Where's Your Raise? Profits are up and inflation is under control, but America's workers aren't getting richer. File your complaints with the benefits department.
By Daniel Altman

(Business 2.0) – At first glance, it seems that life is getting better for America's workers. The unemployment rate has dropped by half a percentage point in the past year, and 1.4 million more people have been hired than fired. GDP growth has been robust, averaging more than 4 percent. But from the perspective of the average worker, the macroeconomic stats don't tell the whole story. Employees aren't seeing improvement where it matters most: in their wallets. Workers feel richer when wages climb faster than the prices of the things they buy. During the last boom, this difference--called real wage growth--averaged about 0.7 percent per year. But during the past five years, real wage growth has stalled, remaining basically unchanged since the recession ended in November 2001.

It's not that bosses are being stingy. From the perspective of employers, the overall cost of compensation--the figure that matters most to them--has been ballooning. Workers may not be seeing more take-home pay, but the cost of their benefits has been rising. Skyrocketing health insurance premiums and unanticipated pension shortfalls have driven up private-sector benefit costs by 17 percent since the economy stopped shrinking.

To see how dramatically things have changed, look at compensation data from the past 10 years. Split the decade in half, and at the beginning of each five-year period, index the growth of wages, benefits, and inflation to see how they compare over time. In the first five years, from 1994 to 1999, wage growth consistently outpaced both benefit costs and inflationary price increases. But in the more recent period, from 1999 to 2004, take-home pay stagnated as the cost of benefits rose much faster than either wages or inflation.

The problem isn't hard to diagnose: Benefit costs are driving a wedge between the revenues that businesses collect from their products and the size of the paychecks that workers receive.

Some employers might argue that workers are simply getting what they want: Rolls-Royce care, which comes at Rolls-Royce prices. And to some extent, that's true--as sophisticated new treatments become available, a health-care plan may indeed be worth more. But consider this: The bulk of health insurance claims involve costs incurred near the end of life, and most employee pools contain workers of all ages. As a result, better care helps the oldest workers most, and everyone else basically subsidizes them.

Meanwhile, many companies have been required to shovel money into their pension plans after market dips wiped out the returns that were assumed in long-term budget forecasts. There's no improvement here; that additional cash simply covers the cost of the pensions that were promised to workers when they enrolled in plans many years ago.

The good news is that the pension snafu should be temporary; funds have been recapitalized, and fund managers have adjusted their expectations to match new market realities. The same can't be said for health-care costs, which are still growing at a double-digit pace. Gold-plated care to wring a few additional hours out of life--an economic luxury--bears a large share of the blame. Older people should carry more of the cost of such intensive (and often futile) measures, rather than passing it on to their fellow workers through group insurance pools. It's time to explore options like age-rated premiums, mandated limits on claims, binding living wills, and new codes of medical practice. Tough medicine? You bet. But that's what it'll take to revive wage growth.