View Full Version : The Unemployability of Low Cost Labour in the USA

25th Jan 2015, 11:09
Let's Make Employment of Low-Skill Labor Profitable Again (http://www.coyoteblog.com/coyote_blog/2015/01/lets-make-employment-of-low-skill-labor-profitable-again.html)

............The costs that government taxes and rules add to labor have been discussed many times, but usually individually. Their impact is clearer when we discuss them as a whole. Let's take California, because that state is one I know well. To begin, the minimum wage is $9 (going to $10 an hour in 2016). To that we have to add taxes and workers compensation premiums, both of which are high because because California does little to police fraud in unemployment and injury claims. For us, these add another $3.15 an hour. We also now have to add in the Obamacare employer mandate, which at a minimum of $3000 per full-time employee (accepting the penalty is cheaper than paying for health care) adds another $1.50 an hour. And the new California paid sick leave mandate adds another 45 cents an hour. So, looking just at core requirements, we are already up to a minimum of $14.10 an hour, less than 2/3 of which actually shows up in the employee's paycheck.

But these direct costs don't even begin cover the additional fixed costs of hiring employees. We pay a payroll company thousands of dollars a year to make sure that regulations on taxes and paychecks are followed. We spend so much time making sure our written plans and documentation on safety meet the requirements of OSHA and its California state equivalent that we barely have the capacity to actually focus on safety. In California we have to have complex systems in place to make sure our employees don't work through their lunch break, that they have the right sort of chair and that they sit in them frequently enough, that they follow all the right procedures when the temperature outside goes over 85 degrees, that they get paid for sick leave and get their job back after extended medical leave.... the list goes on and on.

In a smaller company, we don't have lawyers and a large human resource staff. In fact, we tend to have little staff at all. If some new compliance issue arises -- which happens about every day the California legislature is in session -- the owner (me) has to figure out a solution. In one year I literally spent more personal time on compliance with a single regulatory issue -- implementing increasingly detailed and draconian procedures so I could prove to the State of California that my employees were not working over their 30 minute lunch breaks -- than I did thinking about expanding the business or getting new contracts.

Towards the end of last year I was making a speech to a group of business school students, and someone asked me what my biggest accomplishment had been over the prior year. I told them it was probably getting the company down from hundreds of full-time workers to less than 50, converting everyone to part-time. And it was a huge effort, involving new systems and a number of capital investments to accommodate more staff working fewer hours. And it had a huge payout, saving us hundreds of thousands of dollars a year in Obamacare penalties and compliance costs. But come on! How depressing is it that my biggest business accomplishment was not growing the business or coming up with a new customer service but in cutting the working hours for good employees? But that is the reality of trying to run a service business today. The business couldn't be profitable until we'd adjusted our practices to these new regulations, so there was no point in even thinking about growth until we had done so.

Labor-based business models that work at a $7 or $8 total labor cost may well not work at $15, and they certainly are not going to grow very fast if the people responsible for seeking out growth opportunities are instead consumed in a morass of legal compliance issues. But there is perhaps an even more damaging impact of government interventions, and that is to the culture of work. I will confess in advance I don't have comprehensive data to prove my hypothesis, but let me tell a couple of stories.

Until 2010, we never had an employee sue us. We had over 8 years hiring 350 seasonal workers a year, mostly older retired folks, without any sort of legal issues. Since 2010, we have had eight employee suits threatened or filed, all of which we have won but at a legal cost of $20-$25 thousand each (truly Pyrrhic victories). So what changed around 2010? Well, our work force composition changed a lot. Before that time, we typically hired older retired folks, because the seasonal nature of the job is simply not very appropriate for a younger person trying to support themselves without other means (like retirement or Social Security). However, after 2009 when a lot of younger folks were losing their traditional jobs, they began applying to our company. Our work force shifted younger, which actually excited me because I felt it would help us in attracting a younger demographic to the campgrounds we operate. But all eight of these legal actions were by these new, younger employees. I asked one person who was suing us over what was a trivial slight, really a misunderstanding, why they did not just call me (my personal number is in their employee handbook) to fix it. They said that if I had fixed it, they would have lost the opportunity to sue.

I mentioned earlier that we had struggled to comply with California meal break law. The problem was that my workers needed extra money, and so begged me to be able to work through lunch so they could earn a half-hour more pay each day. They said they would sign a paper saying they had agreed to this. Little did I know that this was a strategy devised by a local attorney who understood meal break litigation better than I. What he knew, but I didn't, was that based on new case law, a company had to get the employee's signature every day, not just once, to avoid the meal break penalties. The attorney advised them they could get the money for working lunch AND they could sue later for more money (which he would get a cut of). Which is exactly what they did, waiting until November to sue so they could get some extra money to pay for Christmas bills. This is why -- believe it or not -- it is now a firing offense at our company to work through lunch in California.

Hopefully you see my concern. I fear that we have trained a whole generation that the way one gets ahead is not to work hard and gain new skills but to seek out and exploit opportunities to file lawsuits. That the way to work in an organization is not to learn to manage the inevitable frictions that result from different sorts of people working together but to sue at the first hint that you have been dissed. As an aside, I think this sort of litigiousness, both of employees and customers, is yet another reason employers are reluctant to hire low-skilled employees. If as a business owner one is absolutely liable for any knuckle-headed thing your most junior employee might utter, no matter how clear you are in your policies and actions that such behavior is not tolerated, then how likely are you to hire a high-school dropout with no work experience?

Is it any surprise that most entrepreneurs are pursuing business models where they leverage revenues via technology and a relatively small, high-skill workforce? Uber and Lyft at first seem to buck this trend, with their thousands of drivers. But in fact they prove the rule. Uber and Lyft are very very careful to define themselves and their service in a way that all those drivers don't work for them. I would go so far to say that if Uber were forced to actually put all of those drivers on their payroll, and deal with they myriad of labor compliance issues, their model would fall apart

We cannot address the skill gap unless people have entry level, low-skill-tolerant jobs to take the first steps up the ladder of success. If the government continues on its current course, it will become impossible to run a business that employs unskilled workers. The value of the work performed will simply not justify the cost. We may be concerned about income inequality today, but if we kill off the profitability of employing unskilled workers, then we are going to be left with a true two-class society -- those with high-skill jobs and those on government assistance --and few options for moving from one to the other.

25th Jan 2015, 12:44
The problem lies in the flunkies being churned out by the modern schools of business. Business is now about the "me" rather than the community and business executives have been known to eat their own flesh if it suits them. Lately they seem to be more preoccupied with repeating things often enough that they actually begin to believe in their own BS.

As far as workers and their low wages are concerned, they are made to feel grateful that their executive doesn't increase it's profits 10 fold by outsourcing the work to some 3rd world country. After all executive salaries are already commensurate with the hard work that they do, aren't they? 10x won't make much of a difference to the grand scheme of things.

Having been unfortunate by circumstance to have worked with some of the politicians and their advisors in the Industrial Relations space on both sides, the short direct answer to all this toing and froing around working conditions is that these people are only looking after their own mates. The words these people like to use such as "world's best practice", "competitiveness", "efficiency", "fairness", etc, definitely don't apply to themselves. Although such words can be applied to many hard working small companies, unfortunately as they deal much closer with government then the meaning of the above words become diluted, about 10x at least. It's that narrow view of the world again, the "me", and all the baggage that goes with it.

In 2013, and in the most unexpected of circumstances I found myself fighting my former employer in court and ended up receiving a reasonable payout. I really felt sorry for some of the managers I'd worked with but it all stemmed from a bullying executive whom I'd never even met and who even got his HR manager to falsify evidence backed up with an expensive lawyer who only specialised in representing HR departments. But it didn't end there, after the case was won I ended up being blacklisted by similar corporate flunkies who were licking each others boots, and some of the libelous things said at a couple of job interviews relating to this very case were really just them clutching at straws - but these losers really aren't worth my time. So what was the point? I don't know. What did they achieve? I don't know.

What I do know is that all those false accusations they made about me somehow don't apply to them. That's the thinking from the new school of business management.

25th Jan 2015, 13:11
To that we have to add taxes?

Why? I pay taxes off my gross salary. My employer didn't add them onto my salary. And who, in the US, pays 25-30% taxes? Surely not minimum wage employees. (and surely not the 1%)

25th Jan 2015, 14:22
This is something of a chicken-and-egg situation.
ORAC - I agree and sympathize, but Cattletruck has a point too.
I am in the fortunate position of only having to work part-time for the last 7 years (and can retire completely now). Every medium/large company in the UK, Canada or the Middle East which has employed me since 2006 has been abysmal on HR and Health & Safety towards its employees, and this has been entirely due to sh!te senior managers. You name it - numerous breaches of contract, cancelling real fire alarms because the boss couldn't be bothered to make a phone call, passing down responsibility but not authority. The only effort these managers put in is to making it just not worth an employee's while to sue them, coupled with the knowledge that they can bullshit the increasingly inefficient Government safety agencies.
I don't know what the answer is. My last two temporary jobs have been delightful; one doing admin for a non-profit and the other running a bin piler for the potato harvest. In both cases they have been small employers who've been in business for 40+ years, and know how to treat employees properly.

Note; it's not just unskilled labour. I have extremely high skill levels with an outstanding record of success, but I will not work for @ssholes. Currently, I cannot find any medium/large company that isn't run by @ssholes, anywhere. My cousin gave me a b#llocking over Christmas for withdrawing my talents from the workforce (he still has socialist ideals), but I don't see why I should participate in a failing system. It'll just prolong the agony.

Not my problem henceforth.

Gertrude the Wombat
25th Jan 2015, 15:01
So what else is new?

Businesses would always luuurve to pay people less than will give them a decent lifestyle (but only, of course, in jurisdictions where owning slaves instead isn't an option), and will work out how much it's worth spending lobbying to achieve that.

It's then up to society to decide, from place to place and time to time, what a "decent lifestyle" is and whether or not workers should reasonably aspire to such a thing.

25th Jan 2015, 15:25
Businesses would always luuurve to pay people less than will give them a decent lifestyle

I disagree. Only bad businesses would.

You can minimise administration costs by having an employee for life, which means either a happy employee, or one who needs the money and has no options.
My experience is that keeping an employee happy starts with full time work on a reasonable wage in a safe and rewarding environment. By reasonable wage, this would mean only about 10-20% above minimum wage. The majority of failures to do this relate to management incompetence, not costs. Indeed, incompetent management costs more in the short term through inefficiencies, and in the medium term when accidents happen.
But, rather than fix the management problem, large companies have created, through globalisation, a situation where unemployment in developed countries means they can get away with the "no options" approach, with the Government topping up wages through social security. But this means stripping the middle class of wealth through taxes, in a situation where the middle class are no longer middle class due to the wage drop. This is why the UK in particular is dropping into deflation - the Government income tax revenues are dropping to below a level that can support current spending; leading to, for example, the NHS crisis.

galaxy flyer
25th Jan 2015, 16:48

25-30% taxes, I do and not unusual to pay that effective rate as a pilot in a high state. 33% marginal rate plus 15.3% Social Security (half from employer) plus 5.3% flat rate from first dollar in state income taxes.


25th Jan 2015, 17:15
You can minimise administration costs by having an employee for life, which means either a happy employee, or one who needs the money and has no options.

Bingo. Ford cut employee turnover from 400% a year to approximately zero by increasing their wages to the highest in the industry. He also got the best workers as a result.

The idea that all companies want to cut employee wages to the lowest possible level is just age-old lefty garbage. That usually leads to high turnover, low motivation, and poor customer service, as the employees are only there long enough to find a better job, and only work hard enough to not get fired.

25th Jan 2015, 18:11
Worked in 2 businesses in same industry in last 4 years..............

One in high cost area paid its staff minimum wage and did everything to ensure no increases, I left as company going bust and even know think they got what they deserved.

Second one in a lower cost area and they employ newbies on minimum wage, as skills develop then then seek to move the people upwards in pay, often not huge amounts but clear focus is there. They need lots of agency staff at peak times and a deal made is that NO agency staff will be paid better than an employee in the area they need the staff and if it comes to it they will temporarily increase employees wages.

One company is being led by a leader the other was being managed by a manager.

25th Jan 2015, 18:52
Bingo. Ford cut employee turnover from 400% a year to approximately zero by increasing their wages to the highest in the industry. He also got the best workers as a result. I could link to multiple articles on the crisis in Fordism, suffice it to say that industrial production (worldwide) is down to 12% of GDP and the industrial worker as the consumer is a thing of the past. Men have been replaced by robots - hence the fall in price of a 50" TV from $7000 to $500.

I'm afraid the idea of paying a production line worker a high wage to turn nuts so he can buy a cheap car is a relic of the past....

John Hill
25th Jan 2015, 21:54
There are alternatives of course such as indentured servitude in this Pakistani brickyard...


25th Jan 2015, 22:06
I wonder what stock control system they operate?

25th Jan 2015, 23:17
The usual Islamic one - loss of hand for theft = loss of job.

26th Jan 2015, 06:35

25-30% taxes, I do and not unusual to pay that effective rate as a pilot in a high state. 33% marginal rate plus 15.3% Social Security (half from employer) plus 5.3% flat rate from first dollar in state income taxes.

I understand how taxes are assessed but I've never heard an employer adding "taxes" to the pay packet. If anything the employer would withhold taxes from the minimum wage employee to forward to governments. While there might be a small administration cost for performing this certainly isn't unique to minimum wage employees.

Metro man
26th Jan 2015, 22:24
There are other government charges when employing people which may incorrectly be labeled as "tax" but amount to the same thing and count towards the overall rate.

Workers compensation insurance, social security, health, unemployment, payroll are just some of the areas governments use to raise money.

"If it moves, regulate it, if it keeps moving tax it and if it stops moving, subsidise it." Ronald Regan

The UK Channel 4 series "Skint" shows the effect on towns which are heavily dependent on one industry which goes into decline. Good wages could be obtained by unskilled workers in the steel industry for example, but in a downturn they found it very difficult to find alternative employment and impossible to obtain the rates of pay they were used to.

29th Jan 2015, 12:15
The major reason that I didn't renew my contract when it expired was that because of Gender Equality and Solvency 2, I had to take my pensions or lose up to 20%. In the UK, if you are a self employed male over the age 65 (at the moment), 9% of your profits go to the government. Add 40% income tax and every day I worked was 49% for the government.......so I don't work.

G&T ice n slice
29th Jan 2015, 12:25
In the UK, if you are a self employed male over the age 65 (at the moment), 9% of your profits go to the government. Add 40% income tax and every day I worked was 49% for the government.......so I don't work.

I hope you've got that wrong !! I think the "National Insurance" slice disappears in the financial year following the FY you turn 65.

So if you turn 65 in Jan 2015 then there is NI payable in FY 2014/2015 but there is no NI in FY 2015/2016

But even so, I am in the same situation - my pension kicked in and I found that for the last 2 years I have been working just to pay 49% to HMG.

Gertrude the Wombat
29th Jan 2015, 12:44
if you are a self employed male
Why would you want to be? Given the increased scope for doing interesting things if you use a company?