time the U.S. was drawn into World War II (“WWII”), unions had a high
penetration into the national workforce.13 When a wartime anti-inflation
presidential Executive Order froze wages,14 the unions had to come up with
something else to push for their workers or union membership would
plummet.15 While it blocked wage increases, the law allowed unions to
negotiate for fringe benefits, such as pensions and health insurance, and the
unions largely focused on the latter.16 Given the labor shortages of the War
years, employers responded to the unions’ pressure by offering health
benefits, and competition among employers for the scarce labor supply
fueled an escalation in those benefits over time.
By the end of WWII, the unions’ push for health insurance was well
embedded, as was the trend toward employers providing health benefits.17
Employers, continuing their competition for manpower in the post-war
“boom” economy, used the strength and attractiveness of their health
insurance plans to recruit and retain employees.18 In 1943, the IRS ruled
that employers could deduct the cost of health insurance as a business
expense but that employees (and their dependents) did not have to
recognize the monetary value of the health insurance benefits as income.19
This exemption from taxation meant that employer-provided health
insurance is purchased with before-tax dollars. If the employer did not
provide insurance, but simply paid the employee more, the employee would
have to pay tax on the additional income and then buy the insurance with
reduced, after-tax dollars.20 In effect, the exemption amounts to a federal
unionization increased during the Great Depression, the New Deal Era, and the early post-war period).
13. See id. (referencing the union density chart). In just one decade, from 1935 to 1945,
the percentage of employed workers belonging to a union more than tripled, from
approximately one-tenth to one-third of the U.S. workforce.
14. Exec. Order No. 9328, 8 Fed. Reg. 4681 (1943).
15. Union members naturally lost a key incentive to pay dues when the union’s primary
function—to negotiate for higher wages—was blocked.
16. David A. Hyman & Mark Hall, Two Cheers For Employment-Based Health
Insurance, 2 YALE J. HEALTH POL’Y L. & ETHICS 23, 25-26 (2002) (explaining that “[t]he
freezing of cash wages forced employers to compete for scarce labor by enhancing their
fringe benefit packages” and “[d]uring the late 1940s and 1950s, unions aggressively
bargained for richer benefit packages, with health insurance at the top of their list.”). For
more on this excellent article and its authors, see notes 94-100 infra and accompanying text.
17. Id. at 26.
18. Id. at 25; Thomasson, supra note 10.
19. Hyman & Hall, supra note 16, at 25.
20. See I.R. C. § 106 (West, WestlawNext through P.L. 113-294 (excluding P.L. 113-
235, 113-283, 113-787, 113-291)) (amended 2014 by P.L. 113-295, 128 Stat. 4010) (“Gross
income of an employee does not include employer-provided coverage under an accident or
health plan.”); see also I.R. C. § 162(a) (allowing a deduction for “other compensation,”
which includes health expenditures furnished by employers).
