Why He’s Not Hiring

Writing in the Opinion section of the Wall Street Journal, business owner Michael Fleischer explains Why I’m Not Hiring.

Fleischer explains that for one of his associates to take home $44,000 + $12,000 in benefits, it costs his company $74,000, much of that difference coming from some sort of tax or government program.  His conclusion:

A life in business is filled with uncertainties, but I can be quite sure that every time I hire someone my obligations to the government go up. From where I sit, the government’s message is unmistakable: Creating a new job carries a punishing price.

While Fleischer’s point is well-taken, I have two things to add.

First, I was struck by the number of things that his company provides or pay.

Payments to government: Social security, state unemployment insurance, Medicare, New Jersey income tax, Federal income tax, Federal unemployment coverage, disability insurance, workers’ compensation.

Costs incurred by company/associate because of government or tax policy: Employee/spouse health insurance, dental insurance and life insurance.

All of these, with the exception of Federal and State income taxes could be provided privately.  For example, there are several ways unemployment insurance can be provided privately.  First, people can self-insure by saving up an emergency fund.  Second, if the risk was still great enough, insurance companies would offer unemployment insurance for us to buy.  Perhaps that would be something they would bundle in with a whole host of other insurance products and create versions of it that might work better for us.

For example, someone who follows responsible savings habits and establishes a 1-year emergency fund might decide to buy an unemployment policy that kicks in after 1-year.

Regarding health insurance, employers provide it and employees choose to accept this because tax policy and company greatly favors this arrangement.  The company pays $7,000 for what the employer views as $10,000 in compensation and the employee views as $15,000 – $20,000 compensation.

The employee views this as $15,000 – $20,000 in compensation because if the employee chooses to buy health insurance on the open market, most companies won’t increase compensation by an amount equal to what the company pays for the employee’s insurance.

Perhaps, the associate could find better deals that better suit their personal preferences, but they choose not to because they are either forced to fund the government solution just for the privilege of being employed or the cost difference driven by the tax policy is great.

Second, I was also struck by the gap between the what employees cost a company and what the employees are willing to for.  His associate needs to add $74,000 of value before creating a job that will provide the associate with $56,000 of pay and benefits.

In minimum wage discussions, we always focus primarily on what the employee takes home and we say things like, “if we raise the minimum to $8/hour, then the associate has to produce $8/hour worth of value or more to be hired.”  That’s too simple.  With all the add-ons, from the company’s perspective, it’s really more like $10 – $12/hour.

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2 thoughts on “Why He’s Not Hiring

  1. You actually make it seem so easy with your presentation but I find this matter to be actually something
    which I think I would never understand. It seems too complex and extremely broad for me.
    I am looking forward for your next post, I will try to get the hang of it!

  2. “Creating a new job carries a punishing price.”

    So, why the difference between the take home pay (plus benefits THAT THE EMPLOYEE VALUES) and what the employee actually costs the employer?

    To put in in the vernacular, that difference due to the fact that the politicians write check with their mouths that their asses can’t cash. In other words, the politicians make promises, them expect business owners (particularly small business owners) to bear the brunt of paying for those promises.

    Most employees would NEVER pony up the dough for many of the “benefits” that employers are forced to purchase. If they thought it was coming out of their own pockets, they would examine the cost and compare it to the benefit and reject it. But when they think that someone else – the “rich” guy – is paying for it, they see no downside.

    Guess what? Someone has to pay for all these benefits. These costs are all essentially taxes and while it may appear that the employer bears the burden of these “taxes”, that’s not the case. The employer is simply where the tax gets collected. The “incidence” or burden of the tax depends on the price elasticities of supply and demand (this is a fancy way of saying the responsiveness of the quantity supplied or demanded to a change in price, i.e. if there is a product that all consumers want and for which there is no substitute, they will demand a similar quantity even if the price is increased – the demand is said to be inelastic).

    Now, if we look at labor as our good being supplied (by employees) and demanded (by employers), we can predict who will bear the burden of these taxes under various situations. In today’s market and with today’s unemployment numbers, I think it’s a safe bet that labor supply is relatively inelastic at least when it comes to unskilled labor. Note: I believe I have made a different case for experience and highly skilled/educated workers in another post as it is harder for employers to replace these workers – due to poor schools and poor incentives to become productive. Demand (especially demand for full time labor) in the unskilled arena is more elastic – to use Seth’s window analogy, this can be seen by simply looking out the rhetorical window – or at the news. Thus, we can predict – we might be wrong if we fail to consider other factors – that employees will bear most of the burden of these taxes. This can take the form of lower wages (or the lack of raises), more work (fewer employees doing work that was previously done by more employees), subtly worse working environment, etc. It can also take the form of fewer jobs or fewer full-time jobs.

    The message is that if you’re an employee (or potential employee) and you’ve been cheering on the government for forcing those “greedy” employers to provide more benefits – some of which you don’t even understand, many of which you will never use – because you’re not a transgender, bipolar, druggie – and all of which are overpriced because they are being purchased by some government worker from a political crony with “other people’s money” (that’s OPM for short – sound out the initials and you’ll see the irony in why this is so addicting), you really need to appreciate who is really paying for all that stuff and why you don’t have a job.

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