Labor Costs

Posted by PITHOCRATES - November 19th, 2012

Economics 101

Small Business Owners may have Nicer Homes but Chances are they are Mortgaged to the Hilt

A lot of people think business owners are cheapskates.  Greedy bastards.  Who hate their employees.  And try to pay them as little as possible.  Not for any business reasons.  But just because they are so greedy.  And hateful.  During bad economic times when the employer has to make some cuts labor leaders will tell the rank and file don’t believe the employer.  “Just look at the house the boss lives in.  And the house you live in.  Whose is better?  Bigger?  That’s right.  The boss’ house is.  Always remember that.”

Yes, bosses may have nicer homes.  But chances are they are mortgaged to the hilt.  Not to mention the fact that these bosses may be working an 80-hour week.  Which is not uncommon for a small business owner.  Especially during bad economic times.  As they may be negotiating with creditors, their banker, their vendors, keeping their customers happy and trying to find new customers.  While the rank and file work their 40 hours, collect their paychecks and enjoy their free time.

So it’s not easy being the boss.  That’s why so few people want to be the boss.  For it’s easier being an employee.  You work.  You get paid.  And you leave work at work.  Even if you think you’re not being paid as much as you deserve to be.  Something most employees feel.  That they’re overworked.  And underpaid.  But they never look at things through their employer’s eyes.  And see what they really cost their boss.

Most Businesses have gone from a Defined Benefit Pension Plan to a Defined Contribution 401(k)

What an employee gets paid and what an employer pays for that employee are two different things.  To begin with an employer pays for more hours of an employee’s time than he or she actually works.  When you factor in vacation time, holidays and sick days an employer may pay for 2,080 hours while the employee only works 1,896 hours.  If an employee makes $35 an hour those nonworking hours can add up to $6,440.  Which an employee gets for doing nothing.  We call them fringe benefits.  Just an employer’s way of saying, “Hey, I don’t hate you.  Here’s some money for doing nothing.”

Why do they pay this?  Because of free market capitalism.  If they don’t pay it someone else may.  And attract their good workers away from them.  Because if there is something employees will do is jump ship the moment they get a better offer.  Which is a good thing.  This is supply and demand.  And despite workers feeling overworked and underpaid this free market dynamic makes sure employees get paid as much as they can while helping employers pay as little as they can.  That equilibrium point where employees will keep working.  While leaving employers still competitive.  Though that’s getting harder and harder to do these days.  As the cost of doing business has never been higher.

In addition to these fringe benefits there are also health insurance, life insurance and retirement contributions.  With health care often being the greatest single employee cost to a small business owner.  Which is why most now make employees pay a small portion of their health care these days.  Retirement contributions have also gotten very costly.  Few people still have a defined benefit pension plan these days.  Typically an owner will offer a defined contribution 401(k) for the employee to contribute to.  And if times are good the employer may match their contribution up to a certain amount.  But employers will call this a discretionary contribution.  And it will be one of the first things to go when they are having cash flow problems in a bad economy.

The Last Thing a Business Owner needs while trying to Deal with Soaring Labor Costs are more Costs and Taxes

In addition to fringe benefits there are payroll taxes and insurances.  Such as Social Security.  Which the employer and employee split.  At least in theory.  The employer currently pays 6.2% on the first $110,100 in an employee’s earnings.  The employee kicks in 4.2% (which may go up another 2 points after the fiscal cliff, as that tax cut expires).  In reality the employee doesn’t pay any of this.  They get their check and go on their way while the employer has to find the cash to pay the 10.4% due.  For an employee earning $66,360 that Social Security tax payable comes to $7,571.  Another big check the owner has to write is for state unemployment.  Which can be anywhere around $4,000.  The following chart summarizes these and additional labor costs (note: the retirement contribution is probably between a 401(k) matching contribution and a defined benefit pension contribution).

An employee with a pay rate of $35/hour will gross $66,360.  Deductions will lower actual take-home pay.  But the employer’s total cost for this employee in this example is $108,252.  Or an additional $41,892 than the employee grosses.  Which comes out to another $17.04 an hour.  Something the employee never sees.  This is why labor is so costly.  And why employers want to hire as few people as possible.  For each additional employee they hire (in this example) they have to pay an additional 22.2% in payroll taxes/insurances.  And an additional 41% in fringe benefits.  Or a combined 63.1%.  In addition to what they’re paying the employees for their actual work.

And this is why employers want to offload health care (especially for their retirees).  And their pension liabilities.  As they can add an additional 30% (or more) to their labor costs.  What started out as fringe benefits to attract some of the best workers is now bankrupting many companies.  People are living so long into their retirement that these cost are growing faster and larger than any other cost a business has.  And it’s also why small business owners are very worried about new regulations and taxes.  For the last thing they need while trying to deal with these soaring labor costs are more costs.  Or taxes.  Which doesn’t make them cheap or greedy.  It just makes them very cautious business owners who are trying to keep their businesses afloat in an ever more difficult business environment.

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Governor Scott Walker Takes on the Public Sector Unions in Wisconsin

Posted by PITHOCRATES - February 18th, 2011

40 Percent of Teachers Call in Sick…in West Bloomfield, Michigan

We start not in Wisconsin.  But in Michigan.  Another of the other Great Lakes States where the Republicans won control of their state house.  And there’s teacher trouble in one of their fair cities (see The West Bloomfield Teacher ‘Sick Out’ by Tom Gantert posted 2/18/2011 on Michigan Capitol Confidential).

About 40 percent of the West Bloomfield High School teachers didn’t show up for work on Feb. 15 in the midst of bitter contract negotiations.

Goodness, that’s a lot of teachers.  Pay and benefit packages for teachers in the West Bloomfield school district must be awful.

West Bloomfield teachers do not do any premium sharing for health insurance and do not have a deductible in their plan, Andrees said…

The total compensation of a West Bloomfield teacher grew 173 percent over an 11-year period, going from $47,346 to $129,637, according to information that was presented at a school board meeting in December.

The teacher’s salary started at $31,881 in 1999-00 and grew to $85,836 in 2010-11. Meanwhile, insurance payments climbed from $9,309 to $19,304 per year, and retirement contributions jumped from $3,717 to $16,854 per year.

Wait a tic.  Isn’t Michigan one of those states suffering from record unemployment?  Even though the federal government just spent billions of dollars to bail out GM and Chrysler to save jobs?  I mean, it’s pretty horrible in Michigan.  But I guess we need to put this aside and focus on what’s important.  There are teachers there who have been working a 9-month year for the measly compensation of $129,637.  What vicious, heartless bastards they must have in Michigan.

Incidentally, teachers get the good months off during the year.  The summer months.  How many of you would like to get paid $85,836, get $19,304 worth of healthcare insurance per year free with no deductible, retirement contributions totaling $16,854 per year AND have the three summer months off?  Not to mention all the holidays and breaks during the school year.  I dare say many people would like this.  Especially the taxpayers who pay for this while they themselves get little in compensation compared to this.  So I don’t see a mass outpouring of sympathy for these teachers.

You know, it’s good to be a teacher.  In the public school system.

Public Sector Unions Impoverishing States, Cities and their Trade Union Brethren

Public school teachers are part of the public sector.  And belong to a public sector union.  In the public sector, there is no competition.  We pay the public sector workers with tax dollars.  Unlike their counterparts in trade unions.  These people who build useful things for us are not paid with tax dollars.  The private sector pays them.  As such, they have to respond to market forces.  Unlike their brethren in the public sector (see Labor’s Coming Class War by William McGurn posted 1/4/2011 on The Wall Street Journal).

Suddenly, it’s a different world. In this recession, for example, construction workers are suffering from unemployment levels roughly double the national rate, according to a recent analysis of federal jobs data by the Associated General Contractors of America. They are relearning, the hard way, that without a growing economy, all the labor-friendly laws and regulations in the world won’t keep them working.

What’s more, “blue-collar union workers are beginning to appreciate that the generous pensions and health benefits going to their counterparts in state and local government are coming out of their pockets,” says Steven Malanga, a senior fellow at the Manhattan Institute. “Not only that, they are beginning to understand the dysfunctional relationship between collective bargaining for government employees and their own job prospects.”

They get it.  All pay and benefits come from the private sector.  Whether paid from business profits.  Or taxes on business profits.  (Or taxes on our private paychecks.)  All taxes come from profitable business operations.  But excessive taxes dampen economic activity.  And kill jobs.  Everybody knows this.  Even some union people.  So something has to change.  And some state governors are stepping up.

The signs of this new awakening are gathering. In New Jersey, Gov. Chris Christie rightly becomes a YouTube sensation for taking on his state’s obstinate public-sector unions…

Over in New York, meanwhile, newly inaugurated Gov. Andrew Cuomo faces a similar battle. Mr. Cuomo campaigned on a cap on property taxes and a freeze on state salaries, both anathema to the powerful state-employee unions…

Elsewhere, in 2005 Republican Govs. Mitch Daniels and Matt Blunt used executive orders to end collective bargaining with state employees in Indiana and Missouri, respectively. Now the incoming Republican governors of Ohio and Wisconsin—John Kasich and Scott Walker—are targeting collective bargaining for government workers in their states.

Scott Walker and Wisconsin.  But more of that later. 

In some ways, this new appreciation for the private sector is simply back to the future. FDR, for example, warned in 1937 that collective bargaining “cannot be transplanted into the public service.” In the old days, unions understood economic growth. Mr. Malanga points to AFL-CIO President George Meany’s strong support for the JFK tax cuts as an example.

These days the two types of worker inhabit two very different worlds. In the private sector, union workers increasingly pay for more of their own health care, and they have defined contribution pension plans such as 401(k)s. In this they have something fundamental in common even with the fat cats on Wall Street: Both need their companies to succeed.

By contrast, government unions use their political clout to elect those who set their pay: the politicians. In exchange, these unions are rewarded with contracts whose pension and health-care provisions now threaten many municipalities and states with bankruptcy. In response to the crisis, government unions demand more and higher taxes. Which of course makes people who have money less inclined to look to those states to make the investments that create jobs for, say, iron workers, electricians and construction workers.

Now, with that background, let’s look at Wisconsin.

40 Percent of Teachers Call in Sick…in Madison, Wisconsin

Just like in Bloomfield, Michigan, teachers are calling in sick (see Schools in Wisconsin’s capital close after protesting teachers call in sick posted 2/16/2011 on myfoxorlando.com).

MADISON, Wis (NewsCore) – Public schools in Madison, Wis., were closed Wednesday after 40 percent of the 2,600 teachers protesting a controversial budget bill called in sick.

School officials were forced to cancel classes, as there were not enough substitute teachers available to cover the absentees, Madison Metropolitan School District superintendent Dan Nerad told local newspaper the Journal Sentinel.

Though in Wisconsin they’re saying little about what their current pay and benefits are.  One can only assume they are as generous as they are in West Bloomfield.  Because if they are awful they would have told us how awful they are. 

President Obama Declares War on Ohio, Indiana, Missouri, New Jersey, Pennsylvania and Wisconsin

So how awful are things really in Wisconsin?  From the media reports it sounds like the end of world.  That Wisconsin’s governor, Scott Walker, is bringing back slavery.  Even the president is joining the fight against the elected government of Wisconsin (see Obama joins Wisconsin’s budget battle, opposing Republican anti-union bill by Brady Dennis and Peter Wallsten posted 2/18/2011 on The Washington Post).

The president’s political machine worked in close coordination Thursday with state and national union officials to mobilize thousands of protesters to gather in Madison and to plan similar demonstrations in other state capitals.

Their efforts began to spread, as thousands of labor supporters turned out for a hearing in Columbus, Ohio, to protest a measure from Gov. John Kasich (R) that would cut collective-bargaining rights.

By the end of the day, Democratic Party officials were working to organize additional demonstrations in Ohio and Indiana, where an effort is underway to trim benefits for public workers. Some union activists predicted similar protests in Missouri, New Jersey and Pennsylvania.

So much for federalism.  Thank God Thomas Jefferson didn’t live to see this.  This meddling by the executive power into a state’s affair is worse than he even feared.  Even Alexander Hamilton would not approve.  And he was in favor of a strong executive.

The Worst of the Assault on Public Sector Unions – Asking them to Live like the Rest of Us

So what is so vile, so repugnant, so evil in the state of Wisconsin?

Under Walker’s plan, most public workers – excluding police, firefighters and state troopers – would have to pay half of their pension costs and at least 12 percent of their health-care costs. They would lose bargaining rights for anything other than pay.

Well that doesn’t sound so bad.  People in the private sector often pay 100% of their retirement.  A pretty hefty share of their health-care costs.  And something like 90% of the private sector doesn’t even have any bargaining rights.  Other than quitting a job if it is so vile, so repugnant and so evil.  And, you know what?  Those jobs in Wisconsin must be pretty damn good.  I mean, to protest like that can only mean one thing.  That these jobs are the best jobs around.  For there isn’t a chance in hell they’ll find anything as good in the private sector.  Which is why they simply don’t quit those ‘God-awful’ jobs.

Beyond their short-term fiscal problems, many states face pension and retiree health-care costs that some analysts say are unsustainable. Some states already are curtailing retirement benefits for new employees, although many analysts say it will take much more to bring their long-term obligations in line.

The huge debt burdens coupled with the impending cutoff of federal stimulus aid later this year have spurred talk of a federal bailout. The White House has dismissed such speculation, saying states have the wherewithal to raise taxes, cut programs and renegotiate employee contracts to balance their books.

What?!?  Our federal stimulus paid for those fat pension and healthcare benefits?  Wasn’t that money suppose to stimulate economic activity?  Create jobs?  Could it be that it was a slush fund all along to reward loyal Democratic supporters?  Good God, can it be that Rush Limbaugh was right?

In Wisconsin, state Democratic senators staged a protest of their own Thursday, refusing to show up at the Capitol for an 11 a.m. quorum call – delaying a vote that would have almost certainly seen the spending cuts pass.

I guess elections only have consequences when Democrats win.  When Barack Obama won, he told the Republicans, sure, you can give me your ideas about how to fix the economy.  I won’t use any of them.  Because elections have consequences.  And I won.  Perhaps the Republicans should have hid during the Obamacare vote.

“Many of the companies I went by, like so many others across the state, don’t have pensions, and the 401(k)s they have over the last year or two, they’ve had to suspend the employer contribution,” Walker told Milwaukee radio station WTMJ. “So, not a lot of sympathy from these guys in private-sector manufacturing companies who I think reflect a lot of the workers in the state who say what we’re asking for is pretty modest.”

What’s good for the private sector is good for the private sector.  The public sector apparently deserves better.  And with record unemployment, I’m sure they’ll get a lot of sympathy from the taxpayers paying their salary and benefits.  Not.

Public Sector Unions and the President are trying to Maintain a Privileged Elite

FDR got it.  The trade unions get it.  And most of the taxpayers lucky enough to still have a job in the worst recession since the Great Depression get it.  If you don’t have a healthy economy there is no money for anyone.  High taxes kill economic activity.  And there is only one way to pay generous public sector pay and benefits.  High taxes. 

We have come to a crossroads.  In one direction there is prosperity.  In the other there isn’t.  The governors in New Jersey, New York, Indiana, Missouri, Ohio and, of course, Wisconsin, are trying to go down the road to prosperity.  While public sector unions and the president are trying to maintain a privileged elite.  At the expense of the ordinary American.  Who will win?  We’ll find out in Wisconsin.

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