resource allocation”.  Ultimately, our living standards depend on what we produce.  The more labor and capital we allocate to health care (and to our almost equally wasteful education system), the less labor and capital is available to provide nice new cars, houses, restaurant meals, and vacations at Disney World.  No amount of subsidies can paper over that problem.  Nor does it help if the employer supposedly “pays for” your health care. If America devotes lots of resources to health care, then our consumption of other goods will suffer. There is no free lunch.

If America insists on an egalitarian health care system where everyone gets the same health care, then it should be a much cheaper system.  I don’t want that sort of one-size-fits-all system.  But if our current system doesn’t improve (i.e. get much cheaper), then the political pressure to move in that direction will be unrelenting.