Jake Towne – Common Sense Fixes the Job Market

“Economics consists of looking not merely at the immediate but at the longer effects of any act or policy; it consists in tracing the consequences of that policy not merely for one group but for all groups… The economic goal of any nation, as of any individual, is to get the greatest results with the least effort.” - economist Henry Hazlitt, Economics in One Lesson

Not only has the government and the Federal Reserve caused the financial crisis with excessive money-printing, reckless spending, bailouts and corporatism, but the government is fully responsible for the rampant unemployment we see in our country today. While the newspaper headlines of 10% use the Bureau of Labor and Statistics U-3 figure.  However, the government's broadest indicator of unemployment, the U-6 figure which includes 'discouraged' and 'marginally attached' workers plus part-time workers who desire a full-time job is currently over 17%. However, the U-6 does not account for long-term discouraged workers who have not been able to find a job, and economist John Williams estimates true employment to be 22% as seen here.

Before listing some of the governments' economic interventions and listing solutions to them, let's pause for a second and ask a couple important questions:

Why does a firm or entrepreneur create a job at all? The ultimate reason is to realize a profit, an overall economic gain, or to “make money.” Firms do not create jobs for pleasure, all businesses entail risk while seeking to create profits.

Why does someone accept a job? Sure, to meet the basic necessities of life – food, shelter, clothing, and health care when sick – but the individual chooses to work ultimately for the same reason – an overall economic gain, to make a profit and “make money.” In the economic sense, by the very act of working each individual demonstrates a preference to their current employment over employment with all other firms, or to leisure time.

Therefore both the employer and employee enter into a contract because they expect a mutual benefit. Employment is just like any other economic transaction – when you purchase a loaf of bread, you demonstrate your preference of the bread over the currency, and likewise the supermarket prefers your currency over the bread. When one works for a firm, the firm obviously prefers to have the work completed versus not having hired anyone at all. Likewise, the employee prefers the benefits gained from working rather than not working for the firm. Mutually beneficial transactions are the heart of any market economy.

The importance of sound money to the job market cannot be understated. Both firms and individuals need a sound method of economic calculation to gauge their profit or loss. I previously remarked that merely increasing the number of dollars certainly does not guarantee a profit since the dollar's purchasing power is dropping courtesy the printing presses of the Federal Reserve over the long term. Regardless, the entrepreneur must still attempt to calculate if spending say $10 per hour for a new hire will create the desired profit margin, say just $1 per hour. However, it is not a simple case of the worker deciding between $10 per hour for this firm, working another job, or not working at all. Consider:

  • The firm has significant graduated corporate profit taxes to pay. The federal rate for this progressive tax is roughly 35%, and Pennsylvania has the second highest corporate profit tax of just under 10%. Pennsylvania has the world's second-highest overall corporate tax rate at 41.5%(1)
  • To pay the mandatory Social Security payroll tax, the worker has 6.2% removed from paychecks. The employer must pay a matching 6.2% that the employee never receives, resulting in a 12.4% flat tax(2)
  • To pay the mandatory Medicare payroll tax, the worker has 1.45% removed from paychecks. The employer must pay a matching 1.45% that the employee never receives, resulting in a 2.9% flat tax(2)
  • The worker pays approximately 1-2% in local payroll taxes, depending on the locality.
  • To pay Pennsylvania state income taxes, a flat tax of 3.07% is removed from workers' paychecks. (3)
  • For federal and state unemployment “insurance” mandates, the firm pays anywhere from 2-6% of pay(4)
  • Employers pay mandated workman's compensation tax, and the national average is around 1.5% of pay.  (5)
  • These taxes all precede the most dreaded tax of them all, the graduated federal income tax. Let's be generous and assume that just 15% net of the employee's pay is withheld, although 20-30% is by no means uncommon. (6)
  • Lastly, to pay for the wild money-printing of the state, everyone pays the insidious hidden tax of inflation. In 2009, the inflation tax on savings in banks was estimated at roughly negative 8%. (7)

I will not factor in significant property taxes, the 6% Pennsylvania sales tax on goods and services, the 32-cent per gallon PA tax on gasoline, the $1.35 per pack PA tax on cigarettes, the $6.65 per gallon PA tax on spirits, capital gains and taxes on interest, state registration and licensing, etc., etc. (8) Plus, note I have not listed the skyrocketing cost of health care – my solutions are in my plank here and outlined in “Health Care Solutions.” Obviously, the firm also has many other financial obligations as well – property, capital expenditures, overhead.

So, when one works it all out, the firm-worker contract calculation is much more complicated than just $10 per hour and $1 profit to the firm. Since the inflation tax (~8%) and the corporate profit tax (41.5%) adds up to about 50%, the firm really needs the employee to generate $2 per hour in profit for the firm. Meanwhile, the firm must pay roughly $11-$12 to employ the worker.  So, the worker needs to generate around $14 per hour to be worth the paycheck and make the firm profitable, but yet the worker only receives about $7 in take-home pay.

To compound the matter, the government forbids firms to pay rates lower than the federal minimum wage of $7.25 per hour, which prices people out of jobs they might otherwise be able to fulfill. (9)

So the common sense solutions I propose to quickly fix the job market, in no particular order, are: (see also 10)

  1. Remove laws that threaten firms with frivolous lawsuits when firing workers. Not only would firms would be more apt to hire new workers, but common sense solutions, such as prearranged separation compensation for sudden termination in the contract could instead become the norm.
  2. Remove laws that prevent firms from hiring workers by mandating criteria outside of the only question that really matters – can they do the job? Firms should be able to hire whom they please, which includes legitimate concerns such as whether they will stay with the firm long enough to warrant the investment in their training.
  3. Remove the mandate for the employer to withhold income for all payroll taxes. The individual can then decide how best to use the funds, even if it is just to earn interest before having to pay the taxes. This reduces transaction costs for the employer, and gives households more flexibility in economic planning.
  4. Permanently reduce (and preferably abolish) the 9.99% Pennsylvania state corporate tax so more firms will prefer our state to the rest of the nation. While reducing the corporate profit tax on the federal level will also make American firms more competitive, Pennsylvanians have more control over state legislators than the remainder of federal Congress, so this would be the most effective first step.
  5. Remove the mandate for the employer to offer workman's compensation. Or, just leave it up to the worker to decide if the 1.5% would be better off left in their paycheck. Likely this would create a competitive private market for workman's compensation insurance that is independent of the employer.
  6. Make enrollment in the Social Security and Medicaid programs voluntary instead of mandatory. These schemes are woefully underwater with $14 trillion in unfunded liabilities for Social Security and a whopping $85 trillion for Medicaid. Put in place a gradual phase-out plan so retirees can still receive the funds they contributed, while younger generations can escape the plundering since the programs likely will not exist by the time they are ready to retire. I would also like to point out the Social Security payments, for instance, should be almost DOUBLE the current levels since the government has been fudging the inflation numbers for many years.
  7. Abolish the federal income tax since it is not only immoral, but unnecessary. Details here. If this step is too radical for Congress – it's not, for most of our history there was either no income tax or a negligible one – surely a tax holiday could be announced to stimulate people to work, and make permanent cuts to wasteful federal spending as I outlined here.
  8. Remove the unfair labor union laws that forbid employers to hire new workers who would do the same jobs for less. There is nothing wrong with voluntary unions that work for safer working conditions by negotiating with employers, but the use of force and coercion to hijack control of a workplace from the firm that risks its owners' capital to provide the employment in the first place is immoral.
  9. Restore sound money to remove the problems that inflation causes for entrepreneurs and individuals alike. For full details, read my Sound Money and Jobs plank as well as the Federal Reserve plank.
  10. Repeal the Sarbanes-Oxley Acts' regulations which are projected to cost firms over $100 billion per year since 2002.  (11) Following the Enron and WorldCom frauds, Congress passed the Sarbanes-Oxley Act, which has failed to prevent rampant fraud in the financial system. The former NASDAQ Chairman, Madoff, is one such example, while the Wall Street Journal exposed Scott Rothstein's billion-dollar ponzi scheme as well. SarbOx legislation has placed American firms at a needless disadvantage to the rest of the world. The question is not which additional regulations were needed – those committing fraud will always seek to cover their tracks – but rather how many other frauds exist.
  11. Slash the $1.1 trillion per year costs of federal regulatory compliance. (12) These regulations and paperwork costs are especially harsh for small businesses, and serve as barriers to new startups.
  12. Abolish federal minimum wage laws, or at least move them much lower so workers are not priced out of jobs. The most common rebuttal in support of minimum wage laws is that if you make less than minimum wage, you can't sustain yourself. However, you must disperse the bad logic around minimum wage laws – the law really says its better for someone to be unemployed and paid nothing rather than be “exploited” and paid less than $7.25 an hour. Likewise, if raising minimum wage secures better jobs, why not raise it to $12 or $20 an hour? Obviously, minimum wage laws can only increase unemployment.

This labor exploitation theory came from Karl Marx, the founder of communism, and completely overlooks the fact that there is no coercion in a market-based contract – an individual can just as easily decide not to accept less then $7.25 an hour by their own choice. Again, it is a question of mutual benefit for both the firm and the worker.

An individual can decide if they are willing to mow lawns or wash dishes for $5 an hour, tutor adults in the evenings or home school a friend's child for a token $2 an hour, or sell a firm's goods just for commission. A CEO should be able to decide to work for $1 a year if he believes he will turn around the firm and receive compensation later. A student or aspiring actor should be able to work a dream internship or prospective theater role for free – or even pay the firm to provide the opportunity – since they believe it will lead to greater opportunities later on.

Well, those are the solutions!  Even if just some of them are implemented, they will all stimulate new jobs and are guaranteed to work very quickly and put an end to all this unemployment nonsense… or you can listen to the drab, dime-a-dozen Republocrat solutions that NEVER WORK and got our country in this whole mess in the first place. These primarily consist of resorting to the printing press or market interventions such as the failed economics of any government-sponsored stimulus plan. See “Why the Stimulus Plan Will Fail… and a Better Alternative” where I debunk stimulus plan economics in January 2009.

For instance, even recent actions of Congress like HR 4508's granting of additional loans to the Small Business Administration are counterproductive. Please understand I do not challenge the fact that small businesses receiving subsidies will benefit. However, the danger lies in having federal bureaucrats decide which firms are to be gifted with special unfair advantages over all other competing firms.  As Hazlitt wrote in his first chapter, the damage to ALL groups must be assessed as well as the handouts given to the privileged groups.

Any rational person will also note that cronyism and corruption will exist, and firms may counter-productively elect to dedicate more resources to lobby for government handouts rather than focusing on providing the goods and services that consumers desire. Plus, always remember that GOVERNMENT HAS NOTHING – it must first tax or create money out of thin air to be able to distribute funds in the first place!

So, the truth is that the mass unemployment we have today is purely a creation of government interventions in modern market economies. In today's world, I assure you there is no shortage of work to be done, it is only a question of how best to generate the goods and services we all want and how best to increase our standard of living. As seen by the USSR's example, economic central planning never works, planning by individuals unlimited by the constraints of government will result in prosperity. Government's only role is to preserve individual liberties by enforcing punishments for fraud, contract violations, theft, and acts of aggression against the sovereign individual.

In conclusion, the only barrier preventing our society from succeeding in fixing the unemployment problem is the separation of the state's interventions from the economy.

Jake Towne

February 2, 2010              Also highly suggested reading is “The Government's 'War' on Main Street”

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Source List

(1) Hodge, Scott. 2008.  “U.S. States Lead the World in High Corporate Taxes.” http://www.taxfoundation.org/files/ff119.pdf

(2) Social Security Online. 2010.  http://www.socialsecurity.gov/pubs/10003.html

(3) Tax Foundation.  2009 Facts and Figures.  p. 17/50. http://www.taxfoundation.org/files/f&f_booklet_midyear-20090723.pdf

(4) The federal (FUTA) and state (SUTA) unemployment taxes are fairly complicated, but worthwhile since it is a fairly furtive way for the government to tax firms, and even assist in their destruction.

The firm pays up to 6.2% on the first $7,000 in wages for each employee under FUTA.  Many Pennsylvania firms receive a 5.4% state unemployment discount resulting in the .08% tax that some people recognize.  It is usually $56 per person, front loaded to hit in the beginning of the year because it is on the first $7,000 in wages.  These funds are moved into respective federal FUTA accounts.

If Pennsylvania borrows from FUTA and does not pay back the unemployment loan, the discounted rate is then less than 5.4% and the firm pays the difference.  If PA doesn’t pay back the feds, then EVERY company in PA will pay an additional tax, say 1%, and will pay 1.08% for each person still employed on the first $7,000 in wages or $75.60 each.  This is a tricky method of raising taxes since the increase happens automatically.  Last year the PA tax went from 0.06% to 0.08%.

Now, there is also a SEPARATE state unemployment tax rate (SUTA) that is paid by the firm on the first $8,000 in wages for PA.  The rate is based on a firm's ‘experience rate’ meaning the more turnover a company has the higher the rate.  For example, in 2009 a firm might be at 6% tax on the first $8,000 in wages for EVERY current employee.  Since many firms had layoffs in 2009, the 2010 rates can rise fairly dramatically – 1-5% increases are likely fairly common.  Again, the tax increase is built right in, but is invisible to the employee.  This tax is paid directly from the firm's cash reserves. As more employees are laid off, the company’s reserves are depleted at a faster rate which increases the tax rate for the following year.  Then the firm gets nailed with an unexpected increase in taxes, lays off more employees, and the downward spiral continues.  S0, when Congress extends unemployment, this may appear to assist the unemployed, but it is leeching the firms of capital and accelerating their destruction and ability to provide new jobs.

Remember, since the tax is on the first $7,000-$8,000 in salary, firms are also increasing reluctant to hire new employees.  Thanks to RH for explaining this in detail.  This source explains in far less detail.

(5) National Academy of Social Insurance.  2007.  “Workers' Compensation Highlights.” http://www.nasi.org/sites/default/files/research/Workers_Comp_Highlights_2007.pdf

(6) Towne, Jake. 2009.  Income Tax Plank.  http://towneforcongress.com/platform-issues/income-tax

(7) Towne, Jake. 2010.  Sound Money and Jobs Plank.  http://towneforcongress.com/platform-issues/sound-money-and-jobs

(8) Tax Foundation.  2009 Facts and Figures.  pp. 23, 26-28 of 50. http://www.taxfoundation.org/files/f&f_booklet_midyear-20090723.pdf

(9) Department of Labor.  January 1, 2010. “Minimum Wage Laws in the States.” http://www.dol.gov/whd/minwage/america.htm

(10) Rockwell, Llewellyn H. 2010.  “How to Fix the Jobs Problem.” http://www.lewrockwell.com/rockwell/fix-jobs-problem140.html

(11) Zhang, Ivy.  2005.  “Economic Consequences of the Sarbanes-Oxley Act of 2002.”  pp. 22-23/68. Zhang also notes that the equity market loss may have been as high as $1.4 trillion.  http://w4.stern.nyu.edu/accounting/docs/speaker_papers/spring2005/Zhang_Ivy_Economic_Consequences_of_S_O.pdf

(12) Crain, W. Mark. 2005.  “The Impact of Regulatory Costs on Small Firms.” p. 8/95.  http://www.sba.gov/advo/research/rs264tot.pdf

(13) Hazlitt, Henry. 1946.  “Economics in One Lesson.” http://fee.org/library/books/economics-in-one-lesson/