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December 15th, 2010

Pay More in Unemployment Benefits, Lose more Jobs!

By Rob Gettemy

Last week, I wrote about how long-term unemployment benefits turn out to be bad for the unemployed person.   This week, I want to turn to how extended unemployment benefits are bad for both the employer and those who are working.  When an employer decides whether to make a new hire, he or she does not focus  exclusively on the hourly wage or salary of the employee.  Instead, they focus on the total cost of employment.  Have you ever calculated the total cost to your company for your employment?  Also, do you have any idea how much money your employer earns in total, or for each dollar of sales?  To truly understand the impact of rising unemployment benefits, we also need to understand these other factors.

Let’s start with how much a company keeps in profits for each dollar of sales.  You may recall a couple of years ago how oil companies were being demonized, and many were calling for “windfall” profits taxes on their “excess” profits.  First and foremost, the very idea of calling profits excess is simply anti-American.  Without profits, progressives in both parties would have very little to confiscate from the productive sector to provide for government programs.  The profit motive is one of the things that gets job creators up each morning.  Take away the incentive, and you take away the activity that leads to job creation.   Second, these oil companies were earning approximately ten pennies for each dollar of revenue received, or a net profit margin of 10%.  Since many called this “excess,” let’s use 10% as our baseline.

So, we’ll look at a hypothetical small business with revenues of $3,000,000.  At 10% net return on sales, that small company would make $300,000 in net income.  Of course, according to Obama, that small company owner is one of the folks who should be punished for succeeding, but that is for a different story.  If this small business is a service business paying workers approximately $10 per hour, it is likely employing approximately 60 employees.  Those 60 employees are collectively earning $1,248,000 ($20,800 each) based on a 2080 hour work-year and the $10 per hour wage.  The reality is though, they are probably working at most 1920 hours assuming 20 days for vacation, holidays and paid sick time.  So, the $20,800 is actually for 1920 hours of work which means the actual pay per hour is now $10.83.  On top of that, the employer must pay for workers compensation, and the employer share of FICA which comes to approximately 9% of their hourly wage or an additional 97 cents.  Next let’s assume the employer has a very modest benefits program including some modest insurance and perhaps a few other related minor benefits.  If the total cost of those benefits comes to $300 a month, that adds another $1.88 to the hourly cost.

So, you can see, we are now up to an employer cost of $13.66 per hour.  For our hypothetical employer with 60 employees, he now has a payroll cost of $1,573,632 as opposed to the cost that we think of for wages of $1,248,000, but it does not stop there.  The employer also must pay into the mandated unemployment compensation fund.  Before all of the growth in unemployment benefits, they might have been paying 2% of the $1,248,000 hourly wage or $24,960.  This brings their total cost of employment to $1,598,592.  Remember, this employer had a net income with these costs of $300,000.

Here is where the problem with extending unemployment benefits comes in.  Many employers are seeing their unemployment “contribution” growing to as much as 8% instead of the 2% we were using in our earlier calculation.  This additional 6% adds up to $74,880.  This additional cost represents approximately 25% of this employer’s net income, and makes the cost of employing anyone grow by $1248 per person.  Like any smart business person, this employer is going to “tighten-up” the ship.  They are going to delay hiring, and maybe determine they can do without a couple of current employees.  So, what happens?  We end up with even fewer employees.  Think for a minute, if due to the recession this employer also had to reduce his prices by even 5%, costs would not go down, but revenue would decrease from $3,000,000 to $2,850,000 meaning his income would have declined from $300,000 to $150,000.  Now, this $75,000 in additional costs equals half of his entire income.

The bottom line is that extending unemployment benefits ultimately hurts the unemployed by killing their incentive, but the impact does not stop with them.  It leads to further unemployment for other workers because businesses have to tighten their belts due to the additional unemployment costs.  It also leads to lower income for the business owner, so he spends less, causing loss of income for other businesses.  In the name of compassion for the unemployed, the government has started a downward spiral that ultimately hurts the economy and prolongs the recession.  For proof of this, you need look no further than the government actions during the Great Depression.  It moved from a recession to a depression because of the government.  We need to break this cycle now.

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About the Author

Rob Gettemy
Rob Gettemy is the founder and owner of 1 Million for Jesus Christ, a Christian apparel company. In addition, Rob teaches entrepreneurship at the University of Iowa and was a candidate for US House, Iowa District 2 in the 2010 Republican primary. Rob attended the 912 rally in Washington DC in 2009 and also attended the 8-28 event in 2010. Rob has been an outspoken critic of liberal policies his entire adult life.

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