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

Tyler Durden's picture

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.

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diogeneslaertius's picture

i dunno, 99% of experts told me this was a Conspiracy Theory and i lack the intellectual fortitude to think for myself so im just going to turn on MSNLSD


so even though all of this is patently obvious im just going to chant "green shoots" like a good muppet

smlbizman's picture


       a 1964 quarter and a 1964 dime , face value .35......todays value...about 7.50, same as minimum we know what labor is worth...on their terms....

Kayman's picture


Getting the monkey to chase his tail. While Central Bankers and their ilk churn and skim.


SafelyGraze's picture

the solution is as simple as it is obvious: employers should be required by law to hire more workers and to pay them a salary of $40k+

NotApplicable's picture

Local government kiddies are operating as follows:

1) Conduct Job Classification Survey in order to create a facade of a mandate.

2) Use facade to weed out expensive/undesired employees by eliminating their jobs.

3) Promote favorites into new positions, primarily those nowhere near retirement.

4) Celebrate by massive expansion into anything they can get a grant to cover parts of.

5) Claim they solved all of their problems.

6) Can kicked? (implementation not yet complete, pension bomb still primed)


SamAdams's picture

Thrash the dead horse!  Only jobs in Amerika will be government jobs in support of the communist machine.  The incremental descent into National-Socialist or Bolshevism (depending on if you think corporations or government run things) is happening right now and people are too thick to notice.  The dollar rapidly losing its value (China declaring reserve currency status), the Talmudic-Canaanite bankers are already courting the new superpower.  Self-styled Christian Freemasons left in the states are beginning to worry, putting their drones in Africa, but why did we remove the radar on the Southern border?

Don't worry about your children firing on you, worry about the NATO soldiers who have no allegience to your constitution.  Your boys are overseas protecting opium, uranaium, hopium and lots of other "iums".

Better stock up on Silver Eagles... oh, right....  Better stock up on AR15's.... oh, right....  We have maybe a few years left before things are so obvious, even braindead TMZ viewers are forced to admit something is seriously wrong with our government. 

Paper complaints as impeachment proceedings and lawsuits will not work.  Did they work for Syria, Libya, Iraq?  What about those people who sued police for not protecting them and lost in NY?  The only thing the psychopaths understand is force, same throughout history.  There are too many on the payroll to win thru justice.

Bananamerican's picture

The gist of this article seems to be that there are too many "entitled" 1st world laborers in amerika and not enough lice-pickers out and about....yet.
Meet you at the bottom, serfs.

SamAdams's picture

That my friend is precisely why the border is not really enforced.  North American Union, Canada will be joining us along with Mexico.  It will be one big, broke family eating tortillas and sipping moosehead beer.  Both of which I like so I guess there is something to look forward to?

Bananamerican's picture

try soaking that Tortilla in your moosehead and see if you still like it...i think that's what the Oligarchs are aiming for

Thomas's picture

I sure wish I had Charles Hugh Smith's intellect.

Boris Alatovkrap's picture

Churn and skim is to making no value?!

Never One Roach's picture

It's a sad day when the gubbermint (instead of markets) chooses winners (GM, GS. etc) and losers (Twinkies, Lehmans, etc).

rotagen's picture


youngman's picture

OBVIOUS......not so...I would bet 98% of the politicians and government workers in Washington DC don´t have any idea about these so called obvious statements....they do not...

But he is right on the money....the USA is overpriced...overregulated..over taxed...overindulged...and other places are where people have moeny...are gorowning...are cheaper..easier...less regulation and taxes...and WANT to work......they are smarter...more stable...cleaner..diligent..more professional...etc..etc..etc

LawsofPhysics's picture

Hhmm, so the real value of one's labor is important then?  What is the real value of creating money out of thin air with the "click of a button".

I think I found the problem, based on the compensation for this "job", I fear that there is some serious capital mis-allocation and mal-investment going on here.

Woodyg's picture

Wages used to follow Productivity Gains - not any more - the economic model is broken -

And it's been broken by the Rentiers and the money printers/changers and their personally owned Kleptocrats.

Lets not blame the victim for christ sakes.

Theres plenty of money and wealth in our country - its just been Captured by the vampires and their minions the kleptocrats.

Bob's picture

I'm sorry, you must be mistaken.  Charles had nothing to say about that.

Shizzmoney's picture

The reason workers want to get paid more, is so they can afford their debts, the rising costs of living, and maybe a car/house (I even think for workers, being comfortable and not in AdHoc is more important than having a car/house).

When you have a currency that is centrally manipulated, and a government (which WORKS for the banks) that ignores and lies about why $40K/year doesn't cut it in most urban areas anymore........well then, wages aren't the main problem.

The only good side about debating wages and jobs?  Now we can all know what it felt like to be a slave owner back in the 1800's, "Hey, how about that negro over there! Look at the size of his arms, I bet he'd pull in a good ROI for the cotton fields!"

If there isn't a middle class to buy your shit, there won't be a middle class. 

I can't wait for 2020 when our political class starts to realize this, and when they realize the corporate class does NOT give TWO fucks about America.


trav777's picture

the middle class is intermixing with people from the 3rd world, and will create a large 3rd world country.  They are not going to do ANYTHING; they never have and never will.

As the US 3rdifies further, stability on a political level will INCREASE, not decrease. 

Toolshed's picture

You could be right, but then.....pigs could fly if only they had wings.

Mad Mohel's picture

If my grandmother had testicles, she would be my grandfather.

CrimsonAvenger's picture

My grandmother had my grandfather's testicles, at least according to him. Apparently she kept them in a vise.

Anglo Hondo's picture

And if, at the same time, your grandfather didn't have tits, you wouldn't be here.


yogibear's picture

The money changers (banksters) and government want to level the US living standard with those in China.

To suceed the living standard in the US needs to drop subtantially and the Chinese poor needs to rise.

The Wall Street and global bankster plan is stilll in progress.

Plenty of muppets in the US still have it too good.

Time to grind gound the muppets financially again.


otto skorzeny's picture

come to IL if you are illegal-our asshole gov will give you a LEGAL document-a driver's license. because-you-know-the first thing they'll do is go buy car insurance/sarc off

jeffgroove102's picture

I loathe trav777's line of reasoning in this regard, and yet respect the logic of the comment. Our pols in this country have a level of hubris approaching absurd, while the population thrives on bread and circuses.

MrPalladium's picture

Sadly, trav is right.

Our welfare system is subsidizing births at the low end of the IQ spectrum.

Recent massive monozygotic twin studies have the heritability of IQ approaching .8, the same result that Shockley and Jensen arrived at many years ago.

Our immigration policy is attracting populations with average IQs around 85, a level so low that they will never be able to add enough economic value to pay for the education of their children, their health care or their retirement costs.

Trav is also right about the political dynamic in which the entrenched elite can control electoral outcomes in a democracy more easily with a stupid, third world population. Our immigration policy is specifically designed to dilute the electoral power of the European derived population with an IQ above 100.

In response we first had flight to the suburbs, then regional flight across state lines. The next phase will be international flight of the young, European derived population of the U.S., in an effort to escape the costs of supporting a huge third world population at first world welfare expense levels.

In truth, the only thing keeping that portion of our population in the U.S. is the Second Amendment, a protection which might not be needed in a more homogeneous society.  Confiscate guns and escape from multiculturalism with its legal double standards becomes imperative.

The U.S. is faced not only with an economic collapse but a demographic collapse of epic proportions not only of an aging European derived population, but the potential for mass emigration of its younger, productive cohort.

The truth is something that we are not permitted to discuss.

Matt's picture

While on the surface this all makes sense, a quick look at Latin America shows a tendancy towards revolving door governments, not the long term stability of the Pharoahs.

Unless they do away with the trappings of democracy altogether, and go straight to dictatorship, I suspect to see less, not more stability over time. Especially if there is ever a food and/or energy shortage or currency crisis.

MrPalladium's picture

Revolving door governments in Latin America leave the wealthy elites of those countries in place. In a third world country looting foreign lenders through inflation and currency crises operates on a shorter cycle. You need revolving governments to promise foreign  lenders "reform" so they will begin lending once again and to give them the "optics" necessary to offload the new debt to investors with promises of "change."

Perhaps I was giving Trav too much credit, but I assumed he meant the substance of government - what it actually does - and not its "form", meaning the particular personalities that temporarily run the continuing show.

Toolshed's picture

You think this shit will go on till 2020? Wow are you optimistic!!

Shizzmoney's picture

You think this shit will go on till 2020? Wow are you optimistic!!

Not so much optimistic, but more a reflection that politicians in Western Countries can kick the can farther than most around here think, and the fact they also have the majority of the guns and the printing presses to keep the masses subdued ENOUGH until the dam finally breaks.

2015 could be a date as well; bubbles tend to burst at the end of second term presidencies (Reagan/Clinton/Bush all had crashes at end of their terms).

MrPalladium's picture

It all comes a cropper when the DHS paychecks are worthless.

Sudden Debt's picture




It's not normal that everybody can buy 2 cars.

It's not normal that everybody can buy a big house

It's not normal that everybody can go on vacation twice a year


Everybody expects so much that average doesn't cut it anymore!


I have kids, fresh out of school, WHO EXPECT TO MAKE AS MUCH MONEY AS I DO WITH NO SKILLS AT ALL!!

Sure, when you hire them, they say: I WANT TO MAKE THIS MUCH MONEY!

And when you ask them WHY WOULD I HIRE YOU AND PAY THAT MUCH? Their eyes turn into glass...



And so, the lower class prefers to sit at home, smoke their crack pipe and wait for the postman to come by so they can rob him...

Shizzmoney's picture

On the bright side, when the hyperinflation happens, it's gonna be pretty lulzy to see CEOs in the food stamp lines so they can afford a $10000 loaf of bread.

otto skorzeny's picture

I have no problem with a potholefiller making that kind of $-AS LONG AS IT'S NOT AN CITY/STATE AFSCME UNION SHITHEAD FUNDED BY THE TAXPAYER  ONE.

Umh's picture

So the politician should outsource the work to his buddies?

otto skorzeny's picture

like they don't already?

tickhound's picture



Memo to Humans:

When finished outsourcing, I will automate.  You are an expense.  Please learn to manage your guilt when I subsidize your consumption.


The Machine   

Tango in the Blight's picture

There are CEO's who create less value than potholefillers.

They run their companies into the ground and then still get huge golden handshakes.

When they drive away from their bankrupt companies they won't have to worry about driving in a pothole because some potholefiller did his work properly.

NotApplicable's picture

WAT??? Those CEOs are creating massive amounts of value. Just not for the shareholders, customers, or general public.

michael_engineer's picture

What your describing sounds like a bane approach, kind of like Romnesia was.

michael_engineer's picture

As if every CEO doesn't want to make 600x the wage of a potholefiller.

The outrageousness goes both ways.

Dr. Engali's picture

You're assuming that the political class gives two fucks for America..which they don't. As long as they are being showered hookers ,blow ,and fiat ,they will continue to sell the country down the road.

Theosebes Goodfellow's picture

~"I can't wait for 2020 when our political class starts to realize this..."~

Do you really think this is all going to hold together until 2020? Seriously? What part of "macroeconomy in its death-throes" are you not seeing? The world is fixing to become much, much more local. Wait for it..., wait for it...

Raymond K Hessel's picture

That's fatalistic.  

Instead of bemoaning high labor costs, the right reaction is to figure out ways to increase the value proposition of employees.

Instead of focusing on scarcity, let's focus on abundance.

caimen garou's picture

can't afford to fill potholes? here is a cheap filler,bernake,kugman, lisman,just to name a few.

otto skorzeny's picture

those are some pretty jew-y names- just sayin'