September 10, 1999

Tax Cuts No Cure For Middle Class Economic Woes

The strong economy of the past few years has lifted the fortune of most working families. At the bottom of the wage and income scales, workers whose living standards declined steadily over the past 25 years have benefited from both the tight labor market and the increase in the minimum wage. At the top of the income ladder, the wealthy have continued to enjoy wage and income growth and have reaped huge gains from the growth in the stock market, according to a new study released by the Economic Policy Institute (EPI).

But what about the middle? Neither the minimum wage nor the stock market does much for workers in middle-income families. The tight labor market has helped those in the middle class, but the gains have been modest compared to the benefits received by those at the bottom.

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 Cuts 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; changes in employment within the manufacturing sector; and the availability of employer-provided health insurance.

From 1989 - the year the economy peaked before slipping into the early 1990s recession - to 1993, the income of median family fell. It began to rise in 1994, and by 1997 it stood at $44,468 - about $300 (in 1997 dollars) above its 1989 level. Yet middle-class hourly wages have been stagnant over this period.

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.

Three key features of the labor market have continued to buffet the progress of middle-class families even as the economic tide rises: wage trends for workers in the middle of the wage distribution, jobs in the manufacturing sector - an important generator of middle-class jobs _ and the availability of employer-provided health insurance. Trends in these three areas have rendered the following consequence for families in the middle:

• Despite gains over the past two and half years, the inflation-adjusted hourly wages of middle-wage men were lower in 1999 than in 1989, the year of the previous business cycle peak.

• Middle-wage women workers fared better than men over the business cycle. Nevertheless, 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 many think heralds a new economy. Real wages for high-school-educated men in the group were 2.7% lower in 1999 than in 1989, while men with some college had wages that were 0.5% lower in 1999 than in 1989.

• Women with a high school degree or some college experienced little real wage growth until 1996. By mid- 1999, their 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 than in 1989.

• The share of high-school-educated workers with employer-sponsored health insurance coverage fell from 72.1% in 1989 to 69.5% in 1997. For those working full time, year round, the share with health insurance through their own employer fell by 5.3 percentage points between 1989 and 1997, from 66.0% to 60.7%.

• The manufacturing sector remains an important source of middle-class jobs for non-college-educated workers (especially men), but the Asian 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, or 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," states the report. "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."

Economic policies can help to remedy these negative trends afflicting middle class families. First, the Federal Reserve should continue to resist raising interest rates so that the current pattern of positive, noninflationary wage growth can continue. Second, the Fed and 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.

(The Economic Policy Institute is a nonprofit, non-partisan economic think tank based in Washington, D.C. The full text of this report is available on-line by visiting

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