Wages and the Cost of Employment

economy-01-smRecently, William Galston of the Brookings Institution penned an oped in the Wall Street Journal about the lack of workers’ wage growth despite a technically “full-employment” economy.  Adjusted for inflation, workers’ wages have grown 0.1 percent over the past year, and only 0.5 percent since 2010.  While there are many unknowns, he attributes some of the problem to weak unions, slow productivity growth and cash-rich firms that aren’t interested in sharing their treasures with workers.

But there is even more going on here than Galston describes.  I would venture to say that compensation costs have had a hand in slow wage growth.  Compensation costs not only include a worker’s wages, but also the cost of providing benefits to the worker, such as health insurance, workers’ comp, unemployment insurance and paid vacation.  According to the Bureau of Labor Statistics, compensation costs for civilian workers increased 0.8 percent the first quarter of 2017 and 2.2 percent over the past 12 months.

When policymakers mandate employer-provided benefits, they don’t often consider that employers have to pay for these benefits in some way, shape or form.  One of the ways to do so is to slow-walk wage growth.  In order to make employees aware of the cost of doing business, there are a few firms that send their employees implicit compensation statements every year.  They state not only what the employee’s annual salary is, but also the monetary cost of every benefit provided by the employer, such as the employer-paid portion of health insurance, the cost of the state’s workers’ compensation insurance, the cost of unemployment insurance, contributions to retirement accounts and the cost of benefits such as vacation pay, sick days, holiday pay, maternity leave, etc.  These can add up to thousands of dollars.  Some of these benefits are mandated by law, while some are fringes to attract workers.  But imagine if an employee could forgo all mandated and fringe benefits and take the monetary value of them in the form of cash.  Of course, that would never happen since government doesn’t trust workers to allocate their own money wisely.

But if progressives have their way and employers are forced to allocate more money to “paid this and that,” don’t expect substantial wage growth.   This is less of an “economic mystery” than Galston realizes.  (See more on this topic from the NCPA: How To Raise Wages.)



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  1. Brian Williams says:

    Great post, Pam! I think this is one of the least understood dynamics of the modern workforce. As employers pay more to provide mandatory employee benefits and comply with compulsory workplace regulations, it is only logical that flexible costs, like wages, will not go up.

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