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Why Trump’s Tax Cuts Will Do Little To Boost Wages (For Now): Goldman Explains

  • While the new GOP tax plan has generated headlines over one-time bonuses of $1,000 and lowered utility bills, and 18 states have increased minimum wage, Goldman Sachs analysts believes the economic measures will have a marginal near-term impact on wage growth – which ideally keeps up with or outpaces inflation in order to maintain a household’s standard of living
  • Despite negligible short-term effects, medium to long-term wage growth should experience a boost from the tax plan via low unemployment, rising productivity and a gradual pass-through of profits – notwithstanding potential economic crosscurrents 
  • Goldman warns that certain metrics used to determine economic health, such as Average Hourly Earnings (AHE), may prove unreliable in the short-term, as the GOP tax plan incentivizes income-shifting by individuals and corporations in order to minimize taxes


While President Trump tweets about the “Great news” over Wal Mart’s minimum wage hike to $11/hour and employee bonuses of up to $1,000 at more than 125 companies thanks to the GOP tax cuts and Jobs Act – and while Treasury Secretary Steve Mnuchin touted climbing paychecks on Thursday in the White House briefing room, questions remain over the medium and long-term effects of both “trickle down” GOP tax plan and minimum wage hikes across 18 states.



It will come at a cost,” New York Fed President William Dudley said Thursday in remarks to bankers in lower Manhattan, adding “There is no such thing as a free lunch.”

To that end, Goldman Sachs analyst Dann Struyven has taken a look at the impact of minimum wage increases and the GOP tax bill on wage growth – perhaps the most important factor in maintaining one’s standard of living as price inflation creeps ever-higher (the whole “wages keeping up with inflation” thing).  

Struyven concludes that short-term wage growth may be negligible outside of the leisure and hospitality industries due to various offsetting factors, while medium-to-long term wage growth is expected to be robust due to low unemployment, rising productivity and a “gradual pass-through” of extraordinary profits

By generating a further 0.25pp decline in the unemployment rate, the tax package should boost wage growth by around 0.1pp.

[W]e estimate that the increase in the effective minimum wage likely added 0.1-0.2pp to Average Hourly Earnings (AHE) growth in the leisure and hospitality industry, but had only a small effect on Average Hourly Earnings (AHE) for the whole economy, around 0.05pp.



Struyven also warns not to read too much into the flurry of headlines touting $1,000 corporate bonuses and other benefits handed out by over 125 companies – including WalMart, American Airlines, Comcast, Boeing and Wells Fargo – as the overall effect is likely to be a one-time drop in the bucket. 

According to press releases aggregated by the Americans for Tax Reform group, around 125 companies employing around 1 million workers in the US—including American Airlines, Bank of America, Comcast, Boeing, and Wells Fargo— have announced intentions to use the tax windfall to increase employee compensation and/or investment. Most of these firms have announced extra year-end bonuses, while a few have announced base wage increases. Taking the announced scope and magnitude of these bonuses—often $1,000 per worker—at face value suggests an approximately $1bn one-time boost to compensation, just less than 0.05% of aggregate quarterly compensation of employees.

“It’s unfortunate that some supporters have latched onto these increases, especially these one-time bonuses,” said Alan Viard, a tax scholar for the right-leaning American Enterprise Institute quoted by Politico. “It undermines our understanding of what we should expect to see.”

Moreover, some economists have suggested that with unemployment at just 4.1 percent, companies such as WalMart were already facing pressure to boost pay in order to attract and retain workers.



It’s impossible to say right now whether it will be a long-term impact or just a publicity stunt,” said Thea Lee, president of the left-leaning Economic Policy Institute. “We’re very skeptical that there is any theory or historical evidence that corporate tax cuts in today’s economy will raise wages.” –Politico

And while the one-time $1,000 bonuses may be a PR win for Trump and the GOP – economists say that the tax bill will have to “broadly lift wage growth over its current 2.5 percent annual pace” while lifting worker productivity in order to truly benefit the economy. 

To that end, over the medium and long-term Goldman’s Struyven thinks the GOP tax plan should result in higher wages due to greater employment, rising labor productivity, and a “gradual pass-through of extraordinary profits.”

The more significant wage effects from tax reform are likely to arise in the new few quarters via a tighter labor market and in the next few years via capital accumulation, rising labor productivity and a gradual pass-through of extraordinary profits.

Finally, in a word of caution, Struyven warns that economic indicators such as the Average Hourly Employment and the Employment Cost Index (ECI) may be misleading due to the way in which both people and corporations are adapting to the new laws. Goldman Sachs, for example, accelerated nearly $100 million in stock awards before the end of 2017 to avoid unfavorable tax consequences which would result from January payments, while individuals have likely attempted to shift income from 2017 to 2018 to take advantage of lower tax rates. As such, the various tax-planning employed by corporations and individuals may synthetically inflate economic indicators beyond expected seasonal factors. 

Overall, we expect only very marginal effects of tax reform on Average Hourly Earnings (AHE) and the Employment Cost Index (ECI) [a measure of labor costs to corporations] in the short term.

In practice, the short-term impact of tax reform and the treatment of bonuses varies across wage indicators. AHE only includes bonuses paid regularly each pay period, but excludes irregular bonuses, and most other types of compensation whose timing can be shifted. We therefore expect no significant short-term effect of tax reform on AHE.

Wage growth and near-term noise aside, there are still a number of crosscurrents which could make moot any gains from lower tax rates and accelerated bonuses – such as spikes in inflation across various inelastic staples such as gasoline, which could cause the Federal Reserve to accelerate rate hikes. 

So while the short-term effects of one-time bonuses and accelerated payouts may provide a nice padding for bank accounts drained by the holidays, the jury is still out on the medium-to-long term effects – keeping fingers crossed of course that we don’t have any nasty “crosscurrents” to erode the impact of the GOP plan.