Why Isn’t Tax Reform Translating Into Higher Wages?

Most corporations aren’t using the savings they got from the Tax Cuts and Jobs Act to increase employee salaries, according to several recent reports. Instead, most tax savings seem to be going toward dividends and share buybacks.

In this segment from Industry Focus: Financials, host Jason Moser and Fool.com contributor Matt Frankel, CFP, discuss why companies aren’t increasing wages and whether this could change anytime soon.

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A full transcript follows the video.

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This video was recorded on Oct. 8, 2018.

Jason Moser: Now, along with this news regarding the market, we also got some jobs data out last week. It looks like the unemployment rate has fallen to its lowest level since 1969. Which is great, right? We’ve really made a lot of progress on that front. It’s good to see that we have a lot of people out there working. Wages grew by 2.8%, which was in line with expectations.

I think, to this point, at least, we’ve seen wage growth remain relatively stagnant. This kind of rolls into another story we wanted to talk about in regard to tax legislation. It was very interesting to see here that a new survey of 152 companies by executive recruitment firm Korn/Ferry International revealed that of those 152 companies, only 14% were putting part of their tax cuts savings into base salary increases. A poll of 1,500 companies by Mercer showed that 4% are redirecting tax savings to budgets for bigger paychecks in the coming year. Then, a survey of more than 1,000 companies published by Aon plc, 99% said the tax cuts were not prompting them to increase minimum wages.

On the one hand, I’m not actually terribly surprised by this. I think that when these corporate tax rates initially were cut, when we saw this legislation go through, the big question was the Wall Street vs. Main Street dilemma there. There are two very different sides of the coin. What may be good for Main Street isn’t always going to be the best for Wall Street, and vice versa. I think what we’ve seen here is a lot of share buybacks, some dividend increases here. That’s great for Wall Street. It doesn’t seem like it’s playing out for Main Street so much yet. I guess I wonder, can we expect things to get better for Main Street? Or are we going to see just more of the same?

Matt Frankel: You have to understand the reason that this is happening in the way it is. As you mentioned, buybacks are at a record high. The reason is that buybacks don’t really add to corporate expenses. Buybacks don’t eat at the profit margins. Increasing minimum wage that you’re paying to employees has the effect of increasing your labor costs, and in turn making your company look less profitable. If you just take all that money and shove it into buybacks, your profit margins stay the same and it’s good for shareholders in the long run, not necessarily for employees.

Now, this move is good for Main Street in the sense that people’s 401(K)’s have never been higher. A lot of buybacks, over time, will increase the inherent value of the shares you own, or your 401(K) indirectly owns. It can be good for Main Street that way. But until companies have more incentive to direct their tax cut savings into wage growth as opposed to dividends and buybacks, I really foresee more of the same.

Moser: We’ve seen a lot of companies offer up those one-time bonuses. I think that was very headline-driven. Right as this legislation was passed, we saw a lot of these companies come out praising it and immediately offering these $1,000 bonuses to all of their employees. A nice thing. No one would ever turn down money. You have to remember, though, that’s a one-time deal. There’s a tax implication there. And, again, one and done. I’m certain that wouldn’t create the same incentive as a nice boost to the paycheck over a longer stretch there.

I thought of two things as we were reading through these stories here. No. 1, we know that Amazon recently went ahead and decided they’re going to raise their minimum wage for their employees. I think that’s a little bit of hardball they’re playing. They’re really telling their competitors at this point, “OK, you guys need to follow suit.” And their competitors can’t really follow suit, because the economics don’t make nearly as much sense for them because Amazon is so much bigger. Another thing I thought of, though, and I’d love to get your opinion on this, I’ve always thought that while a lot of these changes may not flow down to Main Street as much as they help out Wall Street, we participate as investors. As investors, it’s nice to have that. We benefit from Main Street and Wall Street, because we work, and we also invest. I feel like, at least if you start investing, then you will at least benefit from stuff like this. But, what about if a company said, “Instead of offering up this $1,000 one-time bonus, why not structure something around an equity grant that vests over a certain period of time?” Maybe it’s two, three, four years. I just feel like that’s an opportunity, No. 1, to educate your employees more about the benefits of owning equities; and No. 2, it certainly gives you a workforce that’s a little bit more incentivized to stick around for a while and work as hard as they can to try to boost that share price. What do you think about that?

Frankel: Yeah, I’d definitely like to see some kind of more employee-friendly use of the tax funds. In my mind, it’s all about creating incentives. If there was an incentive for companies to do like you just suggested, I think we would see more of that. Shareholders hate seeing profit margins go down. By using the tax cuts to incentivize employees, it inherently makes your profit margins go down. Amazon’s profits are probably going to take a hit as a result of increasing their wages. There’s nothing shareholders hate more than a bad quarterly report. And unfortunately, if there was a tax credit to offset some of the cost of higher wages, we might see something like that happen. But until then, I don’t know. I hope I’m wrong. I’d love to see more wage growth. It’s good for everybody.

John Mackey, CEO of Whole Foods Market, an Amazon subsidiary, is a member of The Motley Fool’s board of directors. Jason Moser has no position in any of the stocks mentioned. Matthew Frankel, CFP has no position in any of the stocks mentioned. The Motley Fool owns shares of and recommends AMZN. The Motley Fool has a disclosure policy.

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