Dividing by 2

An admission of guilt – or wide-eyed, stupid innocence: I’ve never taken an economics course; so I know nothing of how economists do what they do. I have always assumed, however, that it involved numbers; and that suggested to me that they would be able to add, subtract, multiply, and divide across more than one scenario.

However. And correct me if I’m wrong.

I came across this article this morning: “How Health Care Creates Wage Inequality” by Robert Samuelson. “You can add health care to the causes of growing wage inequality in America,” Samuelson begins. And, “it’s simple arithmetic” according to Mark Warshawsky of the Mercatus Center at George Mason University. But here’s the way the “arithmetic” works – Samuelson’s “simple example.”

Assume an imaginary company with two employees: one makes $50,000 a year, the other $100,000. Suppose that the firm has purchased a family health plan, costing $12,000, for each. So the company’s total compensation costs — wages, salaries and fringe benefits, including health insurance — are $112,000 for the higher-paid worker and $62,000 for the lower-paid employee.

part of the twos table

Now look what happens when the company decides to raise its annual compensation costs by 5 percent, but health-care spending is increasing 10 percent. The insurance cost goes up $1,200 (that’s 10 percent of $12,000). This reduces what’s left for wages. The lower-paid worker receives an overall compensation gain of $3,100 (5 percent of $62,000), but after deducting the $1,200, only $1,900 is left for wages. Meanwhile, the higher-paid worker receives a $5,600 gain, which — after deducting $1,200 for insurance — leaves $4,400 for wages.

Presto, wage inequality has increased. Even though the company raised its compensation package by 5 percent for all workers, the wage and salary gap between the best- and worst- paid workers widened. Pursuing one type of equality (health coverage) inadvertently worsened another type of inequality (wages and incomes).

But – again, correct me if I’m wrong – what if the company doesn’t want to “worsen” one type of inequality for the sake of another type of equality? It’s simple arithmetic. In this instance, it takes the total left for wages, $6,300 ($1,900 + $4,400) and divides by 2, giving each worker a wage increase of $3,150.

     How hard is that?