Potential employers have to respond to the incentives and disincentives that exist in today's world, and those do not favor conventional permanent employees.
by
Charles Hugh-Smith
I know you're hard-working,
motivated, tech-savvy and willing to learn. The reason I can't hire you has
nothing to do with your work ethic or skills; it's the high-cost Status Quo, and the many perverse
consequences of maintaining a failing Status Quo.
The sad truth is that it's
costly and risky to hire anyone to do anything, and "bankable
projects" that might generate profit/require more labor are few and far
between. The overhead costs for employees have skyrocketed. So even though the
wages employees see on their paychecks have stagnated, the total compensation
costs the employer pays have risen substantially.
Thirty years ago the overhead
costs were considerably less, adjusted for inflation, and there weren't
billboards advertising a free trip to Cabo if you sued your employer. (I just
saw an advert placed by a legal firm while riding a BART train that solicited
employees to sue their employers, with the incentive being "free
money" for a vacation to Cabo.)
The other primary reason is that there are few (to borrow a phrase used by John Michael Greer) "bankable projects," that is, projects where hiring another worker would pay for the costs of the additional overhead, labor and capital and generate a reason for making the investment, i.e. a meaningful profit.
There is very little real
"new business" in a recessionary, deflationary economy: any new business is poaching from an established
business. The new restaurant isn't drawing people from their home kitchens,
it's drawing customers from established restaurants.
The only competitive advantage in a deflationary economy is to be faster, better and cheaper or have a marketing and/or technology edge. But marketing and technological advantages offer increasingly thin edges. The aspirational demand (driven by the desire to be hip or cool) for a new good or service has a short half-life. As for technology: miss a product cycle and you're history.
Put these together--higher
costs and risks for hiring people, and diminishing opportunities for expansions
that lead to profit--and you have a scarcity of projects where hiring people
makes financial sense.
Faster, better and cheaper usually means reducing the labor input, not increasing it. In a deflationary economy, it's extremely difficult to grow revenues (sales), and as costs continue climbing inexorably, the only way to survive is to cut expenses so there is still some net for the owner/proprietor to live on.
Consider the tax burden on a
sole proprietor who might want to hire someone. The 15.3% Social
Security/Medicare tax starts with dollar one. After the usual standard
deductions, the Federal income tax is 15%, and 25% on all earned income above
$34,800. My state tax is around 5%. Since every other advanced democracy pays
basic healthcare coverage out of tax revenues, the $12,000/year we pay for
barebones healthcare insurance is the equivalent of a tax. That's 15% of our
income. Property tax is also $12,000 annually, so that's another 15%.
Above $35,000 in income, my
tax burden is 15% + 25% + 5% + 15% + 15% = 75%. You can imagine how much money I would need to clear
to be able to afford hiring someone. The number of businesses that generate
huge sums of profit are few and far between, and the number of businesses that
scale up from a one-person shop to mega-millions in revenues is also extremely
limited.
The potential employer is
faced with this reality: the money to hire a new employee will come out of my
pay, at least at first. Hiring an additional worker only makes sense if the new employee will immediately
generate enough additional revenue to fund his/her own wage and overhead costs,
the added expense of supervision and a profit substantial enough to offset the
risks.
I should stipulate that my
knowledge of hiring people and being an employer is not academic. My partner
and I launched a business in late 1981, in the depths of what was at that time
the deepest recession since the end of World War II. We had a very diverse
ethnic workforce and did millions of dollars of work. Rather than make a fortune
I lost $50,000 and had to mortgage the house we'd built by hand to make good
all debts. I exited in 1987 with my personal integrity intact: nobody lost
money working for us.
The losses were basically the
result of me pushing the outer boundaries of my experience and thus my
competence in an unforgiving, very competitive environment. The learning curve
in business is steep and pricey.
I have also been involved in
saving/managing a small non-profit organization that had expanded payroll far
beyond what the organization's revenues could support.
What newly minted employers
understand that employees rarely understand is that the overhead costs of
hiring even one person do not scale at first. To hire one person, even part-time, the employer needs
to set up a complex infrastructure to manage the payroll taxes and accounting,
and comply with a variety of statutes. If the employer does not follow the many
laws regarding labor, witholding taxes, workers compensation, liability
coverage, disability insurance, unemployment insurance and so on, then the
employer is at risk of penalties and/or lawsuits.
If a business does $1 million
in gross receipts a year and already has five employees and a manager, it's not
that burdensome to hire a seventh employee--the framework is all set up. But
the cost of setting all that up for employee #1 is not trivial, especially when you realize the
complex machinery all has to be overseen and managed.
In the Silicon valley model, a
couple of guys/gals work feverishly in the living room/garage until they have a
product/service to sell to venture capital. If the pitch succeeds, the VCs give
them a couple million dollars and they hire a manager to sort out all the
paperwork, management, etc.
Most small
businesses/proprietors don't get handed a couple million dollars. They have to
grow organically, one step at a time. Each expansionist step is fraught with
risks, especially when opportunities to grow revenue are few and far between
and are generally crowded with competitors.
Thirty years ago the
employer's share of Social Security tax was not today's 7.65%; it was much
less. Worker's compensation rates were lower, as were disability and liability
insurance rates. Adjusted for inflation, healthcare insurance was half (or
less) of today's absurdly expensive rates. To pay someone a modest $20,000
annual salary today would cost at least $30,000 in total compensation costs,
and if the employee is middle-aged or requires family healthcare coverage, it could
easily exceed $40,000. That sum may be trivial in the bloated $3.7 trillion
Federal government or in Corporate America, but in millions of small businesses
that $40,000 is the proprietor's entire net income.
In other words, as costs of
hiring anyone to do anything have climbed while revenues have stagnated, the
threshold to hire an employee keeps getting higher. Back in the day, I could hire a young person out of
high school for a modest cost in overhead, and the work-value they produced to
justify the expense was also modest. I could afford to hire marginal workers
and as long as they didn't get in the way too much and ably performed basic
tasks then I could afford to have them on the payroll.
The same was true of older
workers, veterans living on the beach who wanted work, etc.--I could afford to
give all sorts of people a chance to prove their value because the costs and
risks were low.
That's simply less true today.
The costs and risks are much, much higher.
Liability has become a lottery
game where anyone with assets or income is a target for "winner take
all" lawsuits. I would have to be insane to hire someone to work around my property on
an informal basis: if the person injured himself, I would face the risks of
losing my property to the legal defense costs and potential settlements that
exceed the homeowners' insurance policy.
In an office environment, I
could be sued for harassment or for engendering a "stressful work
environment." If you think these kinds of cases are rare, you need to get
out more.
Simply put, the feeble hope of
increasing revenues does not even come close to offsetting the tremendous risks
created by having employees.
There's a Catch-22 aspect to
all this; small business can't expand revenues without employees, but the
costs/risks of having employees makes that a gamble that is often not worth
taking. The lower-risk, lower-cost survival strategy
is to automate everything possible in back-office work and free up the
proprietor's time to grow revenues that then flow directly to the bottom line.
Managing people is not easy,
and it's often stressful. Once a proprietor hires an employee, he/she must wear
a number of new hats: psychiatrist/counselor, manager, coach, teacher, to name
but a few. Frankly, I don't need the stress. I would rather earn a modest
living from my labor and avoid all the burdens of managing people. (In my case,
that included bailing workers out of jail, loaning them my truck which was
subsequently rolled and destroyed, and a bunch of other fun stuff.)
I am not embittered, I am
simply realistic. I enjoyed my employees' company, even the one who rolled my
truck and the ones who managed to get into trouble with the law. But I got
tired of meetings and all the wasted motion of office management, and I got
tired of taking cash advances on my credit cards to make payroll.
If anyone out there thinks
being an entrepreneur/small business proprietor is easy and a surefire pathway
to the luxe life, then by all means, get out there and start a business and
hire a bunch of people. I applaud your energy and drive, and sincerely hope you
are wildly successful.
I hope you now understand why
so many businesses only want to work with contract labor/ self-employed people: having employees no longer makes financial sense for
many small enterprises. What makes sense is paying someone a set fee to
accomplish a set task, and that's it, the obligation of both parties is
fulfilled. If the task isn't completed, then the fee isn't paid.
Revenues just aren't steady
enough in many cases to support a permanent employee. When the work comes in,
then contract labor is brought in to get the work done. When it's done, they're
gone, and all their overhead costs are theirs.
It's extraordinarily difficult
to generate revenue in a deflationary economy, and extraordinarily difficult to
scrape off a net income as expenses such as taxes, insurance, healthcare, etc.
continue climbing year after year.
Self-employment places a
premium on professionalism and results. Unlike offices filled with managers and employees,
nobody cares about your problems, conflicts, complaints about the common-area
fridge or your attendence at meetings. Once you've been self-employed for a
while, and you only hire/work with other self-employed people, then you look
back on conventional work places as absurdist theaters of schoolyard politics,
tiresome resentments and child-parent conflicts acted out by self-absorbed
adults.
Once you're self-employed,
your focus shifts to nurturing a productive network of clients, customers and
like-minded, reliable, resourceful self-employed people who will give you
work/work for you when you need help. Building trust and following through on
what you promised to do become your priority.
The economy is different now,
and wishing it were unchanged from 30 years ago won't reverse the clock. We have to respond to the incentives and disincentives
that exist in today's world, and those do not favor conventional permanent
employees except in sectors that are largely walled off from the market
economy: government, healthcare, etc.
But these moated sectors
cannot remain isolated from the deflationary market economy forever, and what
was considered safely walled off from risk and change will increasingly face
the same market forces that have changed private-sector enterprise.
If you want security and a
steady income, it may be more rewarding to build it yourself via highly
networked self-employment.
No comments:
Post a Comment