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Tax cuts no cure for middle-class economic woes

Contact: Nan Gibson (202) 331-5546 or Brian Lustig (202) 331-5530

Slow Income, Wage Growth; Declining Health Care Coverage; Manufacturing Job Losses Persist

Washington, D.C. – The strong economy of the past few years has lifted the fortunes of most workers. Low-wage workers have benefited from both the tight labor market and the increase in the minimum wage, while the wealthy continue to enjoy wage and income growth and reap huge gains from the stock market run-up. However, for middle-class workers, wages and benefits have not improved throughout the economic recovery, leaving them barely ahead of where they were a decade ago and still trailing well behind growth in labor productivity, according to a new study released this Labor Day by the Economic Policy Institute (EPI).

Some policymakers argue that cutting the federal income taxes paid by middle-income workers is the best way to deal with their stagnant living standards. According to Citizens for Tax Justice, middle-income families would receive an average tax cut worth about $278 under the current tax cut proposals – at best, a one-time adjustment that does nothing to change the long-term trends in wages and incomes. The labor market problems facing the typical family are felt before any taxes are taken out of their paychecks, so cutting federal income taxes is not a sufficient policy tool for raising the fortunes of the middle-class.

Tax Cut No Cure for Middle Class Economic Woes, by EPI economists, Jared Bernstein, Edie Rasell, John Schmitt, and Robert E. Scott, examines three aspects of the labor market which have contributed to the difficulties facing middle-class workers over the past decade: hourly wage trends of workers in the middle of the wage distribution (by gender and education); changes in employment within the manufacturing sector, an important generator of middle-class jobs; and the availability of employer-provided health insurance, a further indicator of how middle-class workers are faring. The report also contains 1998-99 state-by-state median wage data.

By 1997, median family income had just recovered to its pre-recession level. Though it has risen over the past few years, at $44,468 the income of the median family is less than $300 above its 1989 level (in 1997 dollars). Furthermore, the modest income gains that middle-class families have realized have come mostly as a result of working more hours, a sign that living standards for these workers have not improved as much as the highly touted nature of economic growth might suggest.

The report’s other key findings include:

  • Despite gains over the past two and a half years, the inflation-adjusted hourly wages of middle-wage men were 1.8% lower in 1999 than in 1989, the previous business cycle peak. Though middle-wage women workers have fared better than their male counterparts, by the middle of 1999 the median female worker’s wage was only 3.4% above its 1989 level.
  • The 62% of the workforce with just a high-school degree or some college in 1998 has yet to reap the benefits of the high productivity growth that some think heralds the “new economy.” Real wages for high-school educated men in this group were 2.7% lower in mid-1999 than in 1989, while men with some college had wages that were 0.5% lower in 1999 than they had been in 1989.
  • Women with high school or some college experienced little real wage growth until 1996. By mid-1999, wages were 3.9% above their 1989 level for those with high-school degrees and 2.2% higher for those with some college.
  • Middle-income families are working more hours than ever before. The typical married-couple family with children, for example, worked 256 more hours per year in 1997 (the most current available data) than in 1989.
  • Employer-sponsored health insurance coverage (through their own employer or through a spouse’s) among 18-64 year old workers with a high school diploma declined from 72.1% in 1989 to 69.5% in 1997.
  • The manufacturing sector remains an important source of middle-class jobs for non-college educated workers, especially men. The Asian financial crisis and the ensuing growth in the U.S. trade deficit have contributed to the rapid loss of manufacturing jobs – 491,000 since March 1998, 2.6% of total manufacturing employment.
  • Productivity – a broad measure of growing economic efficiency – grew by 12% from 1989 to 1998. Despite their contribution to productivity growth, many middle-class workers continue to experience wage growth that lags behind the overall economy.
  • Since the labor market problems facing middle-class families are felt before any taxes are taken out of the paycheck, cutting the federal income tax is not a sufficient solution. Moreover, the share of income the Congressional Budget Office estimates that middle-class families pay in federal income taxes – 5.4% – is too small to make tax cuts an effective policy tool.

“The booming economy has thus far failed to lift the economic prospects of middle-class workers beyond where they were before the last recession,” the authors write. “Despite their substantial contribution to the growing economy, wages for these workers have been stagnant or declining, manufacturing jobs are disappearing at an accelerated rate, and the share of non-college educated workers with employer-provided health coverage has declined.”

The authors suggest a set of economic policies that can help to remedy these negative trends afflicting middle class families. First, the Federal Reserve should resist raising interest rates so that the current pattern of positive, noninflationary wage growth can continue. Second, the Fed and the U.S. Treasury should work to lower the value of the dollar, thereby restoring the competitiveness of U.S. goods on world markets. Third, the U.S. should strive to provide health insurance coverage to all Americans through a publicly financed insurance system.

Jared Bernstein is a Labor Economist with EPI. He tracks developments in family income inequality and poverty, with an emphasis on low-wage labor markets. He is also the co-author of the last four editions of The State of Working America.

John Schmitt is a Labor Economist at EPI. He has written for general and academic publications on wage inequality, the minimum wage and unemployment. He is the co-author of The State of Working America 1998-99 (Cornell University Press, 1998).

Robert Scott is an International Trade Economist at the Economic Policy Institute. This author specializes in international trade and global finance issues. Additional publications by Dr. Scott include Exported to Death: The Failure of Agriculture Deregulation (1999), and American Jobs and the Asian Crisis: The Employment Impact of the Coming Rise in the U.S. Trade Deficit (1998).

Edith Rasell is an Economist with the Economic Policy Institute. She specializes in issues related to Medicar
e and Social Security, health care financing, and labor economics. Dr. Rasell is co-author of The Prosperity Gap: A Chartbook of American Living Standards (1997).

The Economic Policy Institute is a nonprofit, non-partisan economic think tank based in Washington, D.C. Its founders include economic policy experts Jeff Faux, Lester Thurow, Robert Reich, Robert Kuttner and Ray Marshall.

To order copies of Tax Cut No Cure for Middle Class Economic Woes contact EPI at 1-800-EPI-4844. The full text of this report is available online by visiting EPI’s Web site at or call 1-800-EPI-4844 to order copies at $5 each (plus shipping).