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The Effects of a Wage Increase by Large Corporations on the Macroeconomy



The Peterson Institute for International Economics has for some years undertaken research on inequality and inclusive capitalism, partially supported by a series of grants from the ERANDA Foundation. Last month, Aetna informed the Institute of its plan to raise the wages of its lower-paid workers. Following Aetna's announcement of its intention, the Institute is posting preliminary research on the economic implications of the relevant share of large US corporations raising wages for lower-skilled workers. The research has been undertaken without reference to the effects on Aetna or any specific company or sector.

At first glance, the $51 billion cost to large corporate employers arising from a hypothetical increase in low-wage pay to $16 per hour seems significant.1 When compared to the $5.61 trillion total of private sector wages paid in 2013,2 the proposed increase amounts to a 0.9 percent increase in aggregate wages or 1.1 percent increase in average wages. There may be a 0.3 percent of GDP redistribution from corporate profits to labor and a small bump in aggregate demand—depending on whether increases result in productivity gains or are passed through into prices. Because this proposal would be undertaken voluntarily by larger corporations with smaller shares of low-income workers, it should not affect hiring at the margin, thereby leaving the unemployment rate unchanged.

The largest effects would be felt by US corporations in terms of their unit labor costs. (This analysis excludes corporations that have more than 40 percent in the low-wage category. It also excludes the agriculture, retail, and food service sectors.) These effects may be thought of also in terms of labor compensation's share of GDP. Movements in the ratio of labor compensation to GDP (and its analog, the corporate profit share) can indicate the economies of substitution between labor and capital. In recent years corporations have shifted towards investment and away from labor in terms of their inputs.3 Figure 1 examines the effect of a 0.3 percent of GDP increase in labor compensation.

Figure 1 Labor compensation as a share of GDP


Source: Federal Reserve Bank of St. Louis FRED Database

The cost of raising wages to $16 an hour for all low-paid workers, as Aetna has announced it will do, would likely be mitigated by any improvement in productivity that results, as indicated in a separate posting by my PIIE colleagues Justin Wolfers and Jan Zilinsky. In this scenario the productivity increase would offset fully or potentially even exceed the 0.3 percent of GDP increase in wages. A similar offset would occur if corporations raised prices to offset the wage increase. As a result labor's share of GDP would either remain unchanged or potentially even decrease slightly. A second scenario demonstrates what would happen if there is no increase in productivity or in prices—the 0.3 percent of GDP is transferred from corporations to labor in the form of a real wage increase, so labor's share of GDP increases by 0.3 percent. The very small grey band at the end of figure 1 shows these changes in a historical context.

Figure 2 Wages and inflation


PCE = Personal Consumption Expenditures
Source: Federal Reserve Bank of St. Louis FRED Database, and

What of the effect on wages and inflation? Their historical trends are presented in figure 2. Wage inflation measured by average hourly earnings of production and nonsupervisory employees4—the type of employees affected by this proposal—has been stable for 30 years, with 12-month changes in earnings between 1.3 percent and 4.4 percent, with an average of 3.0 percent. Prices paid by consumers, here represented by Personal Consumption Expenditures (PCE) inflation numbers, have also increased at a moderate rate. Both wage increases and consumer prices have been depressed for some time, consistently undershooting Fed targets, and inflation expectations have been well anchored throughout the crisis.5

Based on my colleague Tomas Hellebrandt's calculations using Current Population Survey data, the proposal would increase average wages of all private workers by 1.1 percent, which would likely be phased in over time. Therefore, it is likely any price effects would be on the scale of 0.1 percent a month rather than a sudden jump. Considering the low inflation environment now in existence, an additional 0.1 increase in wages or PCE inflation in figure 2 does not look like a problem. And that effect would occur only if the labor costs are directly passed on to consumers by businesses, rather than being offset by productivity gains.

Disclosure: Aetna is a supporter of the Peterson Institute , and its CEO, Mark Bertolini, is a member of the Institute's Board of Directors. Aetna has not participated in the preparation of this analysis, and neither Aetna nor its employees has reviewed its conclusions, in keeping with Institute research and publication practices.


1. This examination focuses on the $16 per hour option, as its effect on the wage bill is much larger than the $12 per hour option.

2. "Total Annual Wages, Private, All Industry Aggregations, US Total, 2013," Quarterly Census of Employment and Wages, Bureau of Labor Statistics.

3. There are numerous explanations of why this may be. See, for example, Dylan Matthews, Robots, trade, and four other things that might be keeping you from getting a raise, January 8, 2015, Vox.

4. "Average Hourly Earnings of Production and Nonsupervisory Employees: Total Private," Federal Reserve Bank of St. Louis.

5. See, for example, J. Scott Davis, "Inflation Expectations Have Become More Anchored Over Time," December 2012, Federal Reserve Bank of Dallas.

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