Guest Post: Here's Why Small Business Isn't Hiring, And Won't Be Hiring

Tyler Durden's picture

Submitted by Charles Hugh Smith from Of Two Minds

Here's Why Small Business Isn't Hiring, and Won't be Hiring

The reasons why small businesses aren't hiring are structural; the dearth of jobs is not temporary, and this is not a "soft patch," it is quicksand.

The low job growth in the U.S. isn't a "soft patch," it's a sea of quicksand. In a nutshell, here's the situation: 2/3 or more of all job growth comes from small businesses starting up and expanding; only a third or less of new jobs come from Corporate America or government expansion.

As recent reports have shown, Corporate America has been on a hiring spree--overseas. From the point of view of globalized Corporate America, why hire anyone in a slow-growth market like the U.S.? It makes sense to hire new employees in fast-growing markets where the corporation is reaping its growth and most of its profits.

As for government hiring: the game of expansion based on explosively rising debt or Federal stimulus spending is over. To live within their means, local goverment and related agencies will have to shed jobs, as labor accounts for 80% of government expenses.

That leaves any future expansion of jobs up to small business. But small business isn't hiring, and won't be hiring, for these structural reasons:

1. The high costs of cartel healthcare, a.k.a. Sickcare in the U.S.
Corporate America and small business share one millstone: the absurdly high costs of healthcare in the U.S., which have been pushed onto the employers more as a historical accident than out of rational policy.

I have analyzed sickcare in depth, ( for example, Sickcare Will Bankrupt the Nation--And Soon) and it all boils down to this: we spend twice as much per capita on healthcare as our developed-economy competitors. Countries from France to Australia to Japan (three different systems) spend about 8% of their GDP on healthcare, and the U.S. spends 18% (17.6% in 2009, and of course sickcare costs leap up every year regardless of who's in office).

Here is a report worth studying: UNDERSTANDING U.S. HEALTH CARE SPENDING: 5 percent of the population is responsible for almost 50 percent of all healthcare spending. At the other end, half of the population accounts for just 3 percent of spending.

That 8% of "extra" money our nation squanders on paperwork, fraud, profiteering, needless procedures, useless drugs, $250,000 spent on the last few months of very ill patients' lives and all the rest of the insane sickcare system comes to $1.25 trillion. That is a "tax" on the economy which is paid mostly by employers, the self-employed and taxpayers via the monumental waste in Medicare and Medicaid.

I have covered this topic many times:

Why "Healthcare Reform" Is Not Reform, Part I (December 28, 2009)

The High Water Mark of a Broken System: U.S. "Healthcare" (March 20, 2010)

Skyrocketing Health Care Costs Hamper U.S. Competitiveness

Improving Americans' Health, With or Without Health Care Reform

Is Fee-for-Service What Ails America's Health Care System?

The vast majority of small businesses are marginal, and they cannot afford to hire employees when the already crushing costs of healthcare continue rising. The healthcare insurance for an employee with a family can easily exceed $1,000 per month, and more if the worker is over 50. Add in workers comp insurance, disability and unemployment insurance, and the employer's share of Social Security and Medicare (7.65%) and the "overhead" costs for hiring a new worker can equal or exceed the employee's salary.

2. Politicos and employees don't understand small business. How many politicos started a business from scratch and are still running a small business of 25 or fewer employees? Basically none. How many employees understand what it feels like to be skating close to the edge of emotional and financial collapse, month after month?

Employees wonder why their pay isn't rising, but the employer's compensation costs have been steadily climbing for decades thanks to sickcare and other systemic costs. As I have often said here: you'd have to be literally insane to hire anyone in this economy unless that employee will pull in so much new business that the costs are justified. Unfortunately, that is a rare circumstance.

Out-of-touch politicos think that trimming the employer's share of FICA (Social Security) 2% is going to make a measurable difference in a 100% labor overhead (i.e. you hire a worker at $2,000 per month and the overhead costs $2,000 per month)--what a joke. Great, my overhead per employee dropped to 98% from 100% while my sickcare insurance leaps by 10% a year.

3. Local government views small business as tax donkeys. Local government sees small business as one thing and one thing only: a captive source of extra revenue via higher licensing fees, junk fees, permits, surcharges, etc. Local government thinks small business is captive, but the local politicos and fiefdoms are forgetting every small business owner has an option: it's called closing down, and opting out of the rat-race of higher taxes and costs.

Many oftwominds.com readers are small business owners who have bailed out, sold out or closed their enterprises: it was no longer worth the headaches, hassles and risks.

4. Litigation nation. Employees and others can take a turn at the lawsuit lottery wheel, and if they "win" then you lose. The stress alone is deadly. I know many employees think the owner is exploiting them, and that is a reality for undocumented workers and others. But the number of business owners who are trying to do right by their workers far exceeds the exploiters.

Meanwhile, the cost of "protection" against lawsuits keeps rising, too.

5. The "flexible, free-lance/ independent contractor" model of employment which has been lauded for the past decade as the key to America's rising productivity has some serious downsides--and I should know, as I've been a free-lancer for 20 years.

The basic "innovation" here is to offload that 100% overhead expense onto the employee via paying them more as an independent contractor or free-lancer. But that model has numerous structural weaknesses.

-- I.C.s (independent contractor) don't qualify for unemployment, so when they lose steady work there is no backup income. There is no 6 or 9 months' grace period where the free-lancer can work on Plan B--they're relying on savings the moment they cash their last paycheck.

-- We free-lancers pay our own taxes quarterly. Once your income drops then it's dangerously tempting to short-change that next quarterly payment or skip it entirely. Yes, you will owe less because you're making less money, but those with formal jobs don't realize we all pay 15% FICA (self-employed Social Security) on every dollar earned. Toss in state and Federal income taxes and even supposedly low rates (15% Federal, etc.) quickly add up to 35% or more. That means big tax payments, and big tax problems if you fall behind.

-- Free-lancers' income can drop sharply but that won't be reflected in any employment statistic; it will only show up in declining tax revenues.

-- Laying off I.C.s and free-lancers is the low-hanging fruit for enterprises cutting back. Based on what I've read and heard, most of these initial "easy" cuts to head count have already been made. So the next wave of lay-offs will be formal employees.

-- The number of I.C.s and free-lancers in the U.S. economy is simply enormous-- semi-official estimates put the number at 10 million but I would guesstimate the real number is more like double that: 20 million, or about 15% of the entire U.S. workforce of 139 million.

Many of these are facing zero income, others are scraping by with a few temp gigs and favors from old employers. None show up in official statistics. So when you read that 14 million people are officially unemployed, add in 14 million under-employed (barely scraping by) or totally unemployed I.C.s and free-lancers.

--- Many of the industries which supported I.C.s and free-lancers have been reduced to mere shadows of their former glories, and they won't be coming back. The print media industry supported tens of thousands of free-lance writers, editors, marketing types, ad agency temps, etc.--that industry is toast. The "creative" industries like music and film have also suffered huge cutbacks; as the Web has creatively destroyed income streams, then the number of jobs those industries can support shrinks dramatically.

-- "Consulting" is now a synonym for unemployment. Enterprises and government agencies which handed out consulting contracts like candy at Holloween in the good times have slashed consulting contracts to the bone. Many of these consultants had grown accustomed to pulling down $200,000 or more a year; with their incomes now essentially zero, that's a lot of business-class airline seats and fancy restaurant meals which will now go begging.

-- As regular employees get laid off, some will join the already overflowing ranks of I.C.s and free-lancers in the hope that they can transport their skills and contacts into a free-lance income. Some will, but most will be disappointed; principals are trying to maintain their own income and the only way to do so is not hire and not subcontract out any labor except what is absolutely necessary.

Conclusion: do't expect small business or independent contractors to create new jobs--they're trying just to hang on to whatever they have, not expand headcount.

I have addressed "the end of work" and structural unemployment many times, most recently:

The U.S. Economy Is About to Grow Explosively, Or Whatever
(February 7, 2011)

Unemployment: The Gathering Storm (September 26, 2009)

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Caviar Emptor's picture

Here in NYC, like so many places, margins are razor thin and gone negative for some already. All cost inputs are on the rise. Business has topped out. Bottom line. 

Mudduckk's picture

Nope.  Offer more for less.  Give your customers your very best.  

For my biz, this meant firing all my employees, and delivering all services myself.  Tis the rare employee who gives a hoot about customers as much as the Pres.  Sure I do 10% of the volume I used to do, but I'm paying my wages, covering my overhead, and even putting up a little retained earnings.  That's better than what I did in some of the go-go years.

The proof is in the backlog, construction is my game, 6 months of bookings is as good as it gets.  I am booked four months out.  Could be better, could be worse, but I have not gone without billings for over two years.

The proof is in clientelle feedback.  They keep calling me for new work.

Sure I have strategy for growing market share beyond my capacity, adding headcount.  It has everything to do with can they sell? can they deliver? can they accept lower prices-paid? With genuine satisfaction for self? and for client?  Are they a five tool player?  If not...there's always job retraining.  Good luck with that...whatever that is. 

MileMarker17's picture

I closed the doors to my construction business 6 months ago, after a 30 year career.  High end single family custom homes was 90% of my business, the remaining 10% was marine and commercial construction.

I decided to pull the plug because I could no longer stand the fact that my local building department had (de)evolved into an entity who's only function was to stick their hand in my pocket at every opportunity and who failed to realize that the $75 million or so that I pumped through the local economy over 30 years was not only beneficial to me, but to the county as a whole.

Up until a couple of years ago, if I thought the building department was treating meunfairly,or mis-applying building codes, or a whole host of other issues, I would fight for what I thought was right and generally prevail. As time went on, almost all dealings with the building department became a fight and I began to think "Man I can't fight everything, I'mgoing to have to decide which battles are most important."  In hindsight, this was the beginning of the end, they had beaten me down to the point where Inolonger could muster the will to stand up for what I beleived was right.  I acquired the mentality of "go along to get along"

One of the final straws that brought me to the point of shutting down, was the building department instituting a "re-inspection" fee for failed inspections.  In 30 years ofbuilding, up to that point, you could count the number of , inspections I failed on both hands. As the economy stalled and thebuilding business slowed, the revenue starved bureaucracy decided they were going to take what they could from me and my fellow contractors to make ends meet.  It became routine to fail 9 out of 10inspections, sometimes multiple times with a $50 tribute to the gubmint on each occasion for a re-inspection.

America has become a thirsd world nation where bribery and corruption is now the norm in being a small businessman and I for one am glad to have finally told them to kiss my ass and go bleed someone else unmercifully.

It's not much fun and it's a big adjustment not having that business cash flow that I enjoyed for so many years, but I've done what friends and I discussed for the past several years. I've taken my money out of the county that was my former home for so many years and purchased acreage in the mountains of Western North Carolina.  I've got abundant clean, fresh water, I've got a huge garden in, I've got animals and I'm working towards getting as far "off-grid" as possible.

Oh yeah......and I'm freaking armed to the teeth.

 

m

Silver Dreamer's picture

You shrugged.  America, the country I love, was made great by people like you.  Unfortunately, as our federal government grows further and further out of control, more hard working, innovative, and liberty loving capitalists will do as you have done.  They will opt out.

Mudduckk's picture

Interesting. Code office making bank on getting ticky tacky.  BS.

On one hand I'm sorry to see you exitied the business.  On the other of course I'm glad.

My gig is commercial.  Tile is my specialty.  Used to be 100% commercial.  Subbing to the Generals.  Now about 50/50.  GC the residential work.  Bath remods mostly.

I blog my biz at http://midwest-mosaic.blogspot.com/ join in the commentary there.  Your input would be valued.

@mudduckk on twitter

 

HileTroy's picture

God bless you my brother builder. I miss buliding things I fought for 5 long years then got crushed. You got a excelent plan.

Michael's picture

Small business aren't hiring because there aren't enough people in line to buy their shit because there are too many unemployed people who don't have any money.

It's as simple as that. Really.

Virtually all the US consumer manufacturing jobs were off shored to China and other parts of the world. Why isn't anyone complaining about how that happened? NAFTA, CAFTA, and GATT that's how.

Tell me lies's picture

It's called short term memory. Buba said it will be good for the USA. Ross Perot fortold it. To bad he went off the rails.

oogs66's picture

completely true....all the rest is just cr*p excuses.  If people were lined up to buy stuff, people would be hiring, plain and simple.  No demand, no hiring.  Even with jobs, we won't see the demand we once had because China is still too poor for every household to have 3 flat screen tv's, and people here have lived so far beyond their means they don't need another flat screen tv, they need some savings and a downgrade of what they consume

Urban Redneck's picture

NAFTA, CAFTA, and GATT made movements easier.

However, increased regulation - litigation/complaince costs and compensation costs would have killed US jobs regardless.  A lot of Americans seem to complain that pay has been "flat" or that they have declined in real terms soley due to management greed, and they then fail to recognize or admit that their "flat" pay represents huge cost "inflation" to their employer (regardless of whether management is paying itself bigger bonuses).       

Without NAFTA, CAFTA, and GATT- instead of buying Apple iPads, US consumers would be buying Manzana, S?ba, or Píngguô iPads. 

Michael's picture

I really don't know what that means, but The United States of America really needs to re-arrange the furniture or have a whole house makeover.

One or the other.

This makes my point;

This commentator bitch is smart. She knows what she's saying. See how she really got interested in what Dr Ron Paul was saying, after the second teleprompter question, and let him speak in a great intellectual back and forth discussion.

I didn't think the MSM was capable of this type of discussion.

"I would take the duel mandate from them [The Fed] and let them have a check clearing outfit or something like that"

quote by : Ron Paul

Priceless!

Ron Paul Says 1.3 Trillion Dollar Debt Owed To Federal Reserve Is Not Real!

http://www.youtube.com/watch?feature=player_embedded&v=yYUZvE3-Xwo#at=264

dugorama's picture

So your evaluation of what's wrong with the US economy is that we're OVER regulated?  Really?  The financial sector included?

Sgt.Sausage's picture

Regulation is useless if it has no teeth. We really don't need more legislation/code/law/<whatever>. Adding more to an already ineffective body if law is a useless waste of time/resources/money if it's ineffective and essentially nothing more than a "slap on the wrist" (and hell, they don't even get that these days).

Bring back the firing squads, hangman's noose, and guillotine, and apply them effectively to existing regulation and we'll have no problems whatsoever in terms of compliance.

Urban Redneck's picture

To over simplify it, even in the financial sector -yes (qualification a few posts below). 

Laws and regulations exist to prohibit activity or guide into certain paradigms/loopholes (which have significant costs).  The Glass-Stegall Act was 53 pages.  Repealing it:  Dodd-Frank was 1616 pages, GLB was 145 pages, CFMA was 262 pages.  Each page of laws is implemented by several pages of regulations by the designated department within the executive branch.  The regulations create barriers to entry for all but the largest organizations (for whom the loopholes are designed to benefit).  The legal or regulatory goals can be met while eliminating 75%-90% of the pages of laws and regulations and in the process the loopholes which exist to serve large and moneyed interests can be closed. 

Treaties are more complicated because because at least two different legal frameworks must be synthesized in a single document, but the same truth holds, NAFTA and CAFTA are over 500 pages each and CAFTA required an additional 38-page implementation law.  Free and Fair trade doesn't require that many pages.  Carve outs for BIG Ranchers, Poultry, Agribusiness, Transportation, Telecommunications, Manufacturing, Labor, and Polluters are the bulk of language (the same text that hurts labor and industry in the US protects labor and industry in Mexico, although in some cases its the language that states each country shall be free to regulate... and then you have to back to the voluminous regulation in the US).

The US Tax code coupled with US accounting regulations are the worst offender.  There are legitimate issues that need be addressed in terms of double-taxation and phantom income of pass-through entities, but INCOME is INCOME, and there are tens of thousands of pages code whose primary purpose is so make sure GE's income is not John Q. Public's income, but that the net taxes paid are the same. 

1100-TACTICAL-12's picture

I hear ya, the dickheads on the tv analyze this shit to death , & never hit the nail. NAFTA<CAFTA&GATT.

Urban Redneck's picture

To paraphrase Abraham Maslow-

When all you have is a hammer, every problem starts to look like a nail.

Sambo's picture

Maslow is also right...but I suspect we haven't looked into the tool box and noticed there are many other tools in there.

Maslow is saying in other words, thought is one-dimensional and therefore limited.

Urban Redneck's picture

Which is why the one-dimensional political debate in Washington will fail to actually solve the problem, and best best postpone a collapse.  There is an entire hiearchy of economic needs and issues that must be addressed in order to get out of the rather deep hole that the US had dug itself into.  The window for simple solutions closed several trillion dollars and some years ago.

darkstar7646's picture

So have a lot of other things. People had better get used to that (even if you survive this) the way of life you've known (unless you are of the citizen class of the upper 1-1 1/2%) is OVER.

Bobbyrib's picture

Agreed, no matter who controls the WH, or Congress this is our new economy.

oh_bama's picture

I don't understand why people are crying as if there is no jobs.

There is a ton of jobs on craigslist---go take a look

i am surprised that there is no takers since some jobs are always there.

Bob's picture

Follow up on those "jobs" and you'll have a better understanding.  A hundred applicants for each job, most of which are part time, few if any offering benefits, many temporary/independent contractor/minimum wage/commission based . . . and, in my experience, various scams for getting people to pay for "training," referral services, data harvesting (including identifying and locating off the grid debtors), etc.

snowball777's picture

Dealing drugs is not a career.

HungrySeagull's picture

There is one hardware store that had two good employees for a while.

Now both are gone and the Owner's son is working the place for room and board.

The Owner has talked openly of closing the entire place down.

As the months go by, he may just do it.

StormShadow's picture

Long Remington, short Treasuries.

Boston's picture

"short Treasuries"

Are you nuts?  Have you noticed what the price of Treasuries has done over the last six months, ever since Bill Gross announced he's dumping them?

Be very careful if you're shorting via futures.  The long trade isn't over yet.

 

JW n FL's picture

Oil ='s the only FED approved short! ALL! I SAID ALL!! others will be fed to the dogs, this includes Bill and synthetic shorts.

Oh regional Indian's picture

Indeed JW. They've made so much obscene money on Oil these last 8-9 decades, they can afford to lose a bit on it. Meanwhile, every other 'complex', stocks, bonds, commodities can be flung around like dog by it's tail using oil. 

Got to say, clever boys, whosoever set this whole play up.

Sadly and I've said this again and again, many refuse to recognise that thsi current industrial paradigm is over. With the new financial paradigm you all pray for, work towards... in a fractal world, it will all change, it has to. 

The key is to find what is truly next. Postcarbon! 

ORI

http://aadivaahan.wordpress.com/2010/12/31/a-big-part-of-what-this-here-place-is-about/

carbonmutant's picture

Many empty storefronts in downtown San Jose...

Malls full of lookers and few shoppers

darkstar7646's picture

Casing out what they're going to rob when TSHTF?

Long-John-Silver's picture

A looting plan will help in obtaining the maximum amount of stuff.

Aristarchan's picture

The main reason my small business is not hiring is that we do not need additional employees to fill the reduced orders we get now, and that is the case with everyone I deal with.

Your points are valid, but if a business needs employees to turn out profitable work, they will hire them. They may well hire ICs....but very few companies I deal with hire them for production line work or other areas of manufacturing, usually ICs come into play in the salary slots.

 

Bobbyrib's picture

Junked for not using Neo-Con talking points regarding our President?

I am Jobe's picture

many in Folsom , CA outside Sac empty strip malls. Green shoots. Time to leave the USA and buy a farm in Panama or somewhere and live life.

StormShadow's picture

If we tax the millionaire small business owners that'll turn things around ;)  They'll hire like crazy then!  AYFKM!?  Pure insanity

carbonmutant's picture

I've got a plan. Why not tax the FED?

gorillaonyourback's picture

yeah,,,  best tax idea i have heard yet

agrotera's picture

The Fed taxes us--they have conveniently added a 0.25% "expense" to all excess reserves in addition to the 6% on 1% of all reserves in the entire Federal Reserve system...the Fed of course explains that all "profits" are reimbursed to the treasury--but with so many expenses baked into their system, between fat payrolls for every PhD economist in the country, to the "expense" that gets charged for reserves, how is there any chance in HELL that the US can EVER get out of debt without revoking the Federal Reserve Act, naming and taking back control of the juggernaut that is the privately owned Federal Reserve Corporation?

Caviar Emptor's picture

Cisco laying off 14%. Not all big biz is doing well. 

Fukushima Sam's picture

Cisco has become a bit unfocused and is full of fat.  Those cuts will mostly improve the business within a year or two.

Chambers had the plan to run the company through social networks, and you can see how that is working out.  Ultimately, he will either need to take more control or turn it over to someone who can.

Seasmoke's picture

can there be a worse situation to put yourself into right now than to pay someone to own a franchise......talk about getting screwed from every angle possible

whaletail's picture

Those of us that can expand and hire won't because we don't trust that our customers will pay.  Counter party risk. The system is broken.  That causes one to think in terms of months, not years or decades. That's no way to grow a business, but that's reality. The platitude "fortune favors the bold" will surely be tested during these times. 

BKbroiler's picture

I own a small business.  I have 3 employees, all 1099s, no health coverage, all commission only.  Salaries and benefits are like, so Clinton years.  Time to get real.

Cursive's picture

@BKBroiler

I have 3 employees, all 1099s,

Careful, the IRS may hit you for payroll taxes on "constructive employees."

Mudduckk's picture

BS. 3 employees?  Please.  Rare is the four person firm, ex-fin ops, which makes bank for the IRS.  The IRS knows it.  They don't get the marginal without effort.  Effort which exceeds cost of recovery, rather the IRS prays four-man misses his filing deadline, b/c he's too busy scraping by to comply.  Better yet miss an entire year...or two.  Hell go for three.  Not making profits anyhow so Timmay can wait on his "funny papers" err returns.  That's where the easy money is for the tax collectors, penalties and interest for not following the rules.  As if filing funny papers had anything to do with actually getting something done.  And that's what's messed up with this country.  No emphasis nor value is placed on actually doing/making something.