Friday, November 26, 2004

Tax Cut Article - Part 5 of 5

We now come to the last part of the question and that refers to the quality of the jobs being created.

Like the Reagan tax cut in the 1980s, opponents of the Bush tax cut are reluctantly conceding that the tax cut is creating jobs, but they criticize it for both not creating enough jobs and for creating mostly lower wage jobs.

The simple response to this is that, since there are more entry level and other lower end jobs than there are higher end jobs, it is logical that there would be more lower end jobs created. Remember the story about Ronald Reagan when he was an actor and limited himself to making five movies per year because the high marginal tax rates would tax away most of the earnings from the sixth. It was pointed out that, in addition to Reagan voluntarily making himself unavailable for a sixth movie, all of the lower paid supporting cast as well as support crews also lost out on the chance to be employed on the sixth movie.

New jobs are being created at both ends of the spectrum and in the middle but, since higher end positions usually require many more lower paid positions to support them, more lower end jobs will be created. Also, many of the new higher end jobs are taken by people who are already employed and see a chance to move up or people, like Ronald Reagan, who are not unemployed, in the sense that they have voluntarily limited the amount of work they do, and are now incrasing their employment activities in response to the new tax environment.

Another factor, usually not considered by the media and oposition politicians, is the fact that, due to increasing efficiency and output per worker, money wages are flat or increasing slowly while prices are falling. The falling prices mean that real wages (the amount that the money wages will buy) are increasing. This means that, despite the fact that money wages are not rising, workers are able to afford more with the money wages. This is the same as a raise in money wages when prices are constant. This is called secular deflation and occurs when the aggregate damand curve remains relatively constant while the Long Run Aggregate Supply Curve keeps shifting to the right as output keeps increasing.

The job quality issue, like the other aspects of the tax cut, can be looked at in more than one way depending upon the viewer's perspective. What is happening is that our economy is moving away from central management from Washington and toward a more free market model. The majority of the people benefit from this in the form of more products and lower prices and this is good. But there are some losers and they are the ones who were fortunate enough to get jobs in protected areas (such as unionized manufacturing) where the government protected their high wages from competition. But the cost of that system of protecting the higher than average wages of certain groups of workers came in the form of everyone having to pay higher prices.

No comments: