The money wage -health insurance tradeoff within the compensation package

In recent years as health costs rose rapidly, employers' very vocal complaints about the financial burden of providing health insurance to workers raised questions about the compensating differential for health benefits. This study examines the tradeoff between health insurance and money wages using data from the 1987 National Medical Expenditure Survey and its Health Insurance Plans Supplement. A model of wage determination was estimated to test hedonic wage, efficiency wage, and rank-order tournament theory. The health insurance share of wages (the form in which employers' health insurance expenditures appear in the model) was estimated to avoid simultaneous equation bias and a Heckman procedure was done to correct for the incidentally-truncated sample. After controlling for many of the factors known to affect productivity, workers are shown to gain an additional $1.02 in money wages, on average, for each dollar in health benefits received (p<0.01). However, the tradeoff varies by income. Workers in the lower 40% of the earnings distribution give up $0.81 to $3.67 for each dollar in benefits received, while in the top 60% of the distribution, workers receive a wage premium of $1.06 to $6.95 for each health benefit dollar received (p<0.01 for all these coefficients). The results are robust in a variety of specifications of the model. The change in the sign of the tradeoff argues against a single explanation for these findings. It suggests that, with changes in wage levels, there are also changes in the factors associated with the tradeoff between wages and health benefits; alternatively, the determinants of wages could vary over the earnings spectrum. The change in the sign on the tradeoff and the large wage premia received by high earners seem to require a theoretical explanation other than hedonic wage and human capital theory. Both efficiency wage and rank-order tournament theory are consistent with these findings.