Employment Headwinds May Mean Jobless Recovery

The Current Employment Situation Is Bleak

• Housing starts are at multi-decade low. Housing is overbuilt. Many job losses in the sector will be permanent.
• The deleveraging consumer has hammered the retail and service sectors. If the trend continues, expect some of the job losses to be permanent.
• Business investment is down significantly.
• A large number of jobs in the finance sector have been permanently lost.
• The current 15% vacancy rate in Commercial Real Estate means jobs won’t be coming from this sector anytime soon.

More Headwinds

Businesses not only face diminished sales, soon they will be even more discouraged from hiring because employment costs will increase. This article discusses the headwinds that employers face.

Headwind #1 – Minimum Wage Increase

The Federal minimum wage will increase by 10.7% to $7.25/hour on July 24, (Hat Tip to Optionsgirl). It’s about time, as the old rate put families below the poverty line. It also dampens the job market, as Aaron Smith writes:

John Lonski, chief economist for Moody's Investors Service, said the hike in the minimum wage is "going against the grain" of the economy, and that the job market might not be able to absorb the mandated increase.

Headwind #2 - Payroll Taxes Going Up

When Social Security was set up, its creators incorrectly assumed that the US would continue to grow at the same rate adding more workers every year. When the Social Security program was initiated in 1937, the average life expectancy in the U.S. was under 65. Eligibility for benefits was set at age 65 in the expectation that less than half of the workers would live long enough to collect Social Security. Social Security wasn’t intentionally set up as a Ponzi Scheme; it is the Ponzi-like nature of the Social Security system that will cause an imminent increase in payroll taxes.

Ponzi Scheme?

Charles Ponzi began defrauding investors in 1916, promising stellar returns. Ponzi never made real investments with investor’s funds; he just used the funds from newer investors to pay profits to earlier investors. To keep paying “profits” to investors, Ponzi had to recruit more and more investors. Eventually, unable to find enough new investors, his system collapsed leaving investors penniless. Over the past 75 years, the phrases Ponzi Scam and Pyramid Scheme have entered the vocabulary of nearly every American.

In 1967, Paul Samuelson, an ardent supporter of Social Security wrote the following in Newsweek:

The beauty of social insurance is that it is actuarially unsound. Everyone who reaches retirement age is given benefit privileges that far exceed anything he has paid in…. How is this possible? … Always there are more youths than old folks in a growing population… A growing nation is the greatest Ponzi game ever contrived.

Isn’t Money Being Saved Up?

To fix the actuarial shortfall, OASDI was mandated to create Social Security Trust Fund (SSTF). Because the SSTF has about 3 Trillion Dollars saved for the future, Social Security is only a partial pyramid scheme. SSTF is not run prudently like a private pension fund. The following are the differences between the SSTF and private pensions:

Private Pension	Social Security Trust Fund
Widely considered prudent and desirable for a private pension to fund future payments with a 60:40 stock-bond mix.	Mandated to invest 100% in US Government Bonds.
Can in invest in higher yielding US Treasuries.	Must buy special bonds paying below-market interest rates.
Private pensions must be actuarially sound.	Even the folks who run Social Security admit that the fund is actuarially unsound.

According to the May 12 2009 trustees report , starting in 2016, Social Security will spend more money than it takes in through taxes. By 2037 the fund will run out of money and unless taxes are raised, will not be able to pay promised benefits.

History Repeats

The founders of the Social Security System made a misguided assumption when they setup the program. In 1945, the ratio of workers-to-retirees was 40+ to 1; in 1950, 16+ to 1; and in 1960, the ratio was 5 to 1, in 2005 the ratio was 3.4 to 1. According to the above chart from the Bush Whitehouse, the ratio will be 2 to 1 by 2035. As the worker-to-retiree ratio has persistently fallen since the creation of Social Security, the government has been forced to raise the payroll tax in progressive steps from 2% in 1937-1949 to today’s 12.4% rate.

Two politically unpopular choices:

• Cut benefits
• Raise payroll taxes

Rather than cutting benefits, because the government has consistently raised withholding rates whenever the SSTF has faced insolvency and because the current administration is focused on wealth redistribution, a hike in payroll taxes is a foregone conclusion.

Headwind #3 – Mandated Healthcare

Current System: According to the Census Bureau, 70 percent of working Americans are provided health insurance by their employers. Employees pay a significant portion of the cost. One-third of small businesses do not offer health insurance.

Proposed System: ALL of the nation’s employers will be forced to provide health insurance to ALL of their employees raising payroll costs.

Higher costs mean less incentive to hire. A study by the National Federation of Independent Business (NFIB) estimates that in the first five years of mandated healthcare up to 1.6 million jobs could be lost. NFIB is probably overstating their case a bit by pumping up the numbers.

TeamObama member Larry Summers, wrote about the costs of national healthcare in the May 1989 edition of American Economic Review:

Wages cannot fall to offset employers’ cost of providing a mandated benefit, so it is likely to create unemployment.

Conclusion

Economics and history show that as costs rise, employment sinks. Employers face the following increased costs:

• Increased payroll costs due to mandated healthcare.
• Minimum wage hike.
• Increasing payroll taxes.

The economy is bound to recover. Disincentives to hire may make this a jobless recovery.

FULL DISCLOSURE: No positions.

Comments

[Living4Divi...:]

Author's Update: The link to the article on the min wage hike no longer works, because the author either moved or deleted the instablog entry.

The link to the original min wage article by Aaron Smith is here: cnnmoney.mobi/money/ar...

Jul 14 08:37 AM

[Investing I...:]

Well written, article, thank you

Jul 14 12:27 PM

[Living4Divi...:]

thank you

On Jul 14 12:27 PM Investing In The future wrote:

> Well written, article, thank you

Jul 14 01:22 PM