Thursday, March 25, 2010

No Jobs to be Had?

An interesting situation has developed at the company where I work. Sales have picked up, though not yet to the pre-recession level. At the same time, one of our machine operators gave his notice this week. He’s moving on to a better job, and we wish him well.

But the impending vacancy means I have to go out and hire someone to take his place. The first place we decided to look was people who had worked for us in the past, but who we had laid off in the last year. After all, they would be known quantities.

Here’s where the interesting part starts. The first two people we called were working for $6 an hour, considerably less than what we would pay. It’s also less than the Federal minimum wage of $7.25 per hour. Both of these women were working cash jobs. Their employee was either treating them as subcontractors, but not submitting Form 1099 to the IRS, or else taking unreported cash income and paying their employees out of that stream of money.

Either one is tax fraud, of course, pure and simple. But no one is surprised that people cheat on their taxes. That’s dog bites man stuff.

What struck me is that both women turned down the job offer, even though the aftertax money from our position was greater than the $6 per hour. Why would you turn down a job that pays more than your current position? It turns out I had left out a factor in my calculations: extended unemployment benefits.

Although both women had been laid off from our company over a year ago, both were still drawing unemployment checks, courtesy of the Obama stimulus package. The combination of their unemployment benefit and their $6 an hour job exceeded the amount we were willing to pay. As rational economic actors, they were maximizing the utility of their work.

Conservatives will tell you that continuing to extend unemployment benefits provides a disincentive to work. Why take a job if you can continue to draw a check? Liberals will tell you there are no jobs available, so we have to keep providing benefits to people who have been laid off.

Based on my sample of two, I would argue that the conservatives are winning this argument.

Wednesday, March 24, 2010

Health Care: What Now?

Well, Obamacare was signed into law today, so I guess we just have to react to the new reality. The first thing we did on Monday was to ask the obvious question: "How does this affect our insurance program?"

Bona fide wellness programs are still allowed, so we can continue to provide incentives to our employees who control their weight, cholesteral, blood sugar, blood pressure and smoking. That's good.

The amount that can be contributed to Flexible Spending Accounts (FSA's) is limited to $2500. We're not sure if that includes the employer's contribution or not. Right now, the company matches the employee's pretax contribution on a dollar by dollar basis, up to a maximum of $3000. Most of what I've read so far indicates that I'm going to lose that $500 of tax benefit.

Our company uses a high deductability health insurance plan. The first $5000 of medical care is the responsibility of the employee. Blue cross/blue shield doesn't cover any of the bills until that limit is reached. I like it that way because it keeps the premiums low, freeing up money for other purposes (like bonuses), and I don't consume much in the way of healthcare. After 2014, it is not clear if that type of plan will continue to be on the market. Based on the rhetoric, I'm afraid that high deductible plans will be outlawed once this legislation gets ramped up.

It's interesting that children can be carried on their parent's health plans until age 26. Tax law says that you lose the dependentcy deduction at age 24, and even then you lose it at age 19 unless the child is a full time student. With our current premium structure, adding family coverage to the employee's coverage adds less to the premium than the cost of adding another employee to the policy. It's easy to see how people will begin gaming the system under those rules. Once this becomes widespread, look for dependent coverage to rapidly rise in price to compensate.

I wonder whose idea it was to remove the lifetime caps on medical spending. Because, you know, going through a million dollars of medical care wasn't enough. Maybe if you get another million dollars of someone else's money, they'll find a way to cure you.

You can't help noticing that the unpopular parts of this legislation, like the requirement to buy health insurance, and the fines for not doing so, are timed to all take effect after the next presidential election is over in 2014.

I haven't yet seen when the surcharge on unearned income (interest and dividends) starts up, but from what I have read so far, that only impacts high income individuals. Like the people who decide whether to pay my bonus or keep the money for themselves. I'm probably going to be stung on that one.

Tuesday, March 16, 2010

Break Out the Bulldozers

The Obama administration and Speaker of the House Nancy Pelosi are determined to shred every procedural roadblock standing in the way of their massive restructuring of the health insurance industry in this country.

At first, it was only reconciliation. Normally, the House passes legislation. Then the Senate passes their own version of the same bill. Then a conference committee of Senators and Representatives negotiates a compromise version of the bill, that is voted on again by both Houses of Congress. When that passes, it goes to the President for signature to be enacted into law.

The problem with that system (at least from Obama and Pelosi’s point of view), is that the compromise legislation has to pass the Senate again. With the election of Scott Brown from Massachusetts to fill the seat of the late Edward Kennedy, there are now 41 Republicans in the Senate. With a united front, they can filibuster the bill until it dies a natural death.

Hence the reconciliation maneuver. Under Senate rules, passage of measures affecting the budget can have the compromise, or “reconciled” version passed through the Senate on a vote requiring only a majority of 51 votes. Since the filibuster does not apply, sixty votes are not required to cut off debate.

Pelosi’s reconciliation plan then becomes to push through a House vote on the original Senate version of the health insurance restructuring. The House will then pass a series of amendments to the Senate version, making it more to their liking. This package of amendments will then be presented as a budgetary reconciliation, which can avoid the filibuster. The fig leaf covering this end run around the rules is that Obamacare is intended to reduce the deficit.

I have been watching television for well over forty years. I have been exposed to millions of commercial messages. I have become quite adept at knowing when I’m being lied to.

I know that the fast food hamburger will not be plump and juicy like it shows on screen. I know that if I spray on a cheap cologne, women will not leap out of the woodwork, seeking to have their way with me. And I know that the current package of health insurance reform will not reduce the deficit.

Obamacare is not a budget reconciliation bill, it is a policy bill, and using the process of reconciliation to get a around the procedures of limited government stinks to high heaven.

Monday, March 8, 2010

Rising Productivity

I don’t expect reporters to have much in the way of business literacy. Strategic planning and discounted cashflow analysis are difficult subjects, and it doesn’t surprise me that they aren’t part of the normal journalism curricula. But algebra? I had algebra in the 8th grade.

The source of my ire is a report that has been put out by the Labor Department, and the interpretation thereof by the media.

The gist of the report is that productivity grew at an unusually rapid rate in the fourth quarter last year. Labor productivity grew at an annual rate of 6.9% during the last three months of the year. At the same time, the report stated that unit labor costs dropped t a rate of 5.9%.

The commentary I have seen on this report so far makes it out to be bad news. The viewpoint seems to be that rising productivity means income is dropping. Also, if employers can increase output without hiring more workers, that doesn’t help the unemployed. This ignores the reality that increasing productivity is what increases standards of living. Without increasing productivity, we’d all be stuck at the hunter-gatherer stage, which doesn’t strike me as too much fun at all.

But what really gets me is the assumption that when labor costs fall, that means households have less money to spend. This is a complete misreading of the statistics.

What the report actually says is that unit labor costs have fallen. That does not mean workers are getting paid less. It means that workers are producing more product for the same amount of money. In point of fact, falling unit labor costs are just the same thing as rising productivity, expressed in a different way.

Let’s take an example. Assume that in 2008, a worker getting paid $10 per hour produces 100 units of product in an hour. The unit labor cost of that product is $.10, the $10 the worker got paid divided by the 100 units produced.

In the fourth quarter of 2009, the same worker would have produced 107 units of product in the same hour of production. To figure out the increase in productivity, we divide the 4th Q 2009 output by the 2008 output to get 1.07. Productivity increased by 7%. In this same example, the unit labor cost drops to $.0935. This is a 6.5% drop in unit labor costs. But the worker still gets the same $10 income he got before.

The real news is that productivity growth of over 6% cannot be sustained. That red hot pace is an artifact of starting from a lower base level, due to the recession induced drop in demand. Once demand started to pick up, the workforce that businesses kept on in anticipation of an upturn went from coasting along to serious work. A big jump in production was the result. It probably doesn’t hurt that most businesses, given any kind of a choice, will keep their most productive workers on the payroll, dropping the less than stellar performers.

This sharp jump in productivity is a sign that demand is picking up again. Once businesses have wrung all the benefit out of the existing workforce that they can get, the next step is to start hiring more employees.

Increasing productivity is good news, not bad news.

Wednesday, March 3, 2010

Chile's Hour of Need

The government of Chile is still restoring order after the magnitude 8.8 earthquake that struck the southern half of the nation last week. After some initial confusion, they have requested international aid. According to an interview with the US ambassador to Chile, the confusion was because Chile does not have a history of receiving international aid. In fact, Chile is a donor nation.

Still, the devastation is widespread, and they could use a hand.

So I'm going to go out and buy some grapes, and grape by-products.

Located south of the equator, Chile's seasons are the reverse of ours. Their summer is just ending, and their winter takes place during our summer months. This shift in growing seasons means Chile is in an ideal position to supply fresh fruit and vegetables when fresh produce is in short supply from our own growers. Ordinarily I try to buy American to the greatest extent possible, but due to the emergency I'll make an exception and stock up on Chilean grapes for the next few weeks.

And the grape by-products? I plan on picking up a case of Chilean cabernet.

I just figure it's better to help the Chileans by trading with them, then by giving them some kind of handout. If we help Chile's businesses, those businesses will take the lead in rebuilding the country. If we give handouts, we only encourage dependency.

Of course, I feel the same way about charitable giving in this country as well, and for the same reason.