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.

For example:

• 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!

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