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Head Count or Overhead?

What are you worth as an employee? A good check for anyone working is to add up what it takes to keep them employed and what their net value is to the company. A strong positive value means job security, something pretty valuable these days. But to do it right, what you cost the company is a lot more than just your salary. There are benefits, like health care and retirement plans, yes. The total cost is far more than even that and it can roughly be called the “overhead per employee”.

By the simplest calculation that’s more than 42% above what you take home, and it could be much more than that. And this overhead is one of the biggest barriers to increasing employment, reducing hours, and generally creating a better quality of life for working people in the US. Not to mention it puts us at a competitive disadvantage when it comes to creating high quality jobs.

Big companies have been slow to hire, slow to increase hours

Big companies have been slow to hire, slow to increase hours

The Bureau of Labor Statistics (BLS) keeps track of the total cost of employees, and found that as of October 2013 an average worker in the US makes $20.55 per hour, or about $42.7k per year. It’s not a lot, and it shows why so many families have to rely on two wage earners to live the American dream of a nice car, large TV, and so on.

But their employer sees an average worker as costing much more than that. There is pay for vacations and sick time, retirement, health care, insurance against liability, and required contributions to social security , unemployment, and worker’s compensation. Together, it adds up to $29.23 per hour or nearly $62.9k per year. The costs break down in the chart show below.

Some of this cost scales with higher salary, but insurance and health care do not. All together, they represent a figure of the total overhead per employee that is shockingly close to the “time and a half” paid for overtime. That means that an employer with a highly variable need for workers during a year (such as a Christmas rush) or with slightly higher costs than average sees a net benefit to making employees work more than 40 hours a week rather than hiring more people. And salaried workers don’t even get the time and a half.

Data from the BLS

Data from the BLS

This overhead is high, but it is not the entire story. Recruitment, training, and relocation add to the total – especially for highly skilled workers. For example, every Human Resources department can be regarded as pure overhead for employees. Provaliant, a project management company, has a handy calculator where you can plug in your own numbers and see what you get. Their estimate is that a worker making $75k per year actually costs almost $262k, a whopping 250% overhead.

While work flexibility has different definitions for employee and employer, it’s definitely desirable for both. But with such high overhead it is very expensive and difficult to provide. It’s also obvious why so many large companies are turning towards consultants and temporary employees who do not carry as much overhead to get the job done in order to have the flexibility they need. It’s a situation that needs to be corrected if we are going to have a flexible workforce that is capable of taking time off to take care of the kids and be a good citizen in the community.

As a matter of policy, the required taxes for Social Security and Medicare (7.62% of the first $110k of salary) along with worker’s compensation taxes seem like a good idea. They form a reliable pool of money that funds the necessary social programs and does not need to be adjusted much year to year. But they represent a tax on employment, a terrible choice to make at a time when there is high unemployment and a need for more jobs.

It's hard enough normally, even if you know the song

It’s hard enough normally, even if you know the song

Worse yet, the US has a somewhat unique system where employers are stuck with the tab for health care, rather than taking it out of general taxes in a universal system. Combined with the taxes on employment, this represents 15.5% of total compensation or half of the BLS tracked overhead. Changing these to systems that, for example, rely on taxes on corporate profits will be politically difficult but would help improve the flexibility of the workforce dramatically.

There is no greater barrier to creating more jobs in the US than the very high overhead per employee. The workforce of tomorrow is going to have to be more flexible, and that can be a very good thing for both employee and employer alike. But a lot is going to have to change to get to that point. A strong change in policy combined with a focus on the overhead per employee is a very important part of creating more and better jobs in the years ahead.

15 thoughts on “Head Count or Overhead?

  1. Good that you can quantify it. That is a lot even if you go with the BLS numbers which do leave out a lot of real cost. No wonder the US is not competitive in manufacturing.

    • I don’t know that I really like these numbers, but they are what we have. But yes, this is the real cost of employees and we look incredibly expensive. Other nations don’t have the health care burden attached to manufactured goods (or other things, for that matter).

  2. There are so many different taxes and fees associated with employment that are not listed in the categories you have here. The BLS report is not complete no matter how you look at it. I don’t know how much should be counted as pure overhead. For example you have vacation and sick pay listed above with “paid leave”, is that correct? The employee sees this as regular pay even if it is accounted separately so it is hardly a pure overhead cost in any conventional sense. Most benefits and taxes other than health care usually scale with salary so the numbers make sense there. The website tool from Provaliant is really handy, thanks for it! Those costs are real if a bit high in their example.

    • I accept that this is flawed, and I do think the Provaliant numbers are in many ways closer. Yes, paid leave includes vacation, sick pay, and so on, but it is non-productive work so it does count as “overhead”. It’s a category that other nations will be higher than us in, so there’s always that to consider.
      I agree that outside of health insurance the costs do scale with wages, so as far as these numbers go they are going to be similar at all incomes.
      I suppose I should have calculated that with this ration a Minimum Wage of $7.25/hr is about $10.33/hr. So maybe a compromise to raise the Minimum Wage should be to reduce the other net “employment taxes” – and implement universal health care to take the burden off of business. Oh … wait … Republicans are against that … damned! 🙂

  3. Good blog. Does it follow that if overhead went from 42% to 0% that there could be 42% more jobs? I doubt thats the case but has anyone tried to figure out the relationship?

    • Thanks! No, it does not follow that a 1% reduction in overhead cost gives us a 1% rise in employment, not at all. I have seen no studies on this and I don’t know how I would approach it. I have been looking for the same costs in other nations, but I really can’t find them – that might be one way to do it.

  4. Labor costs are certainly relevant, so, too, is increasing the volume of trade.

    Senator Reid opposes fast track free trade legislation. President Obama supports it.

    Time for Dems to step up to plate…

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