What makes US labor so expensive?

[SenorBeef]

I tried a search but didn’t come up with anything.

Obviously, US wages are astronomically high compared to what most third worlders get paid, but I’ve read before that the actual wage being paid is less than half the cost the employer pays to employ that person. The context was in regard to government mandated things running up labor costs, but I can’t recall anything specific.

So… what does make US labor so expensive? Is it true that that the actual wage isn’t the highest cost of labor? How does labor here compare to, say, most of europe in terms of cost?

[CalMeacham]

I think a lot of what drives up our wages is cost of living – it costs more to live here than in the third world. Add tp that our social security, health benefits, employers insurance, etc. There’s no way that US workers can compete with unskilled or sufficiently skilled labor from abroad. It actually makes sense to manufacture things abroad and ship them over, then sometimes even send them back for additional work, rather than to build things here. It’s also becoming cheaper to bring in foreign workers on visas. All of which I find very scary for the future of the US.

[Johnny_L.A]

No economist, I, but this is what I think.

Wages are high because of supply and demand. A company needs to hire workers. The workers need to make enough money for their needs. If a worker cannot afford to buy things, then the companies that make the things can’t sell them. If the company can’t make the thing for a price a worker can afford, then it may go out of business. If it goes out of business, then there are more people who can’t afford to buy things. So the workers demand a certain rate of pay. Skilled workers are needed for many industries. Those industries must pay a competitive wage, or else the worker will work somewhere else. The cost of doing business is passed on to consumers, who are workers who must make a certain wage to be able to consume. In this country prices are such that wages must be higher than in some other countries, since the workers (being consumers) need to be able to buy the products they want or need. Frankly it reminds me of a giant Ponzi scheme, where businesses need a constantly expanding base of consumers.

Look at it this way: If a person cannot afford a new car, then there will be fewer used cars available. If fewer used cars are available, then the price of used cars goes up. Some people have to make enough to buy a new car so that the car makers can stay in business, so that people can buy new cars, so that people who can’t afford new cars can get used ones, so that people can sell their used cars to buy new ones which keeps the car makers in business.

In third-world countries the cost of living is less, so wages are lower.

I don’t know the figure for certain, but I think I’ve heard that a company pays about 50% more than the worker gets for such things as unemployment insurance, disability insurance, etc.

[Andy]

Surely the important factor is the proportion of the cost of goods produced which is directly attributable to employment costs?
I mean it may well cost $10000 a year to employ someone, but if, eg in high tech products or very efficiently produced goods, this represents say 1% of the ‘selling price’, then that $100000 matters little.

[SenorBeef]

To clarify, I’m mostly interested in non-wage costs that go into labor, especially ones that are government mandated.

** Johnny L.A. ** said:

**
I don’t know the figure for certain, but I think I’ve heard that a company pays about 50% more than the worker gets for such things as unemployment insurance, disability insurance, etc.

**

That’s the sort of thing I’m curious about, I’m wondering if anyone knows this sort of thing in more detail, or where I could look it up.

[Hari_Seldon]

I read somewhere recently that an absurd percentage (something like 50%) of labor costs in the US go to the top few percent of employees. You may not think of the CEO as an employee (and he, or occasinally she, obviously doesn’t) but they are. In a few cases, a high price CEO actually adds value to a company, but most of the them just mine it for short term profits, leaving a hulk worth far less than what they found. And those “farmers” are not usually the most highly paid.

In the meantime, the average non-unionized worker is not making enough to support a family and his spouse has to work too, which was not the case when I was growing up. What it really amounts to is that the US dollar is badly overvalued. And it shows in the balance of payments deficit, which represents a giant interest-free loan from the rest of the world.

[Crafter_Man]

Johnny L.A. is correct. The price of labor is established in the same way as the price of a loaf of bread: supply and demand. At least for the most part. We still have minimum wage laws to deal with…:rolleyes:

[Neurotik]

Part of it is social security taxes that that business must pay. But I assume that safety standards may add to the cost, as well. Proper ergonomic equipment, or equipment that is government mandated to have lots of safety features and on which employees are legally mandated to have lots of safety training on will cost more to a business than a worker in a country with no such mandates.

[js_africanus]

American labor is more productive. In a competitive market labor is paid it’s marginal product; higher marginal product=>higher wages. This is due to education, capital, and infrastructure, IIRC. (There may be cultural factors as well; Protestant work ethic & whatnot, but I’m not going to tap dance in that minefield.)

[Balthisar]

*Originally posted by Hari Seldon *
**In the meantime, the average non-unionized worker is not making enough to support a family and his spouse has to work too, which was not the case when I was growing up. What it really amounts to is that the US dollar is badly overvalued. And it shows in the balance of payments deficit, which represents a giant interest-free loan from the rest of the world. **

Uh, can you cite this?

Granted my case is merely anecdotal, but I’m an average, non-unionized worker, and so are all of my non-union coworkers, and we do absolutely fine. My wife doesn’t work, and I specifically try to avoid all overtime so I can enjoy my family. The union guys, though, actually, uh, sometimes ensure that overtime will be required to meet production schedules. Individually it’s expected that they earn over $100,000 per year. Given that a great number of them are married to other Union workers, well, do the math. Sure, I don’t have the Arizona property, the upper-penninsula cottage, the two snowmobiles, the 52" plasma TV, the 32-foot boat, but I won’t be facing bankruptcy on a 40-hour schedule. Oh yeah, with no time to use those treasures.

I’m not complaining – the point is, what’s “support a family and spouse” really mean? Paying high-interest on needless things that should be taken into account before purchasing them? And what’s “average”? I bought my house when I made $12.80 an hour (a pittance) (and I do thank God every day I remember that I don’t make that amount now). Consider that fast food in these parts starts around $8.00/hour.

[astro]

Here’s a graph that breaks it out for US employees as to the specific wage costs (as a percentage) and these cost categories. In general for most employers it runs about 25%.

[sub]

In the West1, the cost to private industry employers for employee compensation averaged $22.82 an hour in June 2002, according to the Bureau of Labor Statistics of the U.S. Department of Labor. By region, the South had the lowest average at $19.64, while the Northeast had the highest at $25.03. June wage and salary costs per hour worked averaged $16.78 and accounted for 73.5 percent of total compensation costs in the West. Nationally, private industry wages and salaries averaged $15.90. Regionally, average wage and salary costs per hour worked were higher only in the Northeast, where they averaged $17.97. Total benefits averaged $6.05 in the West and account for 26.5 percent of all compensation costs. Among the other three regions, the cost of benefits averaged $7.06 in the Northeast, $6.00 in the Midwest, and $5.17 in the South. Nationwide, private industry benefit costs averaged $5.94.

Among the benefit categories, legally required benefits (that is, Social Security, Workers’ Compensation, and Unemployment Insurance) were the largest non-wage cost to employers averaging $1.99 per hour worked in the West and representing 8.7 percent of total compensation costs. Social security and workers’ compensation costs, at $1.40 and 45 cents, respectively, accounted for most of the cost of legally required benefits. (See chart 1 and table 1.) Among regions, workers’ compensations costs are highest in the West. Paid leave averaged $1.49 per hour in the West and represented 6.5 percent of total compensation. Vacation pay accounted for nearly half of total paid leave, while about a third went for holiday pay. Paid leave in the Northeast eclipses other regions both in terms of dollar amount and percent of total compensation. Northeast paid leave was greater than the West by 33 cents, or 22.1 percent. Insurance, including health, life, short and long term disability, averaged $1.38 per hour worked, followed by retirement and savings payments at 65 cents and supplementary pay (premium pay, shift differential and nonproduction bonuses) at 52 cents.

[/sub]

As a side note US employee wages are not unusually high for industrialized nations. Wages in industrialized nations typically reflect employee skill sets that allow the employer to be productive. Some people think that you can go to a developing (or less industrialized) nation and get highly skilled, productive labor for peanuts. It doesn’t really work that way in many cases.

Some US companies re-located to Mexico (as an example) and did well, others came back with their tail between their legs. One of the mistakes thay made is thinking that all labor will be available for peanuts. A highly skilled Mexican manufacturing executive or engineer in Mexico is not going to make all that much less than he would in the US if he is working for large company.

Attitudes toward schedules, expectations of days off, language issues and in the end simply the baseline technical skill set or aptitude you can expect from a typical factory level worker in the US vs a typical factory level employee in Mexico are often worlds apart. If there is piece work that can easily be routinized and made relatively fool proof then low cost, out of country labor can be a big plus, however, if jobs require a fair degree of baseline education and training and comprehesive skill sets you’re going to have to pay a fairly good wage, no matter where these employees are located.

[TaxGuy]

**Hari Seldon:**In a few cases, a high price CEO actually adds value to a company, but most of the them just mine it for short term profits, leaving a hulk worth far less than what they found. And those “farmers” are not usually the most highly paid.

:rolleyes: In other words, “CEOs have more money than me, so they are bad people.” Get a life (and a clue, while you’re gettin’ stuff).

[Mr.Slant]

In a former tech support job I held, I got to witness a major corporation’s accounting spreadsheets.
The benefits side of the spreadsheet was almost exactly half as expensive as the payroll side of the spreadsheet.

[Skeptico]

astro said:

One of the mistakes thay made is thinking that all labor will be available for peanuts. A highly skilled Mexican manufacturing executive or engineer in Mexico is not going to make all that much less than he would in the US if he is working for large company.

According to this article , it’s already happening (except it’s in India, not Mexico (yet)).

The basic gist is that whereas the first wave of globalization in the 80’s shipped off all the US blue collar jobs, the current trend is to send off the white collar jobs. A sort of global-labor-market-arbitrage.