My last post pointed out that there appears to be an inverse correlation between tax rates and economic growth in developed countries. In particular:
- Tax levels in the U.S. have stayed relatively constant since 1965 while they have grown significantly in other O.E.C.D. countries.
- GDP, on the contrary, has been growing faster in the U.S. than it has in these same countries.
- Median wages, while growing more slowly in the U.S., are still much higher than in the other major O.E.C.D. countries.
A new report from the Brookings Institute analyzes the factors which have contributed to relatively slow wage growth in the U.S.
- Labor productivity has been growing faster than hourly compensation since the mid-1970s.
- Benefits have grown much faster than wages in recent years.
- Labor’s share of income, compared to capital’s share, has been dropping in recent years.
- Wage gains have been greater in the higher wage quintiles.
- Domestic manufacturing output has increased even as manufacturing employment has decreased.
- Entrepreneurship (i.e. new business formation) has declined in recent years even though it may now be starting to pick up.
- Labor market slack has declined since the Great Recession though some still remains (measured as the share of the work force that works part time for economic reasons).
- Recent labor productivity growth has been especially slow, restraining wage growth.
Conclusion. As everyone knows, slow wage growth is a highly contentious issue in the U.S. In addition to being a fundamental measure of a society’s wellbeing, it played a central role in the outcome of the 2016 Presidential election.
What can and should be done to speed up wage growth in the U.S.? Stay tuned!