Sorry Virginia, But Employers Aren't Social Workers

It is now almost four years since the end of the recession, yet unemployment is still at almost eight percent and would be much higher if so many people had not given up completely which means that they don't count as unemployed anymore. This is actually the third recovery in a row during which job growth has been more tepid than the historical norm. Further, employment has recovered more weakly each time: this is the worst jobs recovery, the recovery following the 2001 recession is next, and the recovery following the 1991 recession is the best (or least worst) of the three. The question we need to answer is: why is job growth getting harder to produce?

The problem is not any single cause, but it seems increasingly obvious that job growth is being impeded by the irresistible urge of too many people to use jobs as a vehicle to accomplish an ever expanding number of social goals.

Jobs exist for a simple reason. A job is created when a person is willing to do a task for less than the amount of money that labor can earn the employer. It is that simple. Employers are not interested in providing health care, life insurance, maternity or paternity leave, helping to correct past discriminatory behavior, or otherwise affecting social change. The employer wants a task done for a lower cost than what the output produced is worth. If the employer cannot make a profit through the addition of that employee, the employer will not hire the person. That is basic Economics 101.

In situations where a prospective employee is willing to work for less than the profit that she could earn the employer, there is room for negotiation with each party hoping to capture a larger share of the profit being produced. The problem with forcing employers to address social problems through employee benefits is that the cost of those benefits reduces the room for negotiation. As the cost of all these benefits (paid leave, health insurance, etc.) adds up, at some point there is no room left and the person does not get hired.

People with good intentions, thinking they are making the world a better place, have added so many mandatory benefits to the cost of an employee that companies are looking for any alternative to hiring more employees. Companies strive to produce and sell more each year while simultaneously reducing their number of employees. Doing more with less is the mantra of the day.

While the world might be a better place if every job came with all sorts of benefits beyond a paycheck, the reality is that as society increases the cost of benefits (and all other non-wage employee costs) we are decreasing the number of jobs that will exist.

The people most harmed by this reality are those whose work is worth the least. Thus, people with the fewest skills and least education are likely to face high unemployment rates as a result of increased mandatory benefits. The data show this to be the case, with the unemployment rate for those with a high school diploma currently twice that of college graduates.

There is no Benefits Bunny; benefits are not free. Employer retirement contributions (to a pension, 401(k), or other retirement plan), insurance premiums, the employer's half of social security and Medicare taxes, paid leave for illness, vacation, or maternity/paternity; all these benefits add to the cost of an employee and leave less room to find a wage that can make both employer and employee happy.

In fact, the reported stagnation in wages over the past decade is partly a measurement error. The data look just at monetary compensation. If one looks at the total cost of employees, wages plus benefits, then one sees that employees are getting paid more than they used to be. The rising costs of benefits, particularly the part of health insurance premiums paid by employers, essentially represents the entirety of the pay increase that workers have received. It may not show up in a paycheck, but it is still an increase in pay.

After all, my employer can pay me $1,000 per week and contribute $250 a week to a retirement plan, or pay me $1,250 per week with no retirement plan contribution. In both cases, I am getting paid the same. How the money is divided between what is given to me as cash and what is given to me as employer-paid benefits does not matter to the employer. When deciding whether to hire me (or continue my employment), the employer considers the total expense of me as an employee, not what it says on my paycheck.

Even in the face of today's high unemployment rate and slow rate of job growth, there are people calling for more benefits to be mandated for all employees. There are groups advocating for paid sick leave and more parental leave (both paid and unpaid). Under Obamacare, the full cost of mandatory health insurance, or a fine in its place, will soon be added to the cost of employees. Making it more expensive for companies to hire workers does not seem like a great strategy for solving our unemployment problem.

If our society truly believes that certain benefits are "rights" that everybody has, it makes more sense to fund those benefits through the government (state or federal), so as not to distort the labor markets. Obamacare will likely be more expensive, more disruptive, and lead to more unintended consequences than if Congress and President Obama had just moved us all the way to a single-payer government health insurance program. And we would have had more tax-paying workers around to help pay for it.

The economic truth here is undeniable. Asking employers to play the role of the Benefits Bunny by giving free (or subsidized) goodies to all their employers does not change the worth of an employee to the company. Adding mandatory benefits to a company's tab will undeniably produce two outcomes: fewer people will have jobs and the wages for those with jobs will be lower (as more of their compensation is paid in the form of benefits). Santa Claus and the Easter Bunny may be real, but the Benefits Bunny is a figment of do-gooders' imagination.