Did the tax cut really produce those bonuses and pay raises?

Veronique de Rugy suggests that the bonuses and pay raises granted by many employers right after the tax cut was signed into law might well have been coming even without the tax cut. The key to the increase in worker compensation, she proposes, is the very tight labor market.

De Rugy quotes the Wall Street Journal:

With the unemployment rate low and unfilled job openings high, losing workers to a competitor can be more costly than handing out bonuses. Indeed, the concentration of tax-cut bonuses and raises in certain industries suggests one reason companies handed them out was that they didn’t want their employees to view them as stingier than competitors. Several airlines and dozens of banks got on the bandwagon.

So the real news in the flurry of bonuses and raises might be that the job market has tightened to the point where wage growth, which has long been stagnant, is beginning to pick up. As that occurs, more companies will need to hand over more money to employees. The tax cut will make it easier, but they will still have to pay.

This strikes me as a very plausible analysis. Indeed, with Moody’s estimating that the unemployment rate will drop to 3.5 percent by the end of the year, it’s difficult to see how employers could resist pressure to increase employee compensation.

This doesn’t mean the tax cut isn’t a big plus for the economy. As de Rugy explains, the traditional economic rationale for cutting taxes isn’t to create immediate wage hikes for employees. Rather, it is to increase capital expenditures, which helps the economy (and workers) over the long term.

De Rugy observes that many companies “have made commitments to jack up their capital expenses significantly” and, indeed, capital expenses are “seriously heating up.” “We should expect this trend to continue with positive results for the economy and workers,” she adds.

The tax cut enables companies increase capital expenditure and, at the same, increase employee compensation.

Moreover, even if we assume that compensation would have increased by about as much without the tax cuts, it may be that with the cuts, companies won’t have to pass along to consumers as much of the wage costs. This should decrease inflationary pressure which, in turn, should help sustain the recovery.

JOE adds: This evening news broke that The Walt Disney Co. is joining those companies paying special bonuses. In the case of Disney, the company will pay a $1,000 bonus to 125,000 employees. Disney is also setting aside a $50 million fund to cover tuition costs for its hourly workers.