What Price for Jobs? 2

The first article in this series discussed the amount of capital a business must invest in order to be able hire just one person.  That's the amount of money a business has to shovel out the door to set up a store, or restaurant, or office in which to house a new employee before earning any money at all.  This article discusses the ongoing costs of keeping an employee on the payroll.

The vital point is that all of the costs of making the investment to create a job and all of the costs of keeping an employee on the payroll have to come out of sales.  Regardless of how greedy an employer might be, workers who aren't paid enough will find another job, and customers who feel like they're being overcharged will spend their money elsewhere.  This system of economic checks and balances forces businesses to be efficient, which benefits everyone.

Most of the liberal commentators seem to feel that businessmen are sitting on piles of cash and are simply too selfish to give unemployed people the jobs they need.  If they'd talk to a few business owners, they'd find out that it's not nearly that simple.  They can't do that, of course, because the actual facts on the ground would undermine their song of woe about how greedy bosses are.

Why There Are So Few Jobs

Unlike most media, the Wall Street Journal has not hesitated to quote business leaders who'll tell it as it is:

In a letter to his shareholders, Edward S. "Eddie" Lampert, chairman of Sears Holdings, summed up how Washington's political obstacles may impede a robust recovery:

"Sears Holdings shares the stated goal of many public officials of creating jobs. But, we don't believe that we need large government programs to generate these jobs. Public officials often fail to recognize the obstacles they place in the way of job creation. For example, over the past year proposal after proposal has been put forward to reform health care, reform the financial system, increase taxes, and add regulations, all with the intention of making the United States a better and stronger country.

"Yet, as a business, trying to understand which of these proposals might become law, what their impact might be on business prospects and competition, and what additional costs they might impose creates a great deal of uncertainty. It has led our management team and board (and I am sure those managements and boards of other companies) to spend inordinate time trying to determine which investments we should make, defer, or cancel and which jobs to create, maintain, or eliminate. The removal of this uncertainty and the constant drumbeat of new threats against various businesses would go a long way to allowing American entrepreneurial energy to be unleashed."  [emphasis added]

Sears Holdings is the 9th largest retailer in the US; it combined Sears with K-Mart and operates some 3,900 stores in the US and Canada. In spite of their size, the boss has to explain to his stockholders why their business can't grow - there's so much uncertainty that even after spending "inordinate amounts of time" trying to psych out the government, they can't decide which jobs to "create, maintain, or eliminate."

Mr. Lampert wrote to his stockholders before Obamacare passed.  It turns out he was entirely correct - Washington policies have indeed impeded a robust recovery, just as he predicted.

It's worse for smaller firms.  In "Why I'm Not Hiring," the Wall Street Journal published an article by the owner of a small New Jersey business which explains why he isn't hiring anyone just now.  The most interesting part of his article explained just how much money it takes to keep someone on the payroll.  It was written by Mr. Fleischer, the President of Bogen Communications in Ramsey, NJ.

The Cost of One Employee

Mr. Fleischer's article explained what it costs his firm to keep an employee whom he called Sally on the payroll.  She's the median in terms of base pay among his 83 employees.  That means that half of the employees make more than she does and half make less, which is why he used her as an example.

The bottom line is that it costs his business $74,000 to pay Sally $44,000.  Here's the breakdown:

You've looked at your pay stub and resented the amount the government takes from your paycheck, but you probably haven't seen the total cost of having you on the payroll.  Mr. Fleischer is the first business leader we've seen who explained just what the government really takes away from an employee.

From the employer's point of view, it doesn't matter whether a dollar goes to the health insurance company or to the feds, to the state or to Sally, it's all part of the cost of hiring Sally.  Sally doesn't see it that way - she thinks of her cost as $59,000 per year because that's her "salary" - but the boss thinks in terms of her total cost.

Start with the line "Sally's Salary" because that's what she sees on her W-2 at the end of the year.  The familiar paycheck deductions like federal and state income tax withholding, social security, Sally's share of health insurance, etc., give Sally a net pay of a bit over $43,000 out of her $59,000 salary.  So far so familiar.

Now let's start at "Sally's Salary" and work up.  Sally doesn't see it on her W-2, but her employer pays unemployment insurance costs, workman's comp, the employer's share of Medicare and Social Security, and the employer's share of health insurance.  Add in these, and it costs her boss more than $74,000 to give her $43,000 in take-home pay and $12,000 worth of benefits.

Assuming that Sally receiveds $12,000 worth of benefit from her insurance - somewhat questionable, as we've seen before - she gets a bit more than $55,000 in pay and insurance, the government takes over $18,000, and her employer pays a grand total of $74,000.

For every three dollars Sally gets, the government gets one; her total effective tax rate is around 25% even when you consider that a large portion - her health insurance - is technically tax-free.  Of course, the technicalities make no economic difference; what matters is the bottom line, which is somewhat grim.

There's Yet More Cost Involved

Is this all Sally costs?  Not by a long shot.  When Sally shows up at work, she wears out the paint in her employer's parking lot, she sits at an employer-funded desk and takes up space in an office for which her employer pays rent.  If she's an office worker, she has an employer-funded computer which generates heat which makes her boss run the air conditioner harder in the summer but cuts the heating bill a tad in the winter.

These non-salary costs are referred to as "General and Administrative (G&A)" and they aren't small.  Bogen publishes financial statements such as their 2009 annual report.  The next article in this series simplifies their financials to show you how much more maintaining jobs costs beyond salary.

Remember, every penny of any and all businesses expenses, including creating and maintaining Sally's job, must come from sales or the business dies and nobody has a job.  In the next article, we'll figure out just how much Bogen has to sell in order to support Sally and her colleagues.

Once you see how much money a business has to receive from sales to support an employee like Sally, you'll understand why businesses aren't able to create jobs during the Obama depression.