Another Reason Unemployment Remains So High

It costs a lot to hire someone. Michael P. Fleischer, president of Bogan Communcations in New Jersey, revealed the nitty gritty on labor costs in an op-ed in Monday's Wall Street Journal. He describes the full labor cost of hiring a good employee whose been with his company for many years.

Meet Sally (not her real name; details changed to preserve privacy). Sally is a terrific employee, and she happens to be the median person in terms of base pay among the 83 people at my little company in New Jersey, where we provide audio systems for use in educational, commercial and industrial settings. She's been with us for over 15 years. She's a high school graduate with some specialized training. She makes $59,000 a year—on paper. In reality, she makes only $44,000 a year because $15,000 is taken from her thanks to various deductions and taxes, all of which form the steep, sad slope between gross and net pay.

After documenting the money the government takes from her, Fleischer spells out the details of how much it costs him to hire her:

Employing Sally costs plenty too. My company has to write checks for $74,000 so Sally can receive her nominal $59,000 in base pay. Health insurance is a big, added cost: While Sally pays nearly $2,400 for coverage, my company pays the rest—$9,561 for employee/spouse medical and dental. We also provide company-paid life and other insurance premiums amounting to $153. Altogether, company-paid benefits add $9,714 to the cost of employing Sally.

Then the federal and state governments want a little something extra. They take $56 for federal unemployment coverage, $149 for disability insurance, $300 for workers' comp and $505 for state unemployment insurance. Finally, the feds make me pay $856 for Sally's Medicare and $3,661 for her Social Security.

When you add it all up, it costs $74,000 to put $44,000 in Sally's pocket and to give her $12,000 in benefits. Bottom line: Governments impose a 33% surtax on Sally's job each year.

It is no wonder recessions are drawn out when the state makes it so difficult to reallocate labor. Some people have observed that much of Fleischer's expense is health care costs which are optional. They will not be for long due to the recently passed health care law. These expenses coupled with the general regime uncertainty go a long way toward explaining why companies are not hiring.