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The Wright Perspective℠

Social Commentary from the C-Suite to Main Street℠

A Blog by Gary Wright II

Cost of American Workers and Economy

Tuesday, August 10th, 2010

Last week I participated in the CEO Confidence Index survey, and it looks like we are all in agreement about the current economic condition: Credit is tight, job growth is stagnant, and the recovery has lost its momentum.

Looking at quarterly data: Gross Domestic Product (GDP) growth is negative. Retail sales pretty flat. Consumer Price Index is negative. Producer Price Index is negative. Rate of Inflation dropping which can lead to deflation (see my previous blog entry about the dangers of deflation). Rate of Unemployment contracting. Employment Cost Index rising. Average Hourly Earnings flat at $10.39. Consumer Confidence Index dropped to 50.4 (-3.9) while the CEO Confidence Index fell to 79.8 (-26.5).

To see the latest numbers for July visit: ChiefExecutive.net and then click on the link to the monthly CEO Confidence Index.

Several have asked about my statement that business balance sheets have lots of cash, but they will not be hiring any new employees. To affect cash flow, you either increase money coming in (revenue) or decrease money going out (expenses). For most businesses, payroll is their largest expense. Although the work force is under great strain and burned out, new hires are unlikely since future payroll expenses are so difficult to estimate under our current economic conditions. This leaves business executives paralyzed by fear, uncertainty, and doubt (the FUD factor). Even the cost of what was normally seen as fixed expenses can be hard to predict under these circumstances. A company has to have positive cash flow, but now also has to keep lots of cash on the books for any unforeseen expenses. When cash is kept on the books, that is money that isn't being properly invested or being used in other areas where it is needed.

I don't think many American workers understand the true cost of their employment. If you make $10 an hour, you can easily cost your employer $15 to $25 an hour. Since most workers overseas cost only a fraction of that cost, any job that can be outsourced has already left the country. Another issue is productivity. Most American workers do just enough work to not get fired and they spend their work time playing games and surfing the Internet. This hurts all of us. Assuming we learn to compete at lower wages, we also must exceed the productivity of foreign workers. Until the cost and productivity issues are resolved, no outsourced jobs will ever return.

Let's take a look at the true costs of employment:

Before the hire: Advertising open positions, recruiting potential candidates, passing out and reviewing employment applications, conducting interviews, background checks, and drug screening. One way to bypass some of these costs is to hire contractors versus a new employee. Hiring a new employee is expensive, but the cost of a bad hire can be catastrophic. Pre-hire spending is one area you don't want to cut.

The first 90 days: Uniforms, desks, chairs, computer, monitor, mouse, workstation setup by IT, stapler, tape dispenser, cubicle / office furnishings. Bringing on a new hire actually decreases sales through their inexperience, as well as using an existing worker to train the new one. There aren't many of these expenses that can be controlled.

Taxes: A business pays sales tax on the products it sells and then pays taxes on the income it earns. Many of the taxes that a worker pays must also be matched by the employer. There are federal taxes and state taxes. Social Security taxes run around 12.5% and Medicare is around 3% of wages. Federal unemployment taxes are over 6% of wages, plus the states collect their own unemployment tax which is around another 4%. Those two rates then get adjusted based on how many of the employees file unemployment claims. Though not technically a tax, there is also a percentage of wages that go to workman's compensation insurance. The business also must obtain liability insurance and pay for many other incidental expenses. These are also areas that can't be controlled by the employer.

Benefits: Health insurance (medical and dental), 401K matching, vacation days, sick days, day care, and life insurance. Although an unpleasant decision, the benefits are one area of the budget that is sometimes cut in order to save money.

Other costs: Water, electricity, toilet paper, paper towels, pens, pencils, white out, post-it notes, staples, note pads, stocking up the break room, cleaning supplies.

There is a federal minimum wage requirement, but that is not the same as earning a "living wage." A living wage is the amount of money it takes to actually live on and it is a lot higher than the federal minimum. As things get more expensive, workers also need a cost-of-living adjustment (COLA). I hope that our workers will understand why they haven't received a raise in a long time. A small 4% raise can cost the employer many times that amount.

I don't see the unemployment rate getting better in the near future. Our country is going through tough times right now, but despite all of the bad news, I think we will make it through this crisis. As with any business, our country must cut expenses and increase our productivity. This is going to require some tough decisions and things will probably get worse before they get better. It is important to realize that the spirit of innovation is not dead, and if we fix the broken system of education - we can break new ground on the future markets of technology, energy, and medicine.

Best regards,

-- Gary Wright II

P.S. Now get back to work!!! ;)

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