Re: AltInst: a "work spreading tax"

From: Tom Walker <>
Date: Sat May 30 1998 - 12:53:47 PDT

George L. O'Brien (Certified Management Accountant)

>Currently the fixed costs of hiring an employee in the US are heavily
>weighted by the way various payroll taxes work. A number of taxes such
>unemployement and state disability have relatively low cutoff points, so
>extra hours are not included. More importantly, most medical insurance
>plans are the same once the employee qualifies (usually over 20 hours a week).

At the risk of repeating myself, I couldn't agree more with your analysis.
That's why I have campaigned for several years for "levelling the playing
field" of fixed cost statutory contributions, especially by raising the
ceilings for contributions to social insurance plans.

But a funny thing happens when you chart the regressive, fixed payroll costs
together with progressive income taxes, using annual income as the scale on
the x axis: the trend lines of the two roughly cancel each other out so that
the per hour total contribution is roughly constant. I haven't done the
spreadsheet calculations for U.S. rates, but the major differences would be
in higher private insurance health premiums (adding regressivity) and in the
much higher annual contributions ceiling on social security (adding
progressivity). U.S. income tax rates are substantially lower than Canadian
rates, but I would imagine that the progressivity is comparable, perhaps
with some degree of unevenness introduced by the earned income tax credits.

Given those substantially flat per hour costs, the escalating costs of pay
increments for years of service create a situation where a more senior work
force (on average) is more expensive than a more junior work force. One
might object that the higher cost of more senior workers is justified by
their higher productivity. I would respond that such "higher productivity"
depends entirely on how well their skills and experience are being utilized
by the division of labour.

For example, think of an engineering firm that decides to cut costs by
laying off the receptionist. The savings could easily be overwhelmed by the
cost of the highly paid engineers having to answer their unscreened
telephone calls and direct traffic for people dropping into the office.

I've also noticed a tendency in the literature to systematically overstate
non-payroll fixed costs, such as hiring and training costs, by ignoring
economies of scale and productivity gains. If it costs $10,000 to hire one
new employee, does that mean it costs $50,000 to hire five? Not likely.

The way that I've seen training costs accounted for is also highly suspect.
Here's the way it's done in a pulp industry report on employment costs: say
a new employee requires 100 hours of on the job training, this will require
a senior employee to spend 100 hours training the new recruit. If the cost
per hour for the senior worker is $40, the total training cost is estimated
to be $4,000.

But let's say that senior worker spends two hours out of an eight hour day
training the new recruit. What happens to the senior worker's productivity
during the *remaining six hours*? It's entirely possible that part of the
hypothetical training "cost" is absorbed by slack time rather than
productive time, so it doesn't really cost the employer anything.
Furthermore, what about the training effect on the senior worker? The best
way to learn something new about your specialty is to teach it to someone else.

To treat training time as a charge against production, with no side
benefits, is to describe a worst-case scenario. Worst-case scenarios invite
hoarding, which leads to shortages, bottle necks and dead losses. But why be
verbose? There's an old maxim, 'penny wise and pound foolish' that describes
the miser's dilemma.

It would be ironic if economists thought they could fight fallacy with
fallacy. But I think that is *exactly* what has happened. The evidence for
the charge of 'lump of labour fallacy' -- routinely levelled against any
proposal to redistribute work time -- is itself replete with unexamined
assumptions, anachronisms and worst-case scenarios. It has become a 'lump of
cost fallacy' that, for some inexplicable reason, is exempt from criticism.


Tom Walker
#408 1035 Pacific St.
Vancouver, B.C.
V6E 4G7
(604) 669-3286
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Received on Sat May 30 13:12:39 1998

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