The Economy Grows, but Wages Decline or Stay the Same: Why?

Wage Growth

Wage Growth

The economy is hot almost everywhere you go, but for practically everybody in America, this startling growth has not meant more moolah in the pocket. Employers take note: Higher wages could surprisingly come with support for an old political football, not more pressure on your payroll budget.

Strange Slow Decline

Pay for low-wage workers has been in decline for decades while middle-wage workers have seen stagnant pay, notes the Economic Policy Institute. This comes even as productivity shows sharp, never-ending gains. “Since 1979, hourly pay for the vast majority of American workers has diverged from economy-wide productivity, and this divergence is at the root of numerous American economic challenges,” the group noted in another report.

This comes as the United States in October entered its 101st consecutive month of economic expansion—the third longest in history—and unemployment continues a general downward trend.

“While economists debate the causes and cures, the political implications are profound,” noted a columnist for Bloomberg. “These economic struggles and the demise of the centerpiece of the American dream—that kids will enjoy a more prosperous life than their parents—played a role in Donald Trump’s victory last year.” But what is Trump doing to reverse the trend?

Tax Cuts to the Rescue?

Republicans in the United States are looking toward tax cuts to boost wages—particularly Trump’s corporate tax cuts. Democrats, meanwhile, like to talk about raising the minimum wage. Both Democrats and Trump have supported a major infrastructure program, though Trump has been quiet on that lately.

Corporate tax cuts don’t come along too often. The most recent in the United States was in 1986, and wages fell after that, noted an analyst for the Washington Post. Right-leaning economists say this cut would be different as long as it incentivizes investment without adding to the national debt.

“Real tax reform is hard,” continues the analyst. “That’s why it doesn’t happen often. There will be winners and losers. In order for American workers to be the winners, Congress and the president have to make tough calls that balance offering tax breaks for business investment with finding ways to raise revenue elsewhere so the plan doesn’t add to the debt.”

Sounds good, but tax cuts just boost CEO pay, said one left-leaning analysis. “America’s 92 most consistently profitable tax-dodging firms registered median job growth of negative 1 percent between 2008 and 2016,” claimed the Institute for Policy Studies. “The job growth rate over those same years among U.S. private sector firms as a whole: 6 percent.”

Two Sides of the Story

Like everything else in America, ideas behind raising pay for workers tend to fall along partisan lines.

“When the very existence of wage growth hinges on one’s choice of deflator, it’s safe to say there’s a problem,” the National Review reported. “That problem is multifaceted. Indeed, every step of the process that leads to wage growth seems to be faltering. And to make matters worse, economists disagree on even the most basic facts of what’s happening and why.” Two key tax cuts would spur wage increases, according to the article: cutting payroll taxes—money taken from paycheck for Social Security and Medicare—and tweaking the Earned Income Tax Credit so it is a straightforward wage subsidy.

Liberals, meanwhile, remain skeptical. “Using smoke and mirrors such as unrealistic promises of economic growth to mask the costs of tax cuts and assuring working people that top-heavy tax cuts will eventually trickle down is not sound way to make public policy,” wrote an analyst for the Institute on Taxation and Economic Policy.

Cutting Through Partisan Chatter

Ben Bernanke, who was chairman of the Federal Reserve under both Bush and Obama, pegs the wage solution on infrastructure spending—an issue supported by both Democrats and (at one time, at least) Trump—and tax reform.

“What we want to do is try to improve the supply side of the economy, make it grow faster, have greater potential,” Bernanke said. “And I think that probably that to do that, I would think that on the fiscal side, that infrastructure spending that improves our roads, our bridges, our schools, and tax reform, not necessarily tax cuts, but reform that makes the system simpler, more efficient, those would probably be the highest-return fiscal actions in terms of getting higher growth.”

So according to this nonpartisan economic expert with no dog in the current fight but plenty of hands-on experience, infrastructure spending may be the key to improving wages. Will American voters understand that next time they have the chance to vote on their own bottom lines? Perhaps three years will tell. For their part, employers and small businesses might do well to support infrastructure efforts in the meantime and not worry so much about tax cuts.

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