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Guest Post: Here's Why Small Business Isn't Hiring, And Won't Be Hiring
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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Starting a business in today's economic climate it a crap shoot at best. In the event you are successful the IRS is going to rob you. The kids coming out of high school and college have no work experience, Obama is a good example, and have not a clue about customer service.
But at the same time, those businesses deny the ability to get that experience.
Why should business be allowed to ask for something they will not allow to be asked of themselves?
I recently hear someone make a good point. He said we don't need to increase incentives for businesses to hire because the problem is not one of supply, it's one of demand. No one is buying, so expanding business without addressing why there is little demand for products is pointless.
I am a small business man who up until the recession, owned three separate businesses and employed about 45 people between them. This recession has caused me and thousands like me to modify my business plans to survive. The new business model I operate under has not only allowed me to survive but prosper. I sold one of the businesses, and insurance agency, to a competitor who eliminated 2.5 positions out of the 4 that existed before the sale. He folded my book of business into his and with the help of his computer, believes he can manage the combined book indefinitely without adding people.
The second business, a restaurant, I closed. Those jobs are gone forever, about a dozen. Two of the three suites in the building sit empty now. The third is rented to a self employed entrepreneur who has no employees. The building which cost $430,000 to build in 1996 is on the market for $225,000, has been so for a year and there has been virtually no interest. I think I’m going to die with it.
In my remaining business I have reduced payroll expense, through consolidation, subcontracting and outsourcing of job by $200,000 or just under 27%. Add in the payroll taxes, insurances and employee benefits and you are talking real money for a small business like mine. This business made as much money in 2010 as it did in 2007 on less sales volume. This new model allows for substantial growth without adding people. Sure, the time may come when I have to add personnel or the people I work with have to add personnel but the number of jobs that have been permanently eliminated from my business is substantial and factor this process into the whole economy and, IMHO, the number is staggering.
Anyone who owns a business today and isn’t on the verge of collapse has done the same thing I have. There is no other option. Those who have survived to this point are too smart to be tricked, coerced, enticed or forced, in any fashion, to return to a business model of someone else’s choosing. If you believe otherwise, you need to get your medication changed.
You are a part of the problem in the US - that you wish to be a slavemaster, where innovation is only in how servile you can make people in a business. Go to Europe if you love that kind of slavery.
What would happen if all that subcontracting multiplied liability and benefits requirements, and you got dinged for every single loophole, or for not hiring at all? It'd be a shame if you couldn't enslave people 4 months at a time, and that you had to find some way to show actual respect. Every single below-board thing you do reflects something that is un-American.
The other problem you'll have is that the jobless don't forget your callous kind and would have no problem finding ways to force you. 15-20+ million people who would be more than happy to show you the error of your ways. Surviving this long doesn't mean you can't be broken, it's that someone has yet to break you.
But that's only if you're not copy-pasting that post, inserting the number of employees and industries in the blanks.
I think we are moving through the adjustment of the economy that is so badly needed to get this country back on track. Government cannot stop what is happening. More small businesses are going to close putting more people out of work. This is a good thing because it is forcing the adjustment. It may seem like a long time has passed in two years of increased unemployment; but the results are starting to unfold. Now finally, overstaffed bloated local and federal government is begining to layoff large numbers of people. Now the large monopoly corporations are being affected and they will be reducing their size dramatically to stay in business.
This depression is not like the one in 1929. At that time we did not have big government or large corporations. We also did not have the population we have today. We also have more educated people today with the smarts to start their own enterprizes. And the country has more stuff to work with.
With government shrinking and monopoly corporations failing this gives people more freedom to act on their own behalf to start enterprizes. If we learn anything out of this present situation; it is that big banking, big government, and giant corporations are bad for a balanced well oiled economy. These are the entities that have destroyed incentive for a real free economy. The sacred cows and goldens calves are turning to ashes; and the sooner they are gone the better.
I am in no way discouraged about our future. I watch the talking heads in government doing their thing and spewing their talk like puppets on a string in a makeshift playhouse. Don't take serious their entertainment; for they are no longer in control. Fate is in charge.
I think we are moving through the adjustment of the economy that is so badly needed to get this country back on track. Government cannot stop what is happening. More small businesses are going to close putting more people out of work. This is a good thing because it is forcing the adjustment. It may seem like a long time has passed in two years of increased unemployment; but the results are starting to unfold. Now finally, overstaffed bloated local and federal government is begining to layoff large numbers of people. Now the large monopoly corporations are being affected and they will be reducing their size dramatically to stay in business.
This depression is not like the one in 1929. At that time we did not have big government or large corporations. We also did not have the population we have today. We also have more educated people today with the smarts to start their own enterprizes. And the country has more stuff to work with.
With government shrinking and monopoly corporations failing this gives people more freedom to act on their own behalf to start enterprizes. If we learn anything out of this present situation; it is that big banking, big government, and giant corporations are bad for a balanced well oiled economy. These are the entities that have destroyed incentive for a real free economy. The sacred cows and goldens calves are turning to ashes; and the sooner they are gone the better.
I am in no way discouraged about our future. I watch the talking heads in government doing their thing and spewing their talk like puppets on a string in a makeshift playhouse. Don't take serious their entertainment; for they are no longer in control. Fate is in charge.
The author is truly drinking the corporate koolaid here... they all tell you they hire overseas where their profit growth is (note the author here says where their profit is), but it's a lie. Yes, in fact, American Express earns a lot of their revenue overseas. In Europe. But the hires (thousands) are in India, that's where they earn about 0.000001% of their profits.
The bankers, world govts have created an illusion. There is no such thing as money.