# Unemployment Tax vs. Hiring New Employees

written by Pj on Thursday January 17th, 2013 -- 4:57 p.m.
in reply to Solving the Unemployment Problem

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Yesterday I remembered something from accounting class in high school.  When doing payrolls, we always had to figure up an "unemployment tax" that was paid only for the first \$7,000 an employee makes in a given year.  I wondered if such a thing actually exists, as it would seem to be an incentive for companies to avoid hiring additional employees.

Seems it is a real tax, and it really is paid only on the first \$7,000 each employee makes.

https://en.wikipedia.org/wiki/Federal_Unemployment_Tax_Act#Calculation_of_amount_of_tax

So each employee a company hires costs them \$420 per year.

This really isn't much of a disincentive towards hiring new employees.  For example, say you need N employees for your factory for each of them to work 40 hours per week.  If you instead hire N+1 employees, you pay an additional \$420 per year because of unemployment tax, but you pay the same for labor because each employee works less, since you only have so many hours of work available.  However, if you hire only N-1 employees, the 2000 hours that the missing employee would have worked that year become overtime hours for the other employees.  Thus you end up paying an additional 50% * \$7.25/hour * 2000 hours = \$7250.  It gets even worse if you're not paying your employees minimum wage.

The break-even point is calculated like this: \$420 / (50% * \$7.25) = 116 hours

That's 116 overtime hours total, not 116 hours per employee.  If you've got 15 employees and you're thinking about asking them to all work one day of overtime, you're going to pay more than you would if you hired a new guy for just three weeks to do the extra work.  ...and this is cumulative throughout the year.  Have only five employees, but on three occasions asked them all to work a day of overtime? It'd've been cheaper to have simply hired a sixth employee and had them all work only 34 hours per week instead.  You could even get over that lump of extra work in basically the same amount of time by simply asking them to work 40 hours on those three occasions.  ...and, again, if you're paying more than minimum wage, then asking employees to work overtime makes even less sense.

While the unemployment tax is a disincentive to hiring more employees, it seems to be a small one, since the total tax works out to \$0.21 per hour for a 40-hour/week employee.  ...and if your employees want to work only 20 hours per week, that works out to \$0.42, so why not offer them that choice if they're willing to take a \$0.21/hour pay cut in order to make up for your loss?

Same reason they don't do paid vacation, I guess.  To give someone two weeks of paid vacation each year is nothing more than paying them for 52 weeks when they only work 50 weeks.  That's a 4% pay raise.  For a minimum wage worker, paid vacation is a benefit equal in value to \$0.29 per hour.

So say someone wants to work for you.  You can easily offer them two choices that work out to the same cost for you:

1.  They can earn \$7.50 per hour, but are required to work 40 hours a week, and they get no vacation, or at best, unpaid vacation.

2.  They can earn \$7.25 per hour, but they are only required to work 32 hours per week (but they can work more if they want to and you have extra work) and they get two weeks of paid vacation every year (at their average weekly salary).

In other words, give up \$8 a week and you can pretend like you live in Europe! ...or just work 33 hours per week instead of 32 and take home the same amount you would have without the pay cut.

So why has my poor mother has been working six or seven days a week for what now seems like several months? About half the time she gets Sunday off, the other half she doesn't.  ...and her company pays double for that 7th day each week.  How do they justify not hiring additional employees?

I'm not sure what her hourly wage is, but if I assume it's double minimum wage and that this has been going on for 12 weeks, then they've so far paid \$1400 per employee in overtime pay.  That's excluding their base pay, and so \$1400 they wouldn't have had to pay if they just hired more people.  ...and an extra 12 hours a week is only an increase of 30% in the work load, and so they only need 30% more employees.  So that's \$420 plus whatever hiring costs they have, vs. the \$4640 in overtime they've had to pay to several people to do the same work that just one of those new employees could have done.  The difference is enough to pay someone double minimum wage for seven weeks.  Anyone who couldn't find a dozen factory workers in seven weeks is clearly incompetent.

So what's their problem?

I suspect the problem is just mismanagement.  From what I hear from my mother, the place seems to be managed by a bunch of morons, and as a result, the working conditions suck.  It's quite likely that every unemployed person in town has already worked there and quit, and so there actually just isn't anyone they can hire.  Factories tend to have a "you can only work here once" policy.

I worked there once, for about a week, until I couldn't take it anymore.  Eight hours a day of waiting for a slow machine to mold parts.  At least half my time was spent doing nothing besides standing around and learning to hate the "golden oldies" that were always playing on the sound system.  Honestly, there's only maybe a hundred "golden oldies" from what I could tell, and so after the first day, you never again hear a song you haven't heard before.  ...and why was I standing when I had nothing to do?

You're not allowed to sit down.  Someone in the office has it in their mind that sitting is relaxing, and relaxing is not working.  My mother enjoys the same nonsense to this day.  She spends all day standing on an assembly line, rarely needing to move at all, but she's always required to stand, because "sitting isn't working" or some bullshit.

"Foxconn has long been criticized by human rights advocates for its low pay, strict, demanding atmosphere, and generally harsh conditions," but judging from the photos on that same web page, even Foxconn doesn't require all of their employees to stand for no reason whatsoever.  Standing for no reason sucks.  I can easily walk around for hours without a problem, but just standing in one place for no reason at all is torture.