Productivity is the Key to Wages and Growth

(Photo: Pexels, Creative Commons)

(Photo: Pexels, Creative Commons)

By Michael A. MacDowell

Concerns about stagnate wage growth are driving much of today’s political discussion.  However, few of the many comments made about wages have focused on productivity; the goods and services produced each hour by Americans.   American productivity is declining.  It fell by 0.4% just last quarter.  If this trend continues, productivity for the year will be a meager 1.3%, a rate that is just half of the average increase experienced between 2000 and 2007.

As productivity is one of the major components in establishing wages, prices and overall economic wellbeing in the United States, its poor showing should be of deep concern to all Americans.  Over time lackluster productivity growth lowers American living standards by restricting the economy’s ability to grow, to add workers and to increase salaries.  Slow productivity growth is the key reason why wages in the United States have been stagnate the past several years.

The last major growth spurt in American productivity occurred during the technology boom of the mid to late 1990s. Then investments in new technologies increased the quality and the quantity of goods and services produced by American workers. Today the question is how to stimulate these kinds of investments.  Tax incentives and more rapid depreciation schedules for new plant and equipment are some of the best ways to accomplish this goal.

While economists sometimes disagree on the way to simulate investments, most agree that there are certain policies which clearly retard investments. Chief among these are arbitrary requirements that significant increases in wages above productivity growth which leaves less revenue for investments.  A company making decisions about spending, looks at both the costs of new equipment and technologies as well as its labor costs.  If wages are increasing, because of higher minimum-wage laws, rather than increased productivity, then there will be less funds to invest in productive new technologies, plant and equipment.

On the other hand, if a company chooses to make an investment that will raise worker productivity, the increased profits generated from that investment will mostly go to wage earners in the form of increased salaries.  Putting the cart before the horse, by forcing inordinate nation-wide wage increases often leads to less investment and less employment.

This is a prime reason why most economists are opposed to significant increases in the minimum wage to $15 an hour. They also oppose arbitrary mandates that force companies to give non-hourly workers much higher salaries.  This is certainly the case with the Department of Labor’s recent ruling that requires a minimum salary of $47,000 for all non-hourly employees.

With current interest rates low, this should be the ideal time for companies to borrow money and/or use retained earnings to make investments in technology, training and equipment that make workers more productive. This would raise wages.  Yet today, the unintended consequences of minimum wage laws, coupled with America’s 35% corporate tax rate, the highest in the developed world, gives little incentive for businesses to invest in themselves and their employees.

Various studies demonstrate this point including one in 2007 by the Federal Reserve. It showed that a 10% increase in corporate taxes reduced wages by 7%. Other studies have found a more draconian effect from increased corporate taxes.  By studying multinational firms, Harvard economists found that foreign affiliates of U.S. companies pay significantly higher wages in countries with lower corporate tax rates. And a study just completed in Canada suggests that for every dollar increase in corporate taxes, wages in Canadian provinces dropped by more than a dollar.  When corporate taxes go up, wages don’t grow.

Here is an idea. The next administration should lower corporate tax rates but require that a significant portion of the increased corporate revenue from lower taxes be passed on to employees in the form of increased wages.

The devil will be in the details. For instance, how can we be assured that the new revenue finds its way mostly to more productive workers rather than only to shareholders and managers? Yet such a strategy has great merit. It would certainly help increase salaries and would do so without too much government interference which often diminishes productivity and lowers wages.

Michael A. MacDowell

Michael A. MacDowell

Michael A. MacDowell is Managing Director of the Calvin K. Kazanjian Foundation and President Emeritus of Misericordia University. He lives in Harveys Lake, PA.