The Cost of Employing

If you are interested in why the job market (outside of Rails developers in Silicon Valley, but that’s another story) is so anemic then read this piece:

He’s referring not to wages, but to regulation: He has no way of telling what new rules will go into effect when. His business, although it covers several states, operates on low margins. He can’t afford to take the chance of losing what little profit there is to the next round of regulatory changes. And so he’s hiring nobody until he has some certainty about cost.

Part of the problem is something that Carter explains in a later paragraph, public policy academics and politicians alike think of businesses as abstractions and therefore have little actual insight into what it takes to create and grow a small to medium sized business, the foundation of employment in the United States.

Another part of the problem is that the only people who really appreciate the true cost of an employee are the people who hire them and they are in a minority. For employees they see one line item, their salary and while wage growth has been stagnant for much of the last decade the fact remains that the fully loaded cost that includes the expenses that the employer covers, as much as 40% of the base salary, has been rising steadily.

All employers are required to cover the following taxes on each employee they hire:

  • Social Security/FICA: 6.2% of the employees gross pay to a wage cap of about $110k.
  • Medicare: 1.45% of gross pay with no salary cap.
  • Federal Unemployment Taxes (FUTA): 6.2% on the first $7k earned per employee.
  • State Unemployment Taxes (SUTA): Much more complicated to calculate and varies by state.
  • Workman’s Compensation: Varies by state, from below 1% to as much as 8% of each employee’s gross pay.

The above are tax laws and much has changed with the implementation of Obamacare so the above numbers, which are for 2010 may be out of date. In addition to taxes employers cover a large percentage of benefit costs for employees and they include:

  • Health Insurance: This is the elephant in the room because the average employee can expect their employer to cover approximately $600 per month of healthcare insurance coverage in addition to what the employee has deducted from their paycheck.
  • Retirement: This is highly variable but typical 401k style programs have an employer matched contribution, or in the case of defined benefit systems a contribution and administration cost.
  • Life Insurance: May be covered whole or in part by the employer.
  • Long Term Disability Insurance: May be covered whole or in part by the employer.

The employee cost landscape has changed dramatically for employers in the last year and laws covering worker safety and training, disclosure requirements, healthcare benefits, existing tax law changes (e.g. taxing of healthcare benefit plans), and then there are local taxes (e.g. San Francisco County’s 1.5% tax on payrolls and health insurance tax for over 50 employee companies).

The complexity and changing nature of the tax and regulatory environment is the problem, not the taxes and regulations themselves. Employers need stability and predictability of future costs in order to make investments like hiring and if public policy academics and politicians fully understood this then they would be better at policy making as well as predicting future economic prospects (how many times have you read “unexpected” in economic reports?).