US tax cuts may not trickle down to employees

Pfizer is evaluating how to use its tax gains "on behalf of all stakeholders", a spokesman said when asked about pay and bonuses. "Our compensation is driven by performance, not legislation, and is set at a competitive level."
Pfizer is evaluating how to use its tax gains "on behalf of all stakeholders", a spokesman said when asked about pay and bonuses. "Our compensation is driven by performance, not legislation, and is set at a competitive level."PHOTO: AGENCE FRANCE-PRESSE

Firms may hand tax gains to shareholders; use non-wage benefits to avoid raising base pay

WASHINGTON • President Donald Trump says his corporate tax cuts are setting off a domino effect that will finally end the long, lean years for American wage earners. And there are a handful of very public commitments to increase pay - from Walmart to AT&T - that seemingly back that up.

But a tale out of another giant company, Pfizer, illustrates why it may be too early to predict a wage bonanza. Hours after Mr Trump signed the tax law, Pfizer chief executive Ian Read wrote to 100,000 employees and contractors.

He hailed a landmark measure that would galvanise American business. Mr Read's memo made no mention of higher salaries or bonuses, though, and the company has not announced any such plans.

That did not sit well with one woman working for the drugmaker as a contractor in Chicago. It was late, and she was annoyed by Mr Read's message, so she responded with a salty one of her own.

Why, she asked, was the boss sharing his jubilation at all the benefits the company was set to reap - when none of them might trickle down to its workers? Not only did she not get a raise - she was tossed off the contract. Her "assignment was ended solely because of the use of inappropriate and unprofessional language", Pfizer spokesman Joan Campion said.

In a way, the contractor - who asked not to be identified by name, saying she did not want to lose out on future jobs because of the episode - was only following Mr Trump's advice.

The US President said that more than a million workers already got a pay boost from the tax cuts - and that "there's more to come", because "the ones that didn't get it, everyone is saying, 'Where's mine?' So they're all going to have it".

Many firms say they will hand any additional cash from the tax cuts not to employees but to shareholders, through dividends and buybacks - or spend it on acquisitions, which often result in job cuts.

That would be a big deal for the economy and for markets. Lacklustre pay has been a weak point of the United States' recovery after the Great Recession, helping to keep inflation below the Federal Reserve's target rate, and bond yields at historically low levels.

Some of the top names in fixed-income investing are starting to call the end of that decades-long rally - citing Mr Trump's tax cuts among the factors. The case gets a boost every time a corporate employer raises pay. The biggest of them all did exactly that: Walmart has increased starting hourly rates and handed out bonuses. Last Thursday, Fiat Chrysler Automobiles joined the party.

As for Pfizer, it is evaluating how to use its tax gains "on behalf of all stakeholders", Ms Campion said when asked about pay and bonuses. "Our compensation is driven by performance, not legislation, and is set at a competitive level."

That is a key part of the case that Mr Trump's tax move won't be a game-changer in labour markets.

Corporate profits will rise - but they have been elevated, by historical standards, for several years already, and workers have not seen big benefits. Some firms were doubtless planning pay hikes anyway.

But whatever was a competitive wage before the tax cuts, in employers' eyes, will remain one afterwards. Or, as Philadelphia Fed president Patrick Harker expressed it recently, putting himself in a CEO's shoes: "At the end of the day, I'm going to raise wages because I have to, not because I want to."

Of course, that could happen. There are plenty of economists, including Mr Jan Hatzius at Goldman Sachs, who do expect broad wage acceleration as companies compete for scarce workers. In the takeoff camp's favour is an unemployment rate that looks poised to drop below 4 per cent for the first time since 2000.

There are signs that "firms are starting to be a little more generous", said Mr Stephen Stanley, chief economist at Amherst Pierpont Securities in New York.For those who doubt that 2018 is the year pay will finally pick up, employment is a more important benchmark than unemployment.

The jobless rate may be near the lows it reached at the end of the 1990s boom but that is partly because many Americans have given up on job-seeking. The share of the working-age population that is actually in work has not recovered to the level it reached before the Great Recession, let alone its 2000 peak - leaving a pool of labour on the sidelines.

Anecdotes also suggest that businesses are turning to non-wage compensation, like benefits or flexible work schedules, to avoid increasing base pay.

Many firms say they will hand any additional cash from the tax cuts not to employees but to shareholders, through dividends and buybacks - or spend it on acquisitions, which often result in job cuts.

Cardinal Health, the drug distributor, will "look at strategic M&A opportunities and we'll return cash to shareholders", chief financial officer (CFO) George Gomez told investors in San Francisco.

Pfizer CFO Frank D'Amelio was asked in an October call how the company might use extra funds from the tax measures. He listed its capital allocation priorities: "dividends, share buybacks, investing in the business, and M&A".

THE WASHINGTON POST

A version of this article appeared in the print edition of The Straits Times on January 15, 2018, with the headline 'US tax cuts may not trickle down to employees'. Print Edition | Subscribe