The Campaign Spot

How Can D.C. Make New Employees More Cost-Effective?

Earlier this week we discussed the ugly truth about our economic doldrums: that companies aren’t hiring because they don’t think that the additional revenue that they can generate from a new hire is enough to cover the cost of the new employee — not merely wages and benefits, but capital expenditures, training, overhead, regulatory costs, and so on.

In this light, raising the national minimum wage to $9/hour from the current $7.25 is counterproductive. If companies are reluctant to hire people at the current cost, making them $1.75/hour more expensive isn’t going to make them a more appealing option. This may not be a huge factor, but it certainly won’t help.

In the Washington Post, Robert Shapiro, undersecretary of commerce for economic affairs in the Clinton administration, correctly identifies what should be on the minds of policymakers: “The best approach would be to directly reduce the cost for business to create more jobs.”

The problem is that his solution is pretty bad: “Congress could, for example, permanently cut the payroll tax rate for employers and make up the difference for the Social Security trust fund with a modest carbon or value-added tax.”

The payroll tax is 12.4 percent, with 6.2 percent paid by the employer and 6.2 percent paid by the employee. (For 2011 and 2012, the employee paid 4.2 percent.) But it’s hard to believe that high payroll taxes are a primary factor in slow hiring since 2008–09; the rate has been at 12.4 percent since 1990 and above 10 percent since 1979.

Employers may see new hires as too expensive to be worth it, but it’s not the 6.2 percent payroll tax that’s creating that perception. Most likely it’s the much higher health-care costs and training costs. Shapiro briefly mentions the traditional answers of “electronic medical records” and “preventative care.” Except that new studies about the effect of electronic medical records find “evidence of significant savings is scant, and there is increasing concern that electronic records have actually added to costs by making it easier to bill more for some services.”

As for preventative care . . . well, all those tests to detect health problems early that come back negative cost money, too: “The evidence of hundreds of studies over the past four decades has consistently shown that most preventive interventions add more to medical spending than they save.” And this is just for health problems that can be prevented; accidents, gunshot wounds, some diseases, etc.

As for the other idea, creation of a national carbon or value-added tax would make every product instantly more expensive, with horrific results for discretionary spending, purchasing power, and so on.

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