On Closing the Income Gap

Closing the Income GapHere are some basic truths about our economy: 

  1. Our economy is driven by a combination of innovation and consumption.  Consumer demand for new and better goods and services drives innovation. The overall effect of strong consumer buying power is more money in the hands of Americans to fuel demand.
  2. When our middle class consumers do poorly, the entire economy suffers.
  3. The disparity between the buying power of the wealthy and the middle class is unprecedented and must be addressed.

By virtually every measure, the average American worker’s wages have remained flat (or have declined) in the past decade. According to the Bureau of Labor Statistics, there has been a 94% increase in output per-hour-worked by employees since 1979, and yet that increase in productivity and value is not reflected in improved wages. Some people insist that the way to get more money into the hands of middle class Americans is to cut income taxes. That only permits people who aren’t making enough money to keep marginally more of that “not enough” money, while seriously reducing revenue needed to run the country and service our national debt.  Others assert that the answer is to increase the federal minimum wage.  Doing so will help some at the lower income level (and might hurt others), but will hardly affect the buying power of those who make more than minimum wage now. While I support raising the minimum wage, I do not believe that this alone will address the larger problem of income stagnation.

The critical question is “how do we get American businesses to pay their employees more?” American companies determine how much to pay employees not on their value to the enterprise, but rather on what the market will bear.  Any company can make a straight-faced argument that it cannot afford to pay more for labor than its competitors.  But companies effectively establish what the market will bear by “benchmarking,” and using shared data to determine how much to pay any individual or job classification.  Employers have far more access to such labor market information,  and thus have more bargaining leverage than any individual job seeker normally would. In other words, companies make the employment market they are subject to.  This is true with respect to union and non-union labor, and is most evident during economic slumps when employees are less likely to change jobs.  Put simply, most companies will only pay what they must to get and retain the talent they need.

But there may be a way to prompt employers to be more generous to employees.  While I favor an across-the-board reduction in corporate taxes, I would suggest a much greater reduction for those companies that make significant increases to overall non-executive employee compensation.  This will have the dual benefit of reducing corporate taxes and increasing the buying power of millions of Americans, and will have the added benefit of increasing revenue to the government through income tax revenue without actually increasing tax rates. I believe that if given the choice, companies would much rather pay their employees more, than give that money directly to the governemnt in taxes.