A recent New York Times article confirms a disheartening fact: Obamacare is a job killer. That comes as no surprise to economists who tried to warn Obamacare proponents six years ago. Employer mandates raise the cost of employing workers and, in the process, depress wages and reduce employment.
The Times piece opens with a story about a hair salon entrepreneur, LaRonda Hunter. Ms. Hunter opened a family hair salon franchise outside Fort Worth, Texas in 2006. She now has four locations and would like to open a fifth. But at 45 employees, she doesn’t want to cross the 50-worker threshold where she would be required to either provide employee health coverage or pay a fine.
Ms. Hunter does not currently provide health benefits, although she would like to be able to. She reveals the financial reality behind her difficult decision: Providing health coverage to all her workers would wipe out her profits along with the salary she draws from her business. According to Ms. Hunter, “the margins are not big enough within our industry to support it.”
The Obamacare employer mandate takes effect this coming January. Firms with 50 workers or more that fail to provide “affordable” health coverage are subject to a fine of $2,000 per employee, excluding the first 30 workers. According to the Kaiser Family Foundation’s Employer Benefits Survey, the cheapest coverage businesses offered single employees in 2015 were high-deductible plans costing about $5,567, on average. However, there is a limit to how much of that cost employers can hope can to pass on to workers. Coverage that requires employee contributions exceeding 9.5% of workers’ gross wages is considered “unaffordable.” If their health plans are unaffordable, employers will suffer a $3,000 fine for each worker who rejects employer coverage and applies for Medicaid or subsidized coverage at HealthCare.gov.
In the Times article, Ms. Hunter indicates she has four locations, employing an average of about 11 workers per salon. I’m going to assume opening a fifth location would increase payroll to 56 workers (45+11). Using average figures, providing health coverage costing $5,567 apiece to 56 workers adds up to more than $311,752 per year – an amount that would make her business unprofitable. But what if an employer with 56 workers merely paid the fine instead of offering coverage? For a firm employing 45 workers, expanding the business to 56 employees would result in a penalty of approximately $52,000 annually (56-30x$2,000). That’s far cheaper than providing coverage, but it’s still more than many entrepreneurs can afford.
Hair salon franchises, such as the four Ms. Hunter owns, cost about $200,000 to get up and running. She draws a salary off less than $100,000 per year out of her business. In addition to her own salary, some of her earnings presumably go towards franchise fees, paying down loans, and reserves for future renovation and expansion.
We don’t have enough information on Ms. Hunter’s business to make precise estimates of how much her salons earn. We do know that each worker generates less than $5,567 worth of profit if employee health coverage (minus employee contributions) would wipe out her profit margin. We also know she’s not a trained hair stylist. Most hair stylist entrepreneurs are owner/operators and divide their time between cutting and styling hair, managing the business and supervising employees.
But let’s explore a hypothetical example of a hair salon entrepreneur. For the sake of argument, let’s assume each salon generates $35,000 in gross profits (on a $200,000 investment) after loan payments and franchise fees but before deducting a modest, livable salary. That’s a 17.5% return on investment – which is far more than most new franchises earn by a wide margin. Over the past decade the profit margin in the hair salon industry ranged between 5% and 8% of revenue. By my math, the marginal profit/loss from opening another location with 11 employees would result in a loss of about $17,000 ($35,000 new profit – $52,000 in new penalties).
In my example, employees under the 50-worker threshold generate about $3,200 profit per worker; but that drops to only $1,200 (after the 30th worker) once the 50-worker threshold is breached. If a $200,000 salon investment is required for each additional 11 workers, the likelihood of adding workers beyond the 49th worker is an increasingly risky endeavor.
Four salons employing 45 workers (with no penalties) would earn as much as six salons employing 70 workers. Expanding beyond 49 workers makes no sense considering the higher capital requirements, increased risk and workload involved in managing six salons with 70 workers. Under Obamacare, it would be foolhardy for any firm employing low-wage/low-productivity workers to expand beyond 49 employees.