Creating jobs

Bruce Bartlett
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Posted: Mar 13, 2004 12:00 AM

The lack of employment growth continues to be the major political-economic problem facing the country, and it likely will remain that way through Election Day. Although there are many explanations for the weak jobs situation, the fact is that no one really knows why the economy has created so few jobs since the end of the recession in November 2001. Following are some ideas that have been put forward recently.

-- Businesses are not yet convinced that the recovery is sustainable. Press reports have quoted a number of businessmen saying that they are just not going to hire anyone until they are absolutely certain that they will not have to turn around and lay them off again.

Contrary to popular belief, corporate executives do not enjoy laying off workers. It is very painful for them and often traumatic. They wait as long as possible before taking such action, which is why the unemployment rate never rises until well after the beginning of a recession. Conversely, businessmen are reluctant to hire permanent new workers until well after the end of a recession.

With the growth of the temporary employment industry, it is now easier for executives to increase output without having to hire permanent workers. Since such workers have no expectation of long-term employment, they are much easier to remove should the expansion falter. Similarly, businesses find it easier to terminate contracts with outsourcing firms in India, which is one reason why this has become an attractive option for adding labor when the economic outlook is still tentative.

-- Contributing to the reluctance to hire permanent employees is the rising cost of employment, especially for benefits. Some employers are now arguing that they are at a competitive disadvantage compared with businesses in countries with national health insurance. In the United States, businesses mostly pay for health insurance out of sales, whereas in many foreign countries health coverage is paid for by broad-based taxes.

According to the Bureau of Labor Statistics, the average cost of creating a new job in the United States last year was about $50,000, based on an hourly compensation cost of $24.48. Of this, only $17.52 was for cash wages. Benefits and employment-based taxes paid by employers added the balance of $6.97. The breakdown goes like this: taxes, $1.95; insurance (mainly health), $1.86; paid leave, $1.64; retirement, 88 cents; and supplementary pay and miscellaneous, 64 cents.

Clearly, benefits have been rising rapidly. In the aggregate, they are up 10.9 percent in the last three years, while wages and salaries are up just 1.2 percent, according to the Bureau of Economic Analysis. However, BLS data suggest that benefit costs are rising from a relatively low base. Total benefits fell from 28.9 percent of compensation in 1994 to 27 percent in 2000. In the fourth quarter of 2003, they were back up to 28.1 percent.

This pattern mainly resulted from declining health insurance costs during the mid-1990s as the result of the development of health maintenance organizations. As a consequence, employers' costs fell from 6.7 percent of employee compensation in 1994 to 5.4 percent in 1999. Now they are back up to 6.5 percent. Thus while benefit costs are rising, the fact that they are still below the levels of 10 years ago suggests that it is probably not the major factor hindering employment.

-- Increasing self-employment may not be getting picked up in the employment data. This suggests that people are working, just not in ways recorded by the employment statistics, thus making employment appear lower than it is.

Theoretically, self-employment is recorded, but only in the household survey, which asks a sample of people whether they are employed or not. That is one reason why this measure of employment has shown strong growth. However, economists mostly prefer data from the payroll survey, which comes from business employment records. Consequently, it doesn't pick up self-employment.

Some economists argue that self-employment cannot explain the lack of job growth being recorded by the payroll survey. However, there is growing evidence that this may indeed be the case. Economist Brian Wesbury notes that there were more limited liability corporations established in Illinois last year than any year since this form of business was allowed in 1994. He reports that 18,600 LLCs were created in 2003, a 42 percent increase over 2002.

Journalist Bill Hobbs reports similar data for Tennessee. He found that 7,412 LLCs were created in that state last year, up from 6,204 in 2002. As in Illinois, this is the largest number ever recorded.

The bottom line is that economists don't yet know why employment growth is so slow. Everything they know about the relationship between economic growth and employment suggests that the latter should be stronger than it is. Economists continue to believe that the jobs will come if growth continues at its current pace.