Growth of Wages and Benefits

The Wages of Growth To lift worker incomes, cut the corporate tax rate. Tuesday, December 26, 2006 12:01 a.m. The latest reports on wages and income have been rolling in, and with them we can discount one more canard about the current economic expansion--namely, that wages are stagnant and workers are doing far more poorly than they did in that second Age of Pericles known as the 1990s.

Over the past year, the real average wage for non-supervisory employees has risen 2.8%. That equates to about a $1,200 increase in purchasing power for the typical household this year. Last year, real median household income was also up 1.1% after inflation. This rise in take-home pay helps to explain how Americans have had the disposable income this Christmas shopping season to pay $600 for PlayStation 3 computer games and $150 for the Kid-Tough Digital Camera for three-year-olds.

It is true that income and wages are still about 2% below the peak they hit in 2000 before the dot-com bust and recession. But a new Treasury Department analysis finds that, measuring from the start of the peak of each expansion, wages so far in this decade's cycle are running ahead of the recovery pace during the 1990s. Thus the "stagnant wages" story can join the "jobless recovery," the "outsourcing" crisis and the runaway budget deficit as other tales of woe that have all turned out to be evanescent.

Why are wages finally starting to show smart gains for workers? First, the labor market is tight with very low unemployment (4.5% nationwide), giving workers more bargaining power. Second, the big spike in energy prices in recent years raised the cost of living and offset nominal pay hikes, but energy costs have declined since Labor Day and those lower costs translate into higher real wage gains. Third, the surge in business capital spending that began in 2003 with the passage of the investment tax cuts has increased the capital to labor ratio that is a major driver of wage increases over time.

Contrary to popular myth, worker benefits have also been rising, not falling. Yes, many companies are changing to more sustainable 401(k)s from traditional pensions, and most are passing along some of the costs of rising health insurance to workers in co-pays and higher premiums. But the Labor Department measures employer pay packages and finds that fringe benefits paid to workers have risen 39% since 2000, or nearly twice the 22% rate of increase in nominal wages.

Take-home pay would be rising even faster if the cost of health benefit plans hadn't climbed by 65% since 2000. Health insurance now costs the average employer $2 an hour per employee--money that could otherwise be paid in wages. But that $2 still goes toward benefits, not into corporate profits.

All told, the pattern of wage growth this decade isn't all that different from that of the 1990s. Wage increases always lag behind economic growth, corporate profits and productivity gains. In the 1990s in fact, workers didn't enjoy really big paycheck gains until 1997. This isn't to disparage the 1990s, but only to point out that those who assail this decade's gains either have short memories or political agendas.

We certainly agree with those who'd like to do more to lift worker paychecks, so here are two ideas. First, make the Bush tax cuts permanent. If Congress lets them expire in 2010, as many Democrats are urging, the average family will suffer the equivalent of a $2,000 a year pay cut.

Second, slash the corporate income tax. A recent study for the American Enterprise Institute by economists Kevin Hassett and Aparna Mathur examined 72 nations over 22 years and found that "wages are significantly responsive to corporate taxation." In today's global economy, capital migrates across national borders away from high-tax nations to places where tax systems are less punitive. Workers suffer when capital flees, and job and wage growth slow.

Many political leaders have adapted to this reality, which is why the average corporate tax rate across the globe has fallen over the past 25 years to an average of about 30% from 50%. The AEI study finds that, if the U.S. were to cut its 35% corporate tax to the OECD average of 30%, American manufacturing workers would gain nearly a 10% pay raise dividend within five years, which is the equivalent of roughly a $3,500 a year pay boost.

Some on the political left have other ideas for raising wages, such as more and easier unionization, more trade and tariff barriers, or a government takeover of employer health care. But all of these would make the U.S. more like Old Europe, where job growth is far slower than it is here. Now as ever, policies that keep the economy growing and employers hiring will lift wages for everyone.

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