Economy & Business

Why 2018 Will Be a Banner Year for Worker Wages

(Photo: Mark Skalny/Dreamstime)
The wealthy will see too much of the new tax cuts — but workers will benefit, too.

The liberal media has been replete with pronouncements that the Trump tax cuts are a giveaway to the top 1 percent and provide only meager benefits to working-class households. Trump’s economic advisers, by contrast, claim the new law will boost wages significantly across the board. The administration’s claim is very likely to prove correct.

In a typical example of the media’s approach to the topic, New York Times columnist Eduardo Porter casts doubt on the notion that wages will rise for the non-rich. He notes that despite tax cuts during the Reagan presidency, wages actually declined for the bottom half of the income distribution (after adjusting for inflation) while the top 1 percent saw enormous gains. A decade later, during the Clinton presidency, the bottom half had robust wage gains despite a substantial increase in federal income taxes.

Since the Reagan era, income gains have indeed been skewed to high-wage earners. But while Porter and most liberals identify this with the top 1 percent, the main beneficiaries were the top 20 percent of households: the professional class. Richard Reeves has noted that the “top fifth has seen a $4 trillion-plus increase in pretax income since 1979, compared to just over $3 trillion for everyone else. Some of those gains went to the top 1 percent. But most went to the 19 percent just beneath them.”

Not only is Porter’s focus on the top 1 percent misplaced, but his attempt to link wage gains to changes in personal taxes misunderstands how labor markets work. Cuts to personal income taxes might boost economic growth in general, but they have no direct impact on (pre-tax) wages.

Supply-and-demand considerations are what primarily determine wages. In particular, wage gains are minimal when there is widespread joblessness, because employers in need of more labor can hire idle workers without raising pay. Despite significant job growth, the unemployment rate during Reagan’s presidency fell below 6 percent only in his last year. Further, Reagan’s employment expansion primarily generated lower-wage, entry-level jobs, bringing average wages down.

In addition, the Reagan era saw the implosion of well-paying manufacturing jobs in the U.S., which was especially devastating to young black men. In 1975, 40 percent of Midwestern young black men were employed in manufacturing. By 1990, only 10 percent were.

It is true that President Clinton signed a substantial personal-income-tax increase, but it had little adverse impact on economic growth for two reasons. First, it was delayed, so it affected households only after his government-spending stimuli had generated momentum for growth. Second, these income-tax increases were almost entirely on top earners, who were substantially benefiting from economic growth and a resulting stock-market boom.

Most important, unemployment rates were much lower during Clinton’s administration than they had been during Reagan’s: below 6 percent for the last six years and below 5 percent for the last three years. As a result, economic growth created labor shortages in many areas, resulting in the wage increases for the lower half of households that Porter cites. Of note, however, is that wages for those without a high-school degree still declined by 4 percent after adjusting for inflation. Again supply and demand holds the answer: Welfare reform pushed millions of women into the labor market. Between 1995 and 2000, the employment rate of never-married single mothers rose from 49 to 66 percent. Not surprisingly, these welfare leavers — the vast majority having neither a high-school diploma nor significant previous paid work experience — earned low starting wages, depressing the average earnings of the least educated.

Today’s economy is a most favorable environment for robust wage gains.

This past experience helps explain why we should have guarded optimism that the Trump tax cuts will have a substantial positive impact on working-class wages in the coming year. First, despite being weighted heavily to high-wage earners, like the Reagan tax cuts, they will significantly stimulate consumer spending; further, corporate capital spending will increase owing to more generous expensing of equipment, deregulation, and the increased financial benefits of producing domestically. In addition, as was the case in the Clinton era, stock-market growth has created a wealth effect that will further stimulate consumer spending, and tight labor markets will put upward pressure on wages.

Finally, unlike Reagan (and Bush 43), Trump has significantly reduced corporate taxes. While a lion’s share of the money may go to executive bonuses and stock buybacks, there is evidence that some will find its way into workers’ pockets as either wage gains or lower consumer prices. Once more workers will gain.

As always, economic forecasts are fraught with uncertainty. Are we experiencing a stock-market bubble, in which case we may see a strong correction in the next year? Will the lack of unions weaken the ability of in-demand workers to garner significant wage increases? Nonetheless, we should look past the unseemly share of the income-tax cuts going to high-wage earners — particularly the indefensible lowering of the top tax rate — and see that today’s economy is a most favorable environment for robust wage gains.

READ MORE:

Corporate Tax Cuts Would Benefit Ordinary Americans

Study Shows Rising Minimum Wage Harms Automation-Prone Workers

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