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.
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.
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.
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.