by Mitch Kokai
Senior Political Analyst, John Locke Foundation
Chairman of the Council of Economic Advisers Kevin Hassett said the Tax Cuts and Jobs Act may be able to help solve the problem of stagnant wage growth in the United States.
Speaking at a Cato Institute event on Thursday, Hassett said tax reform could lead to about $4,000 in higher wages for a typical family in America.
“The economy up until this year has been very much disappointing, and if you look at real wage growth, it’s been as bad as you’ve ever seen in the recovery,” Hassett said. “We found a really interesting disconnect that is this: Historically if profits go up then wages go up and if profits go down then wages go down. The correlation is really almost perfect but the link between profit growth and wage growth has just disconnected.”
Hassett explained that over the last eight years profit growth has increased by 11 percent per year. During that same time, however, real wage growth has been almost nonexistent.
“That disconnect is historically unprecedented,” he said. “The clear explanation is this—typically what’s happened is that when we get profit growth, then firms say I’m doing well, I can expand my business, and I’m going to buy a bunch of capital, a bunch of new machines, or build some new buildings.”
Hassett says this occurrence, also known as capital deepening, has added about a percent per year to real wage growth since World War II. During the second half of the Obama administration, however, capital deepening’s contribution to wage growth went negative for the first time in American history.
“So there was more depreciation of machines in a typical year than there was investment, so workers’ productivity couldn’t go up because they are actually using worse machines and fewer machines for the first time in history,” Hassett explained.