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"Less For Our Labor" Day?

Mises Daily: Wednesday, August 28, 2002 by

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Every Labor Day, the U.S. is carpet-bombed with politicians' rhetoric extolling working Americans' very real and substantial contributions to our society, followed by words of devotion to their interests. From their speeches, you would think that the government was doing wonderful things to help workers. 

But, in fact, with the average American spending more to fund government than to buy food, clothing, and shelter combined, the greatest impact the government has on those of us for whom it cares so much is through the huge gap it creates between the value of our productive contribution to others in the workplace and what we actually take home.

In other words, the government's primary contribution to our lives is to make us substantially underpaid for the productive work we do, judged by the line labeled "net" on our pay stubs. But because our net is all that most of us really look at any more, we tend to blame our employers rather than the government for that underpayment

If you are one of those whose net pay makes you feel underappreciated by your employer on "your" holiday, remember that what your employer pays for your services is far greater than what you net. The grasping hand of the government that is "honoring" you  is primarily to blame for the difference between what you are "worth" to your employer in productivity and what makes it to your bank account.

The most obvious difference between your gross and net pay is income taxes. But if you are like most, you are now so accustomed to income tax withholdings--which you can do little about but change your claimed exemptions at the beginning of the year--that you don't even look at the amount withheld from your pay any more. Labor Day is a good time to take another look at how much of your compensation goes directly from your employer to the IRS, rather than to you.

Social Security and Medicare taxes, which are greater than income taxes for a substantial majority of Americans, also create a huge gap between workers' compensation and their net pay. Some do not even know that 7.65 percent of their pay goes toward Social Security and Medicare taxes. Those who do notice often say "I was robbed" as they get their paycheck (remember what you or your children said upon receipt of that first "real" check, if you have forgotten). 

But even then, they recognize only half of the tax cost, because employers must also "contribute" an equal amount on your behalf, an amount that really comes out of your pocket. Employers compare their estimate of your productive contribution with the cost of your entire compensation package. 

The result is that, since employers know they must bear this 7.65-percent tax over and above the wages they pay, they offer less in wages. But employers, rather than the government, get the blame for the resulting underpayment for our skills.

Other taxes supposedly borne by employers are also borne by employees in reduced net pay (or higher prices for the products they buy, which is analytically equivalent), as well. Unemployment taxes and "workman's comp" payments may be officially paid by your employer, but workers actually bear any resulting burdens employers can anticipate from hiring them. Sales and excise taxes also lower the net value to purchasers of the goods and services workers produce.

Similarly, corporate taxes impose a burden on workers, either by reducing their pay or increasing prices they must pay out of their earnings. In each of these cases, you may blame your employer for the lower real wages that result, but the government actually gets the money, along with accolades from taxpayers who think they are less burdened (instead of indirectly burdened) as a result.

Further, because all of these taxes reduce saving and investment, they also reduce the accumulation of capital over time below what it would have been otherwise. With fewer tools, workers are less productive, and they receive less income as a result.

Benefits which the government mandates employers to provide their workers also really come out of workers' pockets, because that cost is part of their total compensation package, which must be covered by the value of worker output to their employer. Similarly, the productivity-reducing costs of complying with regulatory burdens (a "tax" of hundreds of billion dollars a year) reduce take home pay.

Labor Day is intended to recognize and honor the contributions of the working men and women of America, and to give politicians a chance to make speeches to show how they represent the interests of every worker. But rather than a holiday that mainly reminds me how much the government makes me underpaid with what they squeeze out of what I earn, I would feel far more appreciated if the government just took less instead.


Gary M. Galles is a professor of economics at Pepperdine University. Send him MAIL, and see his Mises.org Articles Archive.