Friday, December 7, 2012

Obamacare and the job market

With the re-election of Barack Obama and the Supreme Court decision that the individual mandate can stand as a tax, Obamacare is the law of the land, like it or not. It will be fully implemented in 2014. With all the uncertainty surrounding the law, one thing is certain; labor costs are going to go up. How will that effect the labor market? For clues, look at the housing market.

After the credit market debacle of 2008, new requirements were put in place for loans, making qualifying for a home mortgage much more difficult. Demand for housing is still there, but fewer people can qualify to buy a house. Hence the housing market, four years later, is still lackluster at best.

The same principals will apply to the labor market. In fact, anticipated cost increases have already had a major impact. The official unemployment rate for November actually dropped to 7.7% as the economy reportedly created 120,000 new jobs. However, the drop in the rate came from the fact that 350,000 people quit looking for work and are therefore no longer counted in the employment numbers. The percentage of working age adults participating in the workforce is now at a 50+ year low.

There are job openings out there, but the bar has been raised and is going to be raised further. Consider a company that operates on a 30% margin. That means that for every $1 they generate in revenue, they net a profit of 30 cents after expenses. If their current cost per employes is $20,000 per year, they have to take in an additional $66,000 in revenue per new employee to maintain that margin. Now increase the cost per employee by $5,000 per year to cover an insurance requirement. The company now has to generate over $83,000 per employee to justify a new hire. If you can't deliver that kind of productivity, they don't need you.

This may actually benefit companies at the top of their field as companies operating on tighter margins drop out. It could also benefit temporary employment services. More companies may opt for "just in time" labor, using them only when they really need them, rather than taking them on as employees. Again, look at the housing market. In our area, it now costs almost twice as much to rent a house as to it does to pay a monthly mortgage, but if you can't get the mortgage, you're going to have to rent. Your hourly cost to rent an employee may be substantially higher than taking one on permanently, but you can let them go or stop using them any time without consequence.

It may also cause an increase in independent contractors as individuals find it easier to get a little work from a lot of companies than to get a full time position with one company.

Obamacare will cause changes in more than just the labor market, but the labor market may be where most people experience change first. I'm not going to say the world will come to an end or that we're going to suddenly experience some kind of train wreck. After all, Greece, Portugal and Spain still exist, despite their economic woes. Life will go on, but it will likely be quite different. You can't regulate, mandate, tax and spend your way to a vibrant economy, but that's not what America voted for.

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