This decision is something businessmen confront often. Projecting this issue across the country, to all industries and to companies of all sizes, gives us a perspective on the persistent high unemployment rate. What issues should the businessman consider? What causes him to decide to hire or not?
Let’s examine this issue in detail and see how government policies impact hiring.
Will there be work tomorrow?
At the moment, you certainly have enough work to keep someone busy full time. But is the growth temporary, or do you project it to last for the foreseeable future? If it is temporary, then it makes more sense to avoid taking on the long-term obligation of hiring a full-time employee. Maybe you hire a temp or offer extra pay to encourage current employees to work longer hours.
To answer this, look at the source of the growth in business.
Suppose the growth is due to a spending stimulus package from Washington. What type of hiring would that encourage? If your customers are buying more because of a one-time surge in extra cash, they won’t continue once it is spent. A full-time employee, without the extra business, may need to be laid off. Could you count on another stimulus, then another, in an unending series?
Suppose instead it is a permanent income tax cut. The customers now have extra cash, and you can project they will have more cash next year as well. Hiring a full-time employee makes more sense.
What’s the job worth?
You need to offer at least enough to motivate someone to work for you. Yet the work that needs to be done is worth only so much to you, and you can’t pay someone more. These facts set a range for an offer.
You also have to factor in the overhead costs. You have to rent the space from the landlord, pay benefits, keep the lights and air conditioning on, buy supplies, carry insurance, time to comply with business regulations, and so on. Add these up and spread the costs across your staff, and you have to reduce the offer.
A lot of these overhead costs – benefits, taxes, insurance, regulations – are directly driven by government policy. Every increase in these rates makes the case for hiring new employees less compelling.
Medical Benefits:
ObamaCare has unleashed massive changes to the health care system in this country. Every business has to look carefully at the details and determine its impact. They have to calculate the cost of benefits for every employee.
It is not clear that an individual business comes out ahead on this. An interesting point is the deluge of demands for waivers from large corporations like McDonald’s to small companies with political connections to unions. If this is such a good deal, why the exemptions? (Curiously, there is a disproportionate distribution of waivers to Nancy Pelosi’s district. One would think the electorate that chose Pelosi, who championed ObamaCare, would eagerly accept the law.)
Taxes:
Every time a “windfall profit” tax is proposed on a company, consider the impact to potential new hires. Will ExxonMobil or Chevron be able to expand if they are taxed at a much higher rate? What about Citibank or Bank of America?
If a city like Los Angeles raises its local sales tax, some shoppers will cross into neighboring Orange County to save a little. Does that help or hurt employment in L.A.?
Don’t forget to add all the taxes employers and employees must pay – Social Security, Medicare, state and federal income, state disability and unemployment.
Regulations:
Think of the ridiculous regulations businesses face, from San Francisco’s fight to ban McDonald’s “Happy Meals” to the Los Angeles ban on disposable paper and plastic bags from grocery stores. If you make Happy Meals or grocery bags, you won’t be hiring anyone soon. If you use grocery bags in your store, you’ll have to figure out how to comply with the new law, dispose of the existing bags, figure out from whom to buy new bags (or whether to offer them at all).
These burdens make the case to hire harder to make. In some cases, the profit margin may be so large that it is an easy question to answer, and one needs to hire quickly or lose business. In some cases the profit margin is so small that it clearly isn’t worth it. But there is a great middle ground where it is too close to call without looking very closely at the numbers or taking unnecessary risk.
These are all contributing factors, but so far I’ve treated them as if they are objective – well understood, predictable, and objective. In reality they are rarely so.
More often, the taxes, regulations, laws and other business burdens change with the political winds. It may depend on who is in the White House, but often they come down to anonymous government bureaucrats deciding who gets investigated (Gibson Guitar) and who doesn’t, whose taxes deserve extra scrutiny, what types of industries curry political favor ("green" tech companies like Solyndra) and which get targeted (coal-fueled power plants).
Consider Obama’s deals to bailout GM. Decades of established contract law and bankruptcy rules were thrown out when the government ignored the rights of GM bondholders, leaving them empty handed. If this can happen to one of the biggest companies, what’s to stop the government from stepping on your property rights as a business owner?
Consider the Defense industry. In August, a deal was struck to establish a special committee to cut the federal budget. Failing to find agreement in November means automatic cuts in the Defense budget in hundreds of billions of dollars. Consider the uncertainty that creates for defense contractors, who won’t know – who CAN’T know – whether or which programs may get funding or get cut. In such an environment, would a contractor seek to hire staff?
Consider how long we waited for the last Democratic Congress to pass a budget; in all that time, businesses had no way of knowing how much tax they’d have to owe. In such an environment, would your business hire? Or would you wait until the budget was passed, and your accountant could determine the cost of each employee and how much profit (if any) you could anticipate with a larger staff?
You can begin to see why it is not just the amount of taxes or costs of laws that cut into hiring, but the sheer uncertainty in planning for the future that is a significant burden. This is not just a financial or business issue, but fundamentally a cognitive issue. A businessman cannot function long term in a market ruled by arbitrary laws and regulations; a businessman who cannot function long term will be less likely to make the long term investment in new employees.
This is why the best way to reduce long-term unemployment is to get government out of the way.
A small tax reduction, a moratorium on new regulations, a repeal of ObamaCare, Dodd-Frank, Sarbox, and the like will help, but it is the sum of all of it that contributes to the Great Uncertainty that keeps businesses from expanding. Repeal of the major regulatory legislation of the last few years would be an important step.
While each little improvement is good, what’s needed is a major overhaul of the tax system and regulatory environment. It will take a dramatic step to change the mood of the country and give businessmen the confidence that they will be able to forecast without government intervention arbitrarily changing things. They will see the potential return on their investments in new employees.
Above all, reduce uncertainty. Restore the rule of law and respect for the property rights of businesses and businessmen – loudly and clearly so that all will hear the message and understand. This will unleash a flood of new hiring.
POSTSCRIPT
A 9/7/11 Wall Street Journal article (“Private Ideas on How to Create Jobs”) asked business leaders for their views on how to spur job creation. (What a radical idea: to find out how to create jobs, ask people who create them!)
A few excerpts:
CEOs:
“Chief executives … support repairs to aging infrastructure… and point to lower taxes and fewer business restrictions…”
“… U.S. infrastructure is simply not competitive.” – Rio Tinto CEO Tom Albanese
“The CEOs also want lower corporate taxes… and a moratorium or rollback of business regulations.”
“U.S. companies need the ability to recruit the best workers…. We must increase the number of H1-B visas available and reform the employment-based green card process.” – Bob Greifeld, CEO, NASDAQ-OMX
SMALL BUSINESS:
“Carey O’Donnell, chairwoman of the Chamber of Commerce of the Palm Beaches, said that the lack of access to capital is the top impediment to growth… Loosening financial regulations for banks, she said, could make it easier for business in her area of Florida to grow.”
O’Donnell adds that “… cuts in her tax burden would prompt her to add to her own 14-employee staff. ‘It would reduce the risk of hiring more people, even if it was temporary.’”
And finally, there’s this:
“Republican Douglas Holtz-Eakin, a former director of the Congressional Budget Office and president of the American Action Forum think tank, said measures such as tax credits for new hires and extending emergency unemployment-insurance benefits won’t encourage hiring. ‘They’re all one-time things that don’t genuinely raise the long-term growth capacity.’”
Bingo.
POSTSCRIPT NO. 2
Here's a list of taxes Obama has imposed on us since he's taken office. Is it surprising?
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