Reducing Real Compensation

I should point out that minimum wage was raised about 40% and that effect wont go away without some inflation. Also that private sector wages are less sticky than they were in the 70's and 80's due to less union involvement.

I'd go further on the employer contribution to health care. If that contribution was converted into salary (for $0.90 on the $1 of premia), then employers would save money (still tax deductible) AND employees would take control over their health insurance. The combination of more competition, a desire to keep more of the premium AND the 10% cut they just took (whoops! sorry!) would put massive downward pressure on costs. More here.

What exactly is the "payroll tax"? Is it Social Security? Medicare? FUTA? State UI? All four?

Perhaps I'm wrong but I was under the impression that there is no "payroll tax" in the sense of taxing payrolls for general revenues.

@Rich:

Yes, it's (e) All of the above. As an employer, my payroll service debits my account every time I run payroll, based on the size of that payroll.

Where those dollars go once they leave my bank account is orthogonal--for me, it's a tax on payroll.

In any event, history suggests that taxed dollars go wherever politicians want them to, regardless of whose name taxpayers write on the check. SocSec taxes were used for general expenditures for decades, while the Stimulus bill sent hundreds of billions to pay for state Medicare and UI programs. It's all one big barrel, and we're over it.

Don't you have a significant problem if you reduce real wages without also reducing real household expenses? Most households have nominal monthly costs that can be hard to float downwards even in a deflationary environment. Most obviously housing costs, because rents and mortgage repayments are fixed for at least a year in most cases, but also other fixed interest debt eg. car loans.

Any cut in the households real income is magnified by these sticky expenditures, so unless you're very careful these kinds of policies will reduce real household expenditure and saving and thus reduce aggregate demand (or if you think that's too hydraulic, demand for investment goods and household consumables).