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Thursday, 12 July 2012

Dear Prospective Employee, Why I can't hire you

Above Video: The Scene in Spain as Socialists are told 
they will have to earn their wages, not be guaranteed them by Government.

Further rioting erupted in Madrid in response to a de-regulation of the labour market which allowed bosses to more easily make staff redundant. The clash between the Socialists who believe that all responsibility and freedom should be removed from them in return for their leasing themselves into slavery to an employer and the government and the reality that workers must earn their pay and that part of the reason for the high levels of unemployment is the high cost of employing someone.

With youth unemployment at over 50% and a large number of over-paid, union affiliated civil servants refusing to accept any change to their terms and conditions despite the economic realities of the world today a clash would seem to be inevitable and this is unlikely to be the last.

The sheer ludicrous position that is the modern union movement is echoed in the case of San Bernardino where unions have successfully files an injunction to prevent the city from only paying them minimum wage, the City already $40 million in debt and unable to extend their line of credit is simply unable to pay them any more. So faced with an inevitable breach of injunction the City has entered bankruptcy and with the protection of the Court is now only going to pay its workers the federal minimum wage of $7.20 per hour.

There is something not right about these government employees, but then let's face it they would not be government employees otherwise. These are the very employees who vote in the politicians against the will of the normal people because they promise to be complicit whilst the government employees abuse their positions and rob the rest of us to line their own pockets. There is a kind of karma in all this.

These unions are of course only serving as the foot-soldiers for the upper echelons who do not want to lose the same privileges as the manual workers, but certainly don't want to be seen to be causing a fuss. The protests and strikes go on with their tacit approval and behind closed doors encouragement.

No one objects to someone on £20,000 getting a 2% pay rise, but it is inextricably tied to the person on £360,000 also getting exactly the same pay rise and he is over paid already.

Once you've been self-employed for a while, and you only hire or work with other self-employed people, then you look back on conventional work places as absurd theatres of schoolyard politics, tiresome resentments and child-parent conflicts, acted out by self-absorbed adults.

If you wonder why you cannot get a job, then look no further than the raft of employment legislation which whilst protecting those in employment (most particularly the civil servants), is stopping those not in employment from getting a job and robbing the younger generation of a chance to live independent of government handouts.

Those of us under 50 are paying for the folly of the previous generation, who elected idiots to run their affairs, entrusted all personal responsibility to an untrustworthy government, and in the process allowed the government to rob them of their freedom. The previous generation cannot be allowed to escape the consequences of their actions by robbing the future of the younger generation, that cost is too high.

So with this in mind, I am going to attempt to explain what exactly the cost is of employing one person and why I will no longer be a slave-master, and why you should no longer wish to be a slave to anyone, especially not the government.

Dear Potential Employee,

I know you're hard-working, motivated, tech-savvy and willing to learn. The reason I can't hire you has nothing to do with your work ethic or skills; it's the high-cost of the Status Quo, and the many perverse consequences of Government in maintaining a failing Status Quo.

The sad truth is that it's costly and risky to hire anyone to do anything, and "bankable projects" that might generate profit/require more labor are few and far between. The overhead costs for employees have skyrocketed. So even though the wages employees see on their paychecks have stagnated, the total cost the employer pays has risen substantially.

Thirty years ago the overhead costs were considerably less, adjusted for inflation, and there weren't billboards advertising a free trip to Cabo if you sued your employer. (I just saw an advert placed by a legal firm that solicited employees to sue their employers, with the incentive being "free money" for a vacation.)

The other primary reason is that there are few (to borrow a phrase used by John Michael Greer) "bankable projects," that is, projects where hiring another worker would pay for the costs of the additional overhead, labor and capital and generate a reason for making the investment, i.e. a meaningful profit.

There is very little real "new business" in a recessionary, deflationary economy: any new business is poaching from an established business. The new restaurant isn't drawing people from their home kitchens, it's drawing customers from established restaurants.

The only competitive advantage in a deflationary economy is to be faster, better and cheaper or have a marketing and/or technology edge. But marketing and technological advantages offer increasingly thin edges. The aspirational demand (driven by the desire to be hip or cool) for a new good or service has a short half-life. As for technology: miss a product cycle and you're history.

Put these together--higher costs and risks for hiring people, and diminishing opportunities for expansions that lead to profit--and you have a scarcity of projects where hiring people makes financial sense.

Faster, better and cheaper usually means reducing the labor input, not increasing it. In a deflationary economy, it's extremely difficult to grow revenues (sales), and as costs continue climbing inexorably, the only way to survive is to cut expenses so there is still some net for the owner/proprietor to live on.

Consider the tax burden on a sole proprietor who might want to hire someone. The 12.5% Social Security tax starts with pound one. After the usual standard deductions, income tax is 20%. My GST is 5%. There are many other taxes levied.

You can imagine how much money I would need to clear to be able to afford hiring someone. The number of businesses that generate huge sums of profit are few and far between, and the number of businesses that scale up from a one-person shop to mega-millions in revenues is also extremely limited.

The potential employer is faced with this reality: the money to hire a new employee will come out of my pay, at least at first. Hiring an additional worker only makes sense if the new employee will immediately generate enough additional revenue to fund his/her own wage and overhead costs, the added expense of supervision and a profit substantial enough to offset the risks.

I should stipulate that my knowledge of hiring people and being an employer is not academic. My partner and I launched a business in late 1998.

What newly minted employers understand that employees rarely understand is that the overhead costs of hiring even one person do not scale at first. To hire one person, even part-time, the employer needs to set up a complex infrastructure to manage the payroll taxes and accounting, and comply with a variety of statutes. If the employer does not follow the many laws regarding labour, witholding taxes, workers compensation, liability coverage, insurance and so on, then the employer is at risk of penalties and/or lawsuits.

If a business does £1 million in gross receipts a year and already has five employees and a manager, it's not that burdensome to hire a seventh employee--the framework is all set up. But the cost of setting all that up for employee #1 is not trivial, especially when you realize the complex machinery all has to be overseen and managed.

In the Silicon valley model, a couple of guys/gals work feverishly in the living room/garage until they have a product/service to sell to venture capital. If the pitch succeeds, the VCs give them a couple million dollars and they hire a manager to sort out all the paperwork, management, etc.

Most small businesses/proprietors don't get handed a couple million dollars. They have to grow organically, one step at a time. Each expansionist step is fraught with risks, especially when opportunities to grow revenue are few and far between and are generally crowded with competitors.

Thirty years ago the employer's share of Social Security tax was not today's 6%; it was much less. As costs of hiring anyone to do anything have climbed while revenues have stagnated, the threshold to hire an employee keeps getting higher.

Back in the day, I could hire a young person out of school for a modest cost in overhead, and the work-value they produced to justify the expense was also modest. I could afford to hire marginal workers and as long as they didn't get in the way too much and ably performed basic tasks then I could afford to have them on the payroll.

The same was true of older workers --I could afford to give all sorts of people a chance to prove their value because the costs and risks were low. That's simply less true today. The costs and risks are much, much higher.

Liability has become a lottery game where anyone with assets or income is a target for "winner take all" lawsuits. In an office environment, I could be sued for harassment or for engendering a "stressful work environment." If you think these kinds of cases are rare, you need to get out more. Simply put, the feeble hope of increasing revenues does not even come close to offsetting the tremendous risks created by having employees.

There's a Catch-22 aspect to all this; small business can't expand revenues without employees, but the costs/risks of having employees makes that a gamble that is often not worth taking. The lower-risk, lower-cost survival strategy is to automate everything possible in back-office work and free up the proprietor's time to grow revenues that then flow directly to the bottom line.

Managing people is not easy, and it's often stressful. Once a proprietor hires an employee, he/she must wear a number of new hats: psychiatrist/counselor, manager, coach, teacher, to name but a few. Frankly, I don't need the stress. I would rather earn a modest living from my labor and avoid all the burdens of managing people. (In my case, that included bailing workers out of jail, loaning them my truck which was subsequently rolled and destroyed, and a bunch of other fun stuff.)

I am not embittered, I am simply realistic. I enjoyed my employees' company, even the one who rolled my truck and the ones who managed to get into trouble with the law. But I got tired of meetings and all the wasted motion of office management, and I got tired of taking cash advances on my credit cards to make payroll.

If anyone out there thinks being an entrepreneur/small business proprietor is easy and a surefire pathway to the luxe life, then by all means, get out there and start a business and hire a bunch of people. I applaud your energy and drive, and sincerely hope you are wildly successful.

I hope you now understand why so many businesses only want to work with contract labor/ self-employed people:having employees no longer makes financial sense for many small enterprises. What makes sense is paying someone a set fee to accomplish a set task, and that's it, the obligation of both parties is fulfilled. If the task isn't completed, then the fee isn't paid.

Revenues just aren't steady enough in many cases to support a permanent employee. When the work comes in, then contract labor is brought in to get the work done. When it's done, they're gone, and all their overhead costs are theirs.

It's extraordinarily difficult to generate revenue in a deflationary economy, and extraordinarily difficult to scrape off a net income as expenses such as taxes, insurance, healthcare, etc. continue climbing year after year.

Self-employment places a premium on professionalism and results. Unlike offices filled with managers and employees, nobody cares about your problems, conflicts, complaints about the common-area fridge or your attendence at meetings.

Once you're self-employed, your focus shifts to nurturing a productive network of clients, customers and like-minded, reliable, resourceful self-employed people who will give you work/work for you when you need help. Building trust and following through on what you promised to do become your priority.

The economy is different now, and wishing it were unchanged from 30 years ago won't reverse the clock. We have to respond to the incentives and disincentives that exist in today's world, and those do not favor conventional permanent employees except in sectors that are largely walled off from the market economy: government, healthcare, etc.

But these moated sectors cannot remain isolated from the deflationary market economy forever, and what was considered safely walled off from risk and change will increasingly face the same market forces that have changed private-sector enterprise.

If you want security and a steady income, it may be more rewarding to build it yourself via highly networked self-employment.