Stimulating Fewer Jobs

In another strike against government effort to create jobs, the NYTimes excellent "You're The Boss" blog (which we should have on our blog roll) observes how the extension and modification of unemployment insurance is undercutting small businesses. This is an old saw, but research backs it up: legislation that tries to protect workers will chill hiring instead. When will they ever learn?

It gets even worse when the employee files for unemployment. A lot of people — including a lot of business owners — don’t understand how this works. Because the government cuts the unemployment check, it is widely assumed that it’s the government that pays the unemployment benefits. In reality, those benefits are funded by employer taxes. And here’s the killer: The more unemployment benefits your former employees collect, the higher your taxes go.

It works like insurance. If the government pays a claim, your rates go up. In fact, if your former employee collects $10,000 in unemployment payments, you can expect to pay close to twice that in increased premiums. At least that’s how it works in my state, Illinois.

Thus, this becomes another cost of doing business that smart owners attempt to control. How do you control it? By making as few hires as possible, by making sure that those hires you do make are as strong as possible, and by combining documented rules with good management.

And now, thanks to the stimulus package, unemployment insurance has been extended as much as an additional 20 weeks. If you’ve had to lay off 10 people, this could easily result in additional taxes of $10,000, $50,000, or even $100,000. It’s a time bomb that won’t go off until after employers get their contribution-rate increase in November, but it will go off.

And therein lies the final irony: Even after the economy improves, I’m going to think long and hard before I hire anyone. Thanks to the stimulus package — the stimulus package — the costs, paperwork, and legal exposure associated with hiring employees is on the rise. I’m not saying the package is all bad, but it does make it less appealing for small businesses to hire more people, or even to offer health insurance, for that matter.

Comments

[Jacob Mays]

Two questions:
First, is the author saying that businesses are individually responsible for the workers they fire?
Second, is their support for the claim that a business can expect to pay double what their former employees claim in unemployment? I find this hard to believe, since I would assume the system is set up to be neutral.

[Michael Turner]

"Thanks to the stimulus package — the stimulus package — the costs, paperwork, and legal exposure associated with hiring employees is on the rise."

Yes, but remember there's the other side of it: without a stimulus package in the first place, your laid-off employees would stay unemployed even longer, collect even more benefits, and thus increase your UI premiums even more -- and that's not even considering that, without a stimulus package, you'll have to lay off more employees if a worse recession means reduced demand for what you sell (which is the case for most businesses). And the extension of UI benefits helps prop up consumer demand -- the saying "what goes around comes around" applies equally to the good and the bad. Finally, there's even a silver lining with increased premia: if you view cash-strapped state governments as businesses of a sort that pay employees who represent some fraction of demand for what you sell, some of that money paid out in UI premia comes back to you in the form of sales you wouldn't otherwise have made.

That said, obviously, there should be legislation recognizing that present conditions are exceptional, conditions that justify capping the UI premia that businesses -- and not even especially small buinesses -- should be required to pay. The old formulae were very likely based on fairly reasonable assumptions that don't apply at the moment. Ideally, you extinguish the burning fuse before the time-bomb goes off. Your worst enemy in this: all the other time-bombs -- the ones that have gone off, and that will soon go off. An economy full of contractual obligations -- both social and legal -- predicated on many assumptions that no longer apply will be an endless source of legislative adjustment, and this particular issue might get addressed too late to prevent damage. "Incoming, sir. Far too much of it, in fact . . ."