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Forum Post: Why Employment In The U.S. Isn't Coming Back...

Posted 1 year ago on Jan. 29, 2013, 10:30 p.m. EST by FifeAndDrum (8)
This content is user submitted and not an official statement

Why Employment In The U.S. Isn't Coming Back

Submitted by Charles Hugh-Smith of OfTwoMinds blog,

If we understand the simple dynamics of value creation, total compensation costs and the cost-basis of doing business (general overhead), then we understand why employment isn't coming back in the U.S.

It is impossible to understand job creation without understanding value creation and labor/overhead costs. People hire other people when their labor creates more value than it costs to hire them.

When labor costs are high, the value created must also be high; it makes no sense to hire someone if doing so generates a loss.

When labor is cheap, the bar of value creation is lowered, and so the risk of hiring a worker is also lower: they don't have to add much value to be worth their wage.

This is why you see many low-value jobs in developing-world countries. There are night watchmen on duty in virtually every parking lot and building in urban Thailand, for example; these workers are providing a fundamental value, "eyes on the street," but it is a low-value proposition: no special skill is required other than being a light sleeper. The cost of their labor is equivalently low, but in a low-cost basis economy such as Thailand's, a very low wage is still a living wage.

In a self-employment example, many vendors in urban Thailand set up their informal food stall (a cart or a tent) for a few hours a day. Their net income is low, because what they provide--readymade food and snacks--is available in abundance, i.e. there are many competitors. Nonetheless, because the cost basis of life is relatively low, modest earnings from a low cost, low-profit enterprise make the enterprise worthwhile.

Compare that with the typical government job in the U.S. or Europe. It is difficult to measure the true cost of government pension costs, as local governments do their best to mask their pension costs and inflate their pension funds' projected returns. But a back-of-the-envelope calculation yields about a 100% direct labor overhead cost for the typical government job with full healthcare, pension and vacation benefits. So an employee earning $50,000 a year costs $100,000 in total compensation expenses.

Many local government employees on the left and right coasts earn close to $100,000, so their total compensation costs are roughly $200,000 per worker.

How much value must be created by each employee to justify that compensation? Government needn't bother itself with that calculation, as the compensation is not set by market forces and the revenue stream can be increased via higher taxes, junk fees, tuition, licences, permits, etc. As the legacy costs of healthcare and pensions for retirees become due, local government operating budgets are being gutted to pay these ballooning legacy costs.

As a result, it is now impossible for many local municipalities to fill potholes: it makes no sense to have $100,000/year employees performing low-value work like filling potholes. Put another way, there is a labor shortage in high-overhead government bureaucracies because after paying for legacy pension costs, there is no money left to hire more people at $100,000 a year in total compensation to fill potholes, a job that might be worth $35,000 in total compensation.

The value created by government employees filling potholes is completely out of alignment with the cost of their wages/benefits. If employees cost $100,000 (recall that their annual earnings may be $50,000--we must always use total compensation, not wages as reflected on pay stubs), then in effect all work that generates less than $100,000 in value can no longer be done.

This is why cities and infrastructure are falling apart. Once you raise the cost of compensation far above the value being created by the labor, then most lower-value but nonetheless essential work (e.g. filling potholes) becomes unaffordable to accomplish.

We can understand this dynamic very clearly in a private-sector example. Let's say a high-tech start-up pays its programmers $90,000 a year, with minimal benefits. The total compensation costs of each programmer are thus around $125,000 annually.

Now let's say that the owners are very egalitarian and they pay everyone they hire $90,000 a year ($125,000 in total compensation costs) regardless of their skills or how much value their labor creates. Does it make sense to pay someone $125,000 a year to empty the trash cans in the office? No, it does not. So the trash doesn't get emptied. Does it make sense to have a $125K/year worker being a go-fer, typing correspondence and making copies? No, it does not.

Those menial tasks are pushed down to the programmers and managers, who must do those tasks themselves on a need-only basis.

The new hire is expected to create $200,000 of value annually (the minimum output of value needed to keep the company afloat) or they must be let go, or the firm will lose so much money it goes belly-up.

Now let's say that the local minimum wage law sets the minimum total compensation costs of any employee at $40,000 annually. For example, $25,000 in wages and $15,000 in direct labor overhead (healthcare, disability, workers comp, vacation, 401K pension contributions, etc.)

What is the value created by an administrative assistant who makes copies and empties the trash cans? Let's say the value added is $20,000 a year. At $40,000 per year minimum cost, it makes no sense to hire a "low-cost" worker because the value created by that worker is not even close to their total compensation costs.

As a result, the job of administrative assistant is not just unfilled--it vanishes. It makes no sense to hire workers when the value they create is less than their compensation costs. How do we measure value created? The most accurate way is to let the market discover the value of the work performed by raising the price of our goods and services to reflect the value added.

Does our product or service become more valuable if the trash in our office is emptied? No; so the trash is not emptied, as the labor cost only raises the cost-basis and lowers gross profit, thus increasing the risk of insolvency.

The same can be said of all sorts of overhead: from healthcare costs that rise far faster than the company's revenues, expansive offices, higher junk fees and taxes, higher energy costs, and so on.

In a global economy, the value added by labor is measured on a global scale. As the overhead costs of healthcare, energy, office rent, local government junk fees, etc. keep rising, each worker in the company must produce more value just for the firm to generate enough gross margins to pay overhead costs and stay solvent.

If overhead costs--the cost-basis of doing business in the U.S.--keep rising faster than gross profits (out of which overhead is paid), then the owners have little choice: they can either close the business before they are personally bankrupted, cut everyone's pay or lay off some employees and somehow raise the productivity of the remaining workers to maintain enough value creation to survive.

This is the U.S. economy in a nutshell. If we understand the simple dynamics of value creation, total compensation costs and the cost-basis of doing business (general overhead), then we understand why employment isn't coming back in the U.S.

http://charleshughsmith.blogspot.com/2013/01/why-employment-in-us-isnt-coming-back.html

31 Comments

31 Comments


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[-] 1 points by stevebol (1269) from Milwaukee, WI 1 year ago

What good is all this technology? Should we spend more time eating processed food so we get diabetes? That increases HC costs. Everything is a vicious cycle.

[-] 1 points by stevebol (1269) from Milwaukee, WI 1 year ago

Increasing automation + increasing population = not good.

[-] 1 points by DKAtoday (28248) from Coon Rapids, MN 1 year ago

Unless it is the plan to reduce individual human involvement - while providing for the upkeep for each that is made UN-needed by current technology.

[-] 1 points by WuWei (34) from New York, NY 1 year ago

When you think of it the average person now aspires to 15 years of education and to retire at 60 for 25 years on a nice fat private pension. Thats after working 40 hours a week with $80000 a year final salaries, a year off before and after college and a mid career break too. Only 50% of the population are actually economically active and mqny of those woek for the State. Normally the only way you can increase the number of jobs would be export more or increase tourism But one way of increasing employment would be to give the poor more money to spend. In 2009 the Thai government gave all low paid workers $30 to spend. They said that that cash would pass through more hands on it's way up then it would in the other direction. So maybe simply lifting low paid workers out of taxation would create jobs.

[-] 1 points by niphtrique (323) from Sneek, FR 1 year ago

Another problem is that China is hoarding US dollars, creating an artificial demand for US dollars. If they did not, then the problem would already have been corrected. Wages in the US would be lower and there would be more employment.

[-] 1 points by FifeAndDrum (8) 1 year ago

China is hoarding dollars? Aren't they merely getting paid for goods and products they sell to us?

Many times now, they've been told by the U.S. Government that they aren't allowed to buy X, Y or Z (for example, they wanted to buy Unocal Oil but were barred from doing so). What would you have them do with their U.S. dollars that they earn in return for selling goods?

[-] 1 points by niphtrique (323) from Sneek, FR 1 year ago

China could end this situation by letting their currency rise, for example by demanding payment in their own currency or spending the US Dollars they receive.

If currencies were not hoarded, then the exchange mechanism will correct imbalances. The Chinese currency will then rise relative to the US Dollar. Balances of payment will be in balance. Less jobs will be lost in the US.

Even better, if the government would spend some stimulus, then it would remain in the country, so fewer deficits are needed to improve the economy. There is a solution against hoarding currencies (and many other issues). It is a holding tax on money, see:

http://www.naturalmoney.org/full-theory.html#batr

[-] 1 points by FifeAndDrum (8) 1 year ago

"if the government would spend some stimulus, then it would remain in the country," WTF OVER???

There's no hoarding going on. They can't get rid of the USD fast enough because we're debasing our currency to the tune of $85 billion a month, thanks to the bernanksters printing and ultra artificially low interest rates.

Holding fees? Oh yes, you're talking about the technical term "financial repression" (specifically negative interest rates). Yes, let's drive everyone out of our currency because we're only the world's reserve currency right now. Let's make things ten times worse for ourselves! Brilliant! You must work for Wall Street!

[-] 1 points by niphtrique (323) from Sneek, FR 1 year ago

The US is accustomed to spending and that the rest of the world is paying the bill. The Chinese have more than $1 trillion because they hoarded US Dollars.

Now they want to get rid of them, but it had been better that they never had accumulated them in the first place.

The problem will be corrected somehow and this will certainly be painful. It will happen anyway, so it is only a matter of time.

A holding fee will create a stimulus. Prices and wages will rise, and debts will be forgiven. But it will be painful nonetheless. After some time it will get better. It may look like what happened in Iceland.

National income should be based on real productivity, otherwise the good jobs will not come back.

But many people prefer to believe the fairy tales politicians tell them.

Many people think: "We must demand this, we must demand that." Meanwhile things get worse.

Terms like "financial repression" do not contribute to rational thinking.

This is my theory on money, and on what choices should be made to make it work out better in the long run:

http://www.naturalmoney.org/full-theory.html

So, if things get worse, remember that it can be solved.

[-] 1 points by Narley (280) 1 year ago

I would add that robotics and automation is also a factor. It now takes fewer people to get things done. Something as simple as automated phone systems costs a lot of jobs. Computer programming even takes less people. Programmers use so many canned systems and automated tools these days we don’t need as many programmers. The list goes on, from manufacturing to fast food. Companies just don’t need as many people.

I think it will be interesting in fifty years to see how we deal with this. Do we put everyone on the government dole? Do we force companies to hire my people even if not needed? Do we put everyone on WPA projects just to put people to work? I think it will be a serious problem soon.

[-] 1 points by NVPHIL (664) 1 year ago

I've been thinking about this also. It's very likely products will go from raw material to delivery to customer without a single person involved beyond designing the robots. If you mention a profession that doesn't require true creativity you can replace it by machines.

[-] 1 points by DKAtoday (28248) from Coon Rapids, MN 1 year ago

And there ya go - utopia - people allowed to do - whatever - while machines provide for them. Hmmmmmmmmmm better hope they never breakdown - including those assigned to maintenance.

[-] 1 points by NVPHIL (664) 1 year ago

If a machine breaks beyond the possibility of repair you get another one. I'm not sure what the actual process for obtaining replacements would be since a truly automted society would make capitalism obsolete but it's worth thinking about.

[-] 1 points by FifeAndDrum (8) 1 year ago

Yes, but there are robots in every country. China is seriously getting in to them and the jobs still flow from the U.S. to Chindia.

[-] 1 points by Narley (280) 1 year ago

Yes, that sucks. But that is a corrupt business practice issue, not a lost jobs problem. Off shoring jobs could be fixed if politicians would get off their ass. But jobs lost forever due to technology will be a more serious problem in a few years.

[-] 1 points by FifeAndDrum (8) 1 year ago

Automation is a corrupt business practice issue?

[-] 1 points by peacehurricane (293) 1 year ago

Corrupt anything and automation is no exception with HQ in Washington DC and if this is the future for you better get to moving cause it is not happening like these posts talk in this free land WE stand strong ALL ONE...people working together in happy community OCCUPY

[-] 1 points by FifeAndDrum (8) 1 year ago

Hahahahahahaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaaa

I feel so warm and fuzzy all over.

[-] 1 points by Narley (280) 1 year ago

No, In my mind off shoring jobs is a corrupt business practice. Increasing automation, resulting in more and more loss of jobs is a real problem we will have to deal with.

[-] 1 points by FifeAndDrum (8) 1 year ago

Really? So Japan offshoring jobs to Ohio to build Toyotas or Germany offshoring them to Alabama to build Mercedes or Electrolux of Sweden offshoring jobs to the Carolinas is a corrupt business practice?

[-] 1 points by Narley (280) 1 year ago

It's not an even trade. The US loses jobs big time due to offshoring.

[-] 1 points by FifeAndDrum (8) 1 year ago

So a global economy is a "corrupt" business practice unless the US gains in the deal or it's an even trade?

cor·rupt [kuh-ruhpt] adjective

1. guilty of dishonest practices, as bribery; lacking integrity; crooked: a corrupt judge. 2. debased in character; depraved; perverted; wicked; evil: a corrupt society. 3. made inferior by errors or alterations, as a text. 4. infected; tainted. 5. decayed; putrid.

Really?

[-] 1 points by Narley (280) 1 year ago

Sorry, I do not believe a global economy can work. Someone looses every time. Lately it's been the US.

[-] 0 points by SingleVoice (158) 1 year ago

When technology improves in any field, the jobs lost by that field are gained in another supporting field. Example: if an ATM takes the place of many tellers in banks, it replaces those jobs with the jobs of building them, programming them, filling them, fixing them, putting them in their locations, improving them, etc. Those bank teller jobs are replaced by many others in many more different fields. The jobs lost are actually replaced by many more jobs but they are in many different fields than the original replaced job. Those workers in the original job must now be re-trained for another career. This is nothing new. It has been happening throughout the centuries.

[-] 1 points by Narley (280) 1 year ago

I agree technology that costs jobs also create job. But it’s not an even trade. On average many more jobs are lost than gained. This pace is accelerating . Robotics and technology in manufacturing, warehouse management, transportation and so on will continue to need less people.

With technology and robotics employers don’t have to worry about minimum wage, sick days, retirement cost, etc.. Their goal is to reduce the human work force as much as possible. And, one day we will have to deal with people not finding work because of improved technology. Bottom line is jobs are going away and not coming back. How will we deal with it?

[-] 1 points by SingleVoice (158) 1 year ago

I'll say what I just said to niphtrique below: I disagree with your argument. Throughout history every new invention replaced someone's job and created others. In his example, if the ATM is improved, someone is improving it (job) And when it is improved, someone has to remove the old one and replace it with the new one (job). Someone else has to reprogram it for the particular bank it's going to (job). After it is installed, someone has to fill it and maintain it (job). If it's not a replacement, someone has to build it (job) These jobs are actually better paying jobs than the original bank teller job because they require more expertise and education in the varying fields.

There are a lot of jobs at this time in high tech fields that the employers can't fill because not enough people are qualified for the new technologies. These are very high paying jobs. The uneven trade you refer to is only the fact that the new jobs are more technical jobs than the ones they are replacing. People that want them need to be retrained or educated in these fields.

The overall job market at this time has gone away only because of a white house and congress who refuse to get out of the way and let business work. This last tax increase not only hurt jobs but hurt everyone with a job that pays taxes. Everyone lost money in their paychecks since January 1 and so who is going to spend money when they have less? Where will the demand come from if no one has money to spend? This economy is a result of a government who is killing us. You don't even hear of them speaking about jobs anymore not even in the inaugural address. Congress and the white house are all over gun control and immigration but meanwhile fewer are working and no one cares.

[-] 1 points by Narley (280) 1 year ago

I agree with everything you say about the government. But I maintain as technology, automation and robotics advance we will see increasingly more jobs go away and not be replaced in some other way. Yes, some new jobs will be created. But a lot more jobs will go away forever.

[-] 1 points by niphtrique (323) from Sneek, FR 1 year ago

This is not entirely true. Part of the problem is that there will be less and less useful productive jobs with good wages. If the ATM's are improved, less support personnel is needed.

A writer named CIGA Keith on JSMineset.com assessed the effect of productivity gains as follows:

The fewer people employed, the higher the productivity, that is, until you attain perfect productivity with a fully automated economic production. However a fully automated production means no employees. No employees means no wages paid which means no funds to pay for consumption.

Production cannot be consumed unless employees are paid wages with which the production may be purchased. Therefore, productivity beyond a certain point is counterproductive.

I guess this is a major problem and a reason why Capitalism fails. You can see it in Monopoly too. In the end there is much capital (e.g. buildings) but no demand because all players except one have lost.

See also:

http://www.naturalmoney.org/organisation.html#tcso

[-] 1 points by Narley (280) 1 year ago

Exactly. Technology has the potential to put us all out of work. What will we do then? We need to start thinking about it.

[-] 1 points by SingleVoice (158) 1 year ago

I disagree with your argument. Throughout history every new invention replaced someone's job and created others. In your example, if the ATM is improved, someone is improving it (job) And when it is improved, someone has to remove the old one and replace it with the new one (job). Someone else has to reprogram it for the particular bank it's going to (job). After it is installed, someone has to fill it and maintain it (job). These jobs are actually better paying jobs than the original bank teller job because they require more expertise in the varying fields.

[-] 2 points by niphtrique (323) from Sneek, FR 1 year ago

Over all it will create a few good payment jobs and destroy a larger number of medium payment jobs. Those medium payment jobs will be replaced by low payment jobs (if they are replaced at all). People in medium payment jobs spend in the real economy while people with good payment jobs invest in the stock market. Stock will rise and employment will drop because demand reduces.

Technological development makes life easier, but if we want to continue on this path then we have to consider the social consequences and find a way to make technological development contribute to society. I think it is possible and I am working on that issue.