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Although there are a few signs that unemployment may have peaked - the Wall Street Journal says that about 162,000 more people were hired than were laid off in March - the way back to former employment levels will be long, hard, and slow. Knowing what it costs to create a job may help you understand why recovery will take so long.
WMUR reports that Lowe's is building a home improvement store and garden center in Salem, NH. Other media reported that the total project will cost $12 million and that the store will create about 120 full-time jobs. $12 million divided by 120 jobs shows that an investment of $100,000 is required to create one new retail sales job.
Lowe's plans to make money operating their new store. Thus, Lowe's customers will have to pay for everything associated with it - property taxes, electricity, snow plowing, wages, salaries, Social Security and health care taxes, and, finally, the cost of the goods they sell with, they hope, some profit built in. Every penny of these costs has to be built into the prices their customers pay plus something to pay back the investment and maybe make a profit.
The people who run Lowe's are optimistic enough about the economy in the area around Salem that they're willing to invest $12 million in building a new store. They are also assuming that the government won't impose any new regulations that would make it impossible to operate their store, and they're assuming that neither labor unions nor health care will run up the cost of labor to the point that the store will lose money.
They've analyzed current conditions and decided that they can make money on their $12 million investment. But that holds only if rules, regulations and other conditions don't change all that much.
There is no guarantee that Lowe's will actually make money from their new store, of course. A short distance from their new site a major shopping mall has an empty store that used to be a JC Penney outlet. Penney's management thought that they'd make money when they opened their store, only it didn't work out as well as they'd hoped.
A few miles from Lowe's in the other direction there's a smaller mall which has a Quiznos sandwich outlet. The owner invested in a Quiznos because it's one of the lowest-cost franchises available and he wasn't wealthy. Even at the low end, it cost $250,000 to open the doors.
His store creates 2 full-time jobs and several very small-scale part-time jobs to cover weekends and rush times. Although his objective wasn't exactly creating jobs, he, too, invested about $100,000 per job created.
Like Lowe's, Quiznos has to get every penny of its costs from customers. This particular franchisee doesn't own his real estate so he pays rent instead of paying property taxes and his various maintenance costs are included in the rent, but he pays for phone and a lot of electricity to run the sandwich ovens. The bottom line, he told me, is that he has to sell $80 worth of sandwiches for each hour each of his employees works in order to break even. He has to sell more than $80 per employee-hour to make any profit at all.
Does he pay his employees $80 an hour? Of course not; a Quiznos sandwich-shuffler is a minimum-wage job unless the employment market is very strong. Yet because of all the other costs of operating his business, the store must sell ten times as much product per hour as the employee makes before the owner makes a dime.
I spent several years installing productivity improvement software in an automobile engine plant out in Michigan. The plant cost about $1 billion to build because it was highly automated. In addition, it produced so many different models that it required about a billion dollars worth of parts on hand just to be sure they didn't run out of inventory.
The plant was designed to produce 4 high-end engines for cars like Lincoln Continental or Cadillac per minute.
Running two shifts of 10 hours per day, the plant employed about 750 people. Two billion dollars invested divided by 750 jobs is $2,666,666 per job. Each job in the engine plant required ten times as much investment as setting up the Quizno sandwich shop which created two and a half jobs.
Making engines pays a tad better than making sandwiches, of course. Just before the GM bailout, the UAW had negotiated total labor costs including benefits and pensions up to around $70 per hour. Thus, a UAW worker cost nearly as much per worker-hour as the Quiznos sandwich shop took in per worker-hour. UAW wages have come down a bit since the bailout, but so have wages at Quiznos.
The engine plant had been built on the site of a former tractor plant which had employed 2,500 workers. High levels of automation in the new plant reduced the number of jobs. Since it cost $1,400 per day per worker to run the plant for two 10 hour shifts, any automation that cost less than $1,400 per day to eliminate one position was worthwhile.
If labor costs had been lower, the plant would have installed less automation and hired more people. The combination of a lower investment and creating more jobs would have greatly reduced the required investment per job, but UAW labor has simply become too expensive to use as lavishly as in the past.
An automobile engine plant is very hard to move. That makes it a captive which cannot escape confiscatory taxes or regulations. Before an auto plant is built, politicians will try to seduce the company with all manner of tax breaks, but once it's set up, local politicians have an almost irresistible temptation to raise real estate taxes and impose fees to try to pry more money out of the plant.
Quiznos' landlord suffers from the same problem - the town always wants more money to pay for raises to town employees. A sandwich shop is easier to move than an auto plant - the ovens fit in a van - but moving a retail outlet always loses some of the repeat customers who knew where it was. No business owner wants that.
Before they'll invest, sensible businessmen need to believe that they won't be priced out of the market after they make the investment. That's why our politicians' constant talk of increasing taxes to pay for this or that is so destructive of new jobs.
The hiring reported by the Wall Street Journal doesn't represent very many new jobs. Most of these jobs existed in the past and were eliminated when sales dropped. The equipment those people had used sat idle until sales picked up enough for the businesses to be able to hire more people to run the equipment they already owned. These aren't new jobs, they're old jobs coming back from the dead.
Unfortunately, the Obama recession has caused a large number of business bankruptcies. Jobs at those businesses will never come back, so we'll need a great many truly new jobs to reduce unemployment.
Scragged is not the only voice that recognizes the necessity of creating new jobs. Hillary Clinton pointed out the urgent necessity of creating new jobs back during the Presidential campaign. More recently, the New York Times said, "If we want to bring down unemployment in a sustainable way, we need to create a big bushel of new companies. And fast!"
They're absolutely correct about the urgent necessity of creating new companies to create new jobs:
"Between 1980 and 2005, virtually all net new jobs created in the U.S. were created by firms that were 5 years old or less," said Litan [research director at the Kauffman Foundation]. "That is about 40 million jobs. That means the established firms created no new net jobs during that period." [emphasis added]
The Times proposes some sensible measures by which government could help new companies create new jobs:
Good-paying jobs don't come from bailouts. They come from start-ups. And where do start-ups come from? They come from smart, creative, inspired risk-takers. How do we get more of those? There are only two ways: grow more by improving our schools or import more by recruiting talented immigrants. Surely, we need to do both, and we need to start by breaking the deadlock in Congress over immigration, so we can develop a much more strategic approach to attracting more of the world's creative risk-takers. "Roughly 25 percent of successful high-tech start-ups over the last decade were founded or co-founded by immigrants," said Litan. Think Sergey Brin, the Russian-born co-founder of Google, or Vinod Khosla, the India-born co-founder of Sun Microsystems. [emphasis added]
Straightening out our immigration mess would help, but letting entrepreneurs know that it's OK with the government if they get rich is far more important.
President Reagan praised the "animal spirits" of American businessmen which had created so much national wealth and let the government collect so much in taxes. The Chinese economic boom got underway when Hu Yaobank, vice-chairman of the Chinese Communist Party, promulgated the slogan "To get rich is glorious."
Hu didn't have to point out that the government planned to tax all that new wealth, everybody knew that. His statement was a promise that the government would no longer destroy businesses just because the businessmen who created all those jobs earned more money than anybody else. In other words, inequality between the rich and the poor was OK! Coming from the #2 Commie in China, that was a major policy initiative.
Instead of promoting job creation by helping businesses get bigger so they can afford to pay more and more taxes, Mr. Obama keeps nattering about raising taxes in the name of "fairness." Potential investors are well aware that he means to do this. Mr. Obama, the Democratic party, and the New York Times agree that it's essential for the rich to pay "their fair share" of the cost of health care, climate change, or whatever the cause of the day might be.
This oft-expressed attitude on the establishment's part is a devastating job-killer. Creating one new job requires that an investor risk between $100,000 and $2.5 million! Once the investment is made, the investor can't get the money back unless the business is able to operate under more or less stable conditions for a number of years. His investment is held hostage to whatever the prevailing whims of politicians might be.
With all this talk of new taxes for health care, new taxes on energy, higher taxes on investment income, and much else, is it any surprise that investors have slammed their wallets shut and are moving money offshore?
This article discussed the amount of capital a business has to invest in able to hire just one person. The next article in this series discusses the ongoing costs of keeping an employee on the payroll.