Latest / Wages and Prices with Fexingo: Cost of Living, Pay Raises, and Workers' Purchasing Power / How Your Raise Is Finally Outpacing Healthcare Costs
Transcript
- Lucas: So here's a number that stopped me this morning: average hourly earnings in the private sector hit $37.50 in May. That's up from $37.41 the month before — not a huge jump, but annualized it's about 4.2 percent growth. Luna: Right, and we've been talking a lot about how that stacks up against inflation. CPI came in at 4.2 percent annual too, so it's basically a tie. Lucas: Exactly. But here's the angle that I don't think we've hit yet: healthcare costs. For years, healthcare inflation has been the thing that quietly eats your raise before you even see it. Employer-sponsored health insurance premiums have been growing at roughly 5 to 7 percent annually for more than a decade. Luna: So even if your paycheck goes up, you're actually losing ground because your benefits cost more. But that's changing? Lucas: It might be. The latest data from the Bureau of Labor Statistics shows that employer costs for health benefits rose just 2.8 percent year-over-year in the first quarter of 2026. That's the smallest increase in over a decade. Luna: Wow. So wages are growing at 4.2 percent, healthcare costs at 2.8 percent — the gap is actually positive for workers. Lucas: That's the headline. Now, why is this happening? There's no single cause, but I think there are three big factors. First, the shift to high-deductible health plans. More employers are moving to these plans, which have lower premiums but higher out-of-pocket costs. The premium growth slows, but the risk shifts to workers. Luna: So it's a bit of a mixed bag. Your premium doesn't go up as fast, but you're on the hook for more when you actually need care. Lucas: Exactly. Second factor: the rise of GLP-1 drugs like Ozempic and Wegovy. They're expensive individually, but they're starting to lower overall healthcare costs by reducing obesity-related conditions like diabetes and heart disease. Some insurers are reporting lower claims costs in the long run. Luna: That feels like a longer-term trend, though. We might not see the full effect for years. Lucas: True. But the third factor is more immediate: the labor market is still tight. Employers are competing for workers, so they're holding down premium increases to keep total compensation attractive. They can't raise wages 4 percent and then jack up healthcare costs 6 percent — workers would feel that. Luna: So the tight labor market is actually forcing employers to be more efficient with benefits costs. Lucas: Right. And there's evidence of that in the data. The employment cost index for wages rose 0.9 percent in the first quarter, while benefits costs rose only 0.6 percent. That's a notable divergence. Luna: But let's be real — not everyone feels this. If you're in a high-deductible plan, you might see lower premiums, but a single emergency room visit could wipe out any gain. Lucas: Absolutely. This is an average, and averages hide a lot. For someone with a chronic condition, healthcare costs are still a huge burden. But at the macroeconomic level, the trend is real. And it's one of the reasons real wage growth — after accounting for inflation — has turned positive for the first time in years. Luna: So this is actually part of the bigger story we've been covering. Your raise is beating inflation, and now it's also beating healthcare cost growth. Lucas: Exactly. And I think this is underappreciated. When we talk about 'cost of living,' people immediately think of rent and groceries. But healthcare is a huge part of the household budget, and it's been the silent inflation that nobody talks about because it's not in the typical CPI basket in the same way. Luna: CPI does include medical care, but it's a smaller weight than what people actually spend. And out-of-pocket costs aren't fully captured. Lucas: Right. So this is good news, but we should be careful about declaring victory. The breakeven inflation rate on ten-year Treasuries is at 2.29 percent, down from 2.34 a week ago. That suggests the market thinks inflation will moderate. But healthcare costs could easily reaccelerate. Luna: What would cause that? Higher drug prices? More utilization as people catch up on procedures they postponed? Lucas: All of the above. Plus, the GLP-1 effect might not last — if insurers start covering them more broadly, premiums could spike again. And there's always the risk of a new pandemic or a major policy change. Luna: So for now, the takeaway is: your raise is finally outpacing healthcare costs, but don't bank on it lasting forever. Lucas: Exactly. And that's why it's important to understand what's driving it. The tight labor market won't last forever. When unemployment starts to tick up, employers will have less incentive to hold down benefit costs. Luna: And speaking of the labor market, the small-cap index — the Russell 2000 — is up over 3 percent in the last five days. That could be a sign that smaller companies are feeling more confident, which might help sustain wage growth. Lucas: Good catch. Small caps are often a leading indicator for the broader economy. If they're hiring and raising wages, that's a positive sign. But again, healthcare costs could throw a wrench in that if they accelerate. Luna: So we'll keep watching. And before we wrap, I want to mention something quickly. Lucas and I do this show five days a week, and it's ad-free. That's because of a small group of listeners who chip in monthly through buy me a coffee dot com slash fexingo. Lucas: Yeah, it's a really straightforward model. No sponsors, no product placement. Just listeners who find value in what we do and want to keep it going. If that's you, we appreciate it more than we can say. Luna: And it genuinely makes a difference. Every contribution helps us keep the lights on and the podcast free for everyone. Lucas: Alright, back to the numbers. So the key takeaway from today's episode: for the first time in a long while, your raise is actually keeping ahead of healthcare costs. That's a big deal. But it's fragile. Keep an eye on your own benefits statements, because the macro trend might not match your personal experience. Luna: And if you want to dig into the data yourself, the BLS website has detailed tables on employer costs. It's worth a look. Lucas: Absolutely. We'll link to some of that in the show notes. Until tomorrow, keep your eyes on the numbers — and your premiums.