tonto, I’m going to jump in here and suggest to you all that in certain isolated cases some employees would receive higher wages but across the U.S. most would not.
Lets start with a simple hypothesis: The social security match on employers is eliminated.
Question: who would get the money? Answer: In most cases the business owners, but it depends.
Situation 1
The employees work for companies that operate in either monopolistic or oligopolistic markets.
In such a situation, there is NO effective price competition for the goods and services the companies produce. The companies are profit maximizers. In the monopoly case, neither consumers nor labor have bargaining power so they get nothing. In the ologopolistic case(very typical of many industries in the U.S. nowadays), price wars are are understood by the participants to be counter-productive. While typically there is not de jure collusion on prices, there is de facto collusion. So in either case, the companies take the lowered operating cost and pass it back to the owners. Please note that only current owners benefit (see postscript).
Result: The employees do not receive higher wages.
Situation 2
The employees work for companies that operate in markets that are perfectly competitive.
Situation 2A:
If the supply of labor exceeds the demand for labor, then there is NO impetus to pass along the savings to the employee because the employee has no bargaining power. (and people wonder why we have an illegal immigration problem?) Again, companies are profit maximizers. Hence, in perfectly competitive industries they will take the lower expense from the elimination of the employer match and pass it along to consumers in the form of lower unit price in an attempt to gain market share.
The employees do not receive higher wages (though there is a societal benefit to consumers in the form of lower prices).
Situation 2B
If the supply of labor is tight AND IF the labor productivity makes a measurable difference in the overall cost of production of the good or service, then some of the benefits of the reduced cost will be passed along to the employee in terms of higher wages. The company will attempt to trade off lower cost (social security match) against higher wages (tight labor market offset by productivity gains from the best employees – though this is a game of musical chairs) and lower unit revenue (cost reductions passed to consumers) in order to increase market share (higher unit sales).
The employee only receives a portion of the benefit in terms of higher wages (though again there is a societal benefit to consumers in the form of lower prices).
So:
In all the cases, the employees receive either none or only a portion of the cash associated with the elimination of the employer match. Furthermore, the above ignores the “externalities.” That is, that since the employees either didn’t receive higher wages – or only a portion of them – they now have to fund private retirement insurance from other disposable income. Now if on a macroeconomic basis, the market for ALL goods and services are perfectly competitive, in theory, the lower unit cost for goods and services purchased would increase disposable income enough so that the employee is NO WORSE off. But in NO case, in the aggregate, have they gained. Now when we consider that the economy overall has very few industries that are “perfectly” competitive (perfectly competitive markets being a theorectical construct rather than a practical reality), it becomes mathematically impossible to claim that the employees – as a whole across the U.S. – would not be harmed by the elimination of the match. Yes, there would be some winners, but most would lose.
If anyone can hypothesize a situation whereby the employees get all of the benefits of the elimination of the social security match I’d love to hear it. But I don’t think anyone can because it was pretty well understood at the outset of social security that the match was a tax that essentially - but indirectly - in the short term transferred wealth from capital to labor. The argument that the consumer always ultimately pays is just plain false. The reason why it’s false is because people don’t consider nominal and real rates of return relative to risk (but that’s a whole ‘nother’ post). In the abstract you can make the argument that elimination of the match would correct a 70-year injustice to business owners, but ultimately that argument falls flat for the reason in my postscript and the following. Take the example of Henry Ford. Notwithstanding how he was later vilified for his political views, initially he was hated by his peers in the business community because, overnight, he doubled the wages of his workforce. He did so because (a) he eliminated turnover and got a more productive workforce and more importantly (b) he realized that that in order to sell cars there had to be sufficient income to buy them. Business benefits from having a large base of consumers with sufficient disposable income to buy there products.
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Only current owners would benefit from the elimination of the match just like current owners benefit from any reduction in cost. For example, Businesses in an industry on average are valued at 10x earnings. Company A has $10 of earnings so its fair market value is $100. The social security match is eliminated causing the earning to rise to $11. The fair market value is now $110. Company B buys company A for $110. The owner(s) of Company A have just gotten and extra $10 in purchase price over what they would have immediately preceding the elimination of the match. All other thing being equal, Company B cannot later pass along the cost savings to employees due to the elimination of the match because they’ve already paid the former owners for the right to capture the $11 in earnings, In other words, if they don’t continue to get $11 in earnings they won’t generate their expected rate of return. Essentially, it becomes a one time windfall to the current owner. |
