Is There a Disincentive to Work and Hire in the US?


I want to direct you to a very good rant-type article on the current state of employment and incentives in the US:

Sovereign Man

Regarding unemployment benefits, he says:

It’s not like anyone on unemployment would go door-to-door demanding of their neighbors and friends to pay benefits so that they can be idle.

But with the government as an intermediary to do the confiscation, many people are more than happy to remain unemployed and woefully ignorant of the source of the funds.

regarding US corporate tax policy:

I also saw an interesting interview recently with Cisco CEO John Chambers; his company has $30 billion of cash on its balance sheet, much of it overseas. Due to IRS tax rules on repatriation of overseas profits, however, Chambers has a strong disincentive to invest that enormous amount of cash in the United States.

And regarding the condition of productive people in the US:

Unfortunately, as the prevailing trend seems to be increased government control over the economy, the only direction, at least for now, is down. This is a rigged game, and I think it won’t be long now before productive citizens finally realize it… and stop participating.

It’s true that no place is perfect, but I’m convinced that a well-prepared expatriate can find far greater personal and economic opportunity with minimal disruption and interference overseas… and that is the whole nature of our ongoing conversations.

My take:

American political leaders talk a good game about creating jobs and offering incentives to small businesses to hire (small businesses have been shown in many studies to provide most of the new job creation historically). The talk often centers around “loans” and making sure businesses can “borrow.”

However, there are plenty of good businesses that have the cash flow to hire without borrowing, but government policy has motivated them to NOT hire and NOT invest in their business. With increasing cost burdens on employers and workers (FICA, FUTA, Workman’s comp, health insurance requirements and other benefits) along with the overhang of higher taxes on people who actually earn an income (we’ve decreased taxes on government transfer payments – i.e. handouts – such as the now never ending unemployment benefits of which the first $2,400/year is not taxed), business owners are highly incentivized to take the money now and either stash it in tax deductible retirement accounts or take the income now at 2009 tax rates.

All in all, our system is a mish mash of rules & regulations that, perhaps intentionally, kill the goose the lays the golden eggs – i.e. small businesses looking to hire. One final note, I had an interesting conversation a few months back with a business owner friend. He has a software company which is headquartered in the US with him as CEO and Chief marketing officer. He employs 70 people in Eastern Europe to do his software development. We discussed an interesting topic – how those in “elite” circles have no idea how hard it is for small business people to make things happen.

When Washington wants to consult small business, they go to Google’s executives or to John Chambers at Cisco – however, these “zero to a billion guys” (meaning their company, with start up money grew from nothing to enormous in a short time) have no idea what the regular business owner has to deal with. Hiring ONE person is a big deal to most small business owners. When a company gets $200 million in venture funds, hiring 1 or 25 people is no big deal – it’s OPM. These venture backed executives, whom I applaud for their success, are not the people to consult with small businesses.They can’t relate.

Let’s imagine if thousands of small businesses hired 1 person each. The small photo shop, the pet store, the small computer consultant, or accountant – this would provide a TREMENDOUS boost to the number of workers for many reasons, here’s two, one obvious one not so obvious:

1. we’re adding workers

2. this is a BIG one – a number of my clients age 60+ would love to switch to a part time job, but they can’t because there are no good part time jobs available and health insurance costs are uncontrollable. If these people switched to a part time job, which is often a mid level management job, they would OPEN UP a job for a younger person trying to move up in the world – I think this point is a missed one in discussions as people mention older folks staying in the workforce longer as a deterrent to employment numbers – remember, one of social security’s original goals was to have millions of unemployed seniors re-characterized as “retired” and out of the workforce. It also did in many cases, get them out of the workforce to open up jobs for younger folks.

It is also difficult for the employer who must pay all kinds of added expenses to hire someone. If you had a small business and wanted to hire a part-timer at the rate of $2,000/month, here’s what happens:

1. first, you reallocate some of YOUR income to make room for this salary (unlike our government which also allocates YOUR income in the form of higher taxes to hire more deadbeat relatives and the like for jobs)

2. second, you have to commit another 7.65% of that figure to cover your half of social security and medicare – another $1,836/year

3. Third, to get a committed employee, you need to pay for health insurance – let’s assume for a 62 year old part timer as I outlined above, that is about $475/month or more = $5,700/year.

4. Then you have Unemployment tax which in Massachusetts is $800/year I believe (it’s what I pay)

Just these items – $24,000 + $1,836 + $5,700 + $800 = $32,336

Remember, as a small employer, you have no venture capital backing so it means, until/unless you grow your business, you must take your salary (let’s say you paid yourself $85,000 as the owner of a photo shop) and subtract $32,336 – not likely to happen. If we replaced unemployment benefits, with FICA tax cuts, we might have more incentives to hire, and less incentive to “collect.”

However you look at it, currently, the incentives are not there – thank God entrepreneurs often act and make things happen no matter how foolish their government policy is – if costs keep increasing though, more entrepreneurs might join their friends in “collecting.”