How to Speed Up Wage Growth in the U.S.

 

Donald Trump was elected President a year ago because the white working class is angry about a lot of things, including slow wage growth. The tax burden in the U.S. is lower than in other developed countries and wages are higher in the U.S. even if they are not rising fast enough. The Brookings Institute has carefully analyzed the wage growth issue, here and here, and has delineated several reasons for wage stagnation:

  • Compensation has lagged behind productivity growth. This is largely due to globalization and technology which has put upward pressure on skills and downward pressure on wages.
  • Benefits have grown faster than wages, thus holding down wages. The skyrocketing cost of healthcare is mostly responsible for this.
  • Labor’s share of income, compared to capital’s, has been shrinking. Technology needs less low skill labor. Also, market concentration, i.e. monopoly power, has been increasing, which increases profits and therefore return on capital.
  • Wage gains have been higher in the higher wage quintiles. This is explained by the increasing wage benefit of more education and higher skill levels.
  • Manufacturing output is up and employment is down. High technology needs fewer low skill workers and high skill workers are in short supply.
  • Entrepreneurship, i.e. new business formation, has declined over the past several decades. This is caused by increased business consolidation and would also be relieved by more immigration of high skilled workers.
  • Labor market slack has declined since the Great Recession. This bodes well for wage increases which are now starting to occur.

  • Labor productivity growth since the Great Recession has been especially slow. What is needed is increased business investment which is the justification for the current push for lower corporate and business tax rates.

Conclusion. In short, what is needed to boost wages is better education and skills, more business investment, control of the surging cost of healthcare, better trust busting to break up monopolies, and more high level immigration.

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