Understanding “Underpaid” Workers

By Gary M. Galles. He is a Professor of Economics at Pepperdine.Excerpt:

"Government policy is also the source of another reason why workers’ paychecks are less than their value to employers.

Government-mandated worker benefits illustrate this. The costs of those benefits must ultimately come out of employees’ total compensation. As Ludwig von Mises put it, “If laws or business customs force the employer to make other expenditures besides the wages he pays to the employee, the take-home wages are reduced accordingly.” So while government sponsors claim credit from recipients for mandated health coverage, worker training, family leave, workman’s compensation, etc., workers’ earnings are reduced to cover their added cost. This introduces a substantial wedge between the compensation employers must provide and the wages workers receive, with plaudits to government for the benefits, but blame to employers for the lower wages that such mandates result in. 

Employer “contributions” for state unemployment and disability insurance, as well as their half of Social Security and Medicare taxes, are another source of such worker “underpayment.” Employers, knowing they will be on the hook for these bills, over and above wages paid, offer less in wages. Again, the money ultimately comes from employees’ pockets, but they blame their employers instead of the government for reducing what they take home as a result. When workers say “I was robbed,” they may be correct–but they finger the wrong suspect.

And these costs are substantial. The BLS recently reported that for civilian workers, wage and salary costs averaged 69.1 percent of total compensation, while benefit costs were 30.9 percent of total compensation. So even if you thought your salary was 30 percent below your value to your employer, it would not imply you were underpaid at all.

Corporate taxes have similarly deleterious effects on worker compensation. To the extent that such taxes’ effects reduce net-of-tax earnings, they reduce the value of workers to employers. Yet again, government gets the money and accolades from beneficiaries of added expenditures financed, while businesses are scapegoated as if they caused the underpayment. Steven Entin summarized recent data-based studies on corporate tax incidence as showing that “labor bears between 50 percent and 100 percent of the burden of the corporate income tax, with 70 percent or higher the most likely outcome.” 

The widespread and frequently repeated assertions that people aren’t paid what they are worth to employers may be true in a sense, but not in the sense those making the assertion usually imply. “Greed” or some faulty “ism” is not to blame. More government interference provides no magic solution. The maximum such “underpayment” in a competitive labor market is the extent that your value to your highest valuing employer exceeds that of your second-highest valuing employer. And that difference gets smaller as labor markets get more competitive. Further, however large the difference is, workers are still left better off than they would have if they had taken any other offer.

There are many ways government’s coercive power reduces what workers take home well below their value to their employers by mandating benefits that ultimately come out of workers’ pockets in lower wages, and by reducing the competition that leads to better offers, in order to fill their treasuries and protect their “friends” from competition. So, if being paid what someone is worth to an employer is the criterion to be used, government is the problem and allowing fewer mandates and freer competition is the answer."