A Little Lesson In Microeconomics as it Relates to Employment

Zero Hedge published a guest post that had some wisdom in it.  Unemployment is on the rise again.  Already, some mouthpieces are out there saying that unemployment rates over 7% are the new normal.  Bunk.  Frictional unemployment is around 5% in the classical macroeconomic model.  Keynesians used to believe that until they realized all the crap they have tried hasn’t worked.  When the standards can’t be met, just change the standard.

Anyway, here is what really stood out.  If you have been following Microeconomics Monday on this blog, you might recognize a few concepts.

Those who have spent their careers in government or academia have little idea what it takes to hire more people. Number one is a business with strong demand for one’s products or services. In a developed world with too much of everything except energy, that is no small challenge: the world is awash in over-capacity in every field except niche industries such as deepwater oil rigs.
Second, you need a process that generates so much value (specifically surplus value) that you will generate immediate profits by hiring more people.
If the value added by additional labor is low, then you have no reason to hire more employees, even if Ben Bernanke personally knocked on your door begging you to borrow a couple million dollars at low rates of interest.
If an additional unskilled worker will cost $10 an hour and might generate $100 a day in additional gross revenues, that is $20 in gross profit. But the overhead costs of operating a business are rising faster than inflation: junk fees imposed by cities, counties and states, workers compensation and disability premiums, healthcare costs (if you hire full-time workers), energy costs, and so on.
For most businesses, overhead costs 50% to 100% of total employee compensation–wages plus benefits and payroll taxes. So adding another employee to gross 20% more doesn’t make it worthwhile–it actually generates a loss once overhead costs are paid.
The only time it makes sense to hire another worker is if that worker will create 100% or more surplus value from their labor. For example, a worker paid $200 a day in total compensation generates $400 more in gross revenues–enough to not only support the added overhead but net the business a profit.
In a global economy, competition constantly lowers the premium most businesses can charge. That places most businesses in the vice of declining gross margins and higher labor/ overhead costs. The only way to stay solvent is to grow revenues and slash costs so declining gross margins are still enough to pay the bills and leave some return on capital/time/risk invested.


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