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August 30, 2005
More On The Labor Compensation Issue
In yesterday's Wall Street Journal (page A9 in the print edition), Stephen Moore made an observation similar to the one emphasized in my previous post: While wage and growth has been pretty anemic over the past several years, it is difficult to make the same case with respect to total labor compensation, which adds benefit payments to wages.
Stephen Moore, a member of the Journal's editorial board, writes in today's paper:
The explosion of benefits paid to workers is in large part an artifact of the federal tax code, which allows employers to deduct from taxes pensions, health care, child care, and the like, but not wages.
Read it twice. Stephen Moore apparently thinks companies can't deduct wages paid to their workers from their taxable income the way they can deduct pension, health care, and child care costs. And apparently nobody at the Journal's op-ed page knew enough, or thought enough, to correct him.
Maybe Dan is mainly upset, one newspaper guy to another, about sloppiness of any kind. But the economics of the central claim -- that the tax code favors payment in non-wage form -- does not seem wrong to me. While it is true that employers can deduct wage expense just as they can other employee costs, it is not true that wage payments and benefits are the same when they get into the hands of employees. Wage payments are taxed, benefits are not. When the tax system is taken as a whole, a pre-tax dollar delivered to employees in the form of benefits yields a higher net payout to workers than a dollar delivered in the form of explicit wages. To me, that sounds like the type of tax distortion Moore was trying to describe.
On a (sort of) related point, in the comment section of the previous post Angry Bear's pgl takes me to task (probably with some justification) for not addressing an argument that he has made before:
In my 1st RBC post, I noted Kash's argument that the rise in real compensation is substantially due to more costly health insurance. Not better, just more costly. Why did I mention it? It's a supply side. And yet you don't note that this is the reason for the divergence between real wage growth v. real compensation. Huh?
The reason that I did not take note of it is that I'm not convinced the observation is relevant. Health insurance is the largest single component of employee benefit expenditures. For a given total amount of compensation, increasing payments in the form of more insurance expenditure means less in other forms -- including wages. Whether we get more or less for those higher insurance expenditures is an interesting and important question, as is the question of whether the tax code is introducing welfare-degrading means of compensating workers. But I don't think it has much to do with the question I was trying to address, which was whether or not the return to working has been growing at an abnormally low rate.
UPDATE: Angry Bear (the orginal!) notes that the offending passage has been corrected:
THE AUG. 27 feature, "The Wages of Prosperity," by Stephen Moore mistakenly reported that wages are not tax deductible to employers. The relevant sentence should have said, "Fringe benefits have exploded in recent years because benefits are tax free to employees, but wages are taxed."
AB is still not happy.
The corrected wording doesn't pass muster as an explanation for flat wage growth, either. Benefits have been tax free to employees, and wages have not, for as long as I can remember. So the ongoing taxability (to the employee) of wages but not benefits simply cannot explain why wage growth has been flat in the last 4 years.
The best I can do here is to simply repeat that I think it can.
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