March 28, 2024

Economix Blog: When Cheap Foreign Labor Gets Less Cheap

CATHERINE RAMPELL

CATHERINE RAMPELL

Dollars to doughnuts.

Nick Wingfield and I had an article in Friday’s paper about how some American companies are “re-shoring” manufacturing they had previously sent abroad. The scale of these efforts is still more anecdotal than widespread at this point. Still, it’s worth examining why the United States might be a more attractive place to locate your plant today than in the past.

Cheap energy costs in the United States (thanks to shale gas extraction), concerns about keeping the supply chain close to the American consumer base, quality control issues and intellectual property concerns have all encouraged American companies to produce at least some of their products at home. But so have rising wages in some manufacturing bases abroad.

Inflation-adjusted average wages in China, for example, more than tripled over the decade from 2000 to 2010, according to a report released Friday by the International Labor Organization.

This table, taken from the report, shows that in Asia, inflation-adjusted average wages have about doubled since 2000. In Eastern Europe and Central Asia, average wages almost tripled:

 

Growth rates published as “Provisional estimates” (based on coverage of c. 75%). ** Growth rates published as “Tentative estimates” (based on coverage of c. 40%– c. 74%). *** Growth rates published but likely to change (based on coverage of less than 40%). Source: ILO Global Wage Database.


In the developed world, wages are just barely higher than they were in 2000. In the United States, other studies have shown that median household income is lower today than it was in 2000.

That does not mean that American wages are anywhere close to those in countries in East Asia or other places where American imports come from. As of 2010 (the latest year available), hourly compensation costs for manufacturing in the United States were about four times those in Taiwan, and 20 times those in the Philippines, according to the Labor Department.

But the narrowing of that wage gap does mean that the labor cost advantage some of these other countries have enjoyed is eroding a little, particularly if there are other cost-based advantages to producing in the United States (like access to cheap natural gas or being closer to your consumers).

“I’m going to sound like an economist talking here, but in a way it’s good news that U.S. wages are going down, because that’s making us more competitive year to year,” said Torsten Slok, chief international economist at Deutsche Bank Securities.

On the other hand, as wages in many developing countries rise, companies also have a big incentive to automate more of their production.

The most valuable part of each computer, a motherboard loaded with microprocessors and memory, is already largely made with robots, according to my colleague Quentin Hardy. People do things like fitting in batteries and snapping on screens.

As more robots are built, largely by other robots, “assembly can be done here as well as anywhere else,” said Rob Enderle, an analyst based in San Jose, Calif., who has been following the computer electronics industry for a quarter-century. “That will replace most of the workers, though you will need a few people to manage the robots.”

Article source: http://economix.blogs.nytimes.com/2012/12/07/when-cheap-foreign-labor-gets-less-cheap/?partner=rss&emc=rss

The Agenda: Why the Health Care Tax Credit Eludes Many Small Businesses

The Agenda

How small-business issues are shaping politics and policy.

The Agenda has now profiled three small businesses that are struggling in different ways with providing health insurance to employees. The companies are very different — they trade in very different parts of the economy, and couldn’t be located much further apart geographically — but they do have one thing in common: Though all three have fewer than 25 employees, not one has qualified for the tax credit in the Affordable Care Act that was intended to help small businesses pay for health insurance. Indeed, the credit is one element of the controversial health law that has already fallen short of expectations.

Estimates of the number of businesses eligible to take the tax credit have ranged from 1.4 million to 4 million companies, but in May, the Government Accountability Office reported that only 170,300 firms actually claimed the credit in 2010. Of these, only a small fraction, 17 percent, were able to claim the whole credit.

For eligible companies, the credit effectively refunds 35 percent of health insurance expenses between 2010 and 2013.* After 2014, the credit increases to 50 percent and is available for any two consecutive years. The credit is fully available to companies with 10 or fewer full-time employees and average wages below $25,000. It phases out as the number of employees rises to 25 and wages grow to $50,000. In 2009, there were about 4.6 million companies with fewer than 10 employees, according to the Census Bureau, and 5.7 million with fewer than 100.

The credit was aimed squarely at the smallest companies, which rarely offer health insurance to employees. However, as we reported two weeks ago, it appears not to have persuaded very many to start offering insurance. The most recent study of employer health insurance from the Kaiser Family Foundation found that just half of all companies with fewer than 10 employees offered insurance, a share that has not moved much since 2005.

So why has the credit fallen short of expectations? The G.A.O. concluded that the credit was too small to sway business owners. Moreover, it said, claiming the credit is a task so complicated as to discourage many companies from trying. Companies have to determine the number of hours each employee worked in the year, as well as compile information about their insurance premiums. “Small-business owners generally do not want to spend the time or money to gather the necessary information to calculate the credit, given that the credit will likely be insubstantial,” the report said, citing conversations with tax preparers. “Tax preparers told us it could take their clients from two to eight hours or possibly longer to gather the necessary information to calculate the credit and that the tax preparers spent, in general, three to five hours calculating the credit.”

The G.A.O. report hints at the complexity with this delicious example:

On its Web site, I.R.S. tried to reduce the burden on taxpayers by offering “3 Simple Steps” as a screening tool to help taxpayers determine whether they might be eligible for the credit. However, to calculate the actual dollars that can be claimed, the three steps become 15 calculations, 11 of which are based on seven worksheets, some of which request multiple columns of information.

It may be tempting to hold the Internal Revenue Service responsible for whatever burden accompanies the tax credit, but in this case, the complexity is written directly into the law. It turns out that legislators wrote the provision in a way that makes it appear more generous than it really is. Many businesses with both fewer than 25 employees and average wages below $50,000 are in fact unable to claim the credit.

Under the law, once such a business has calculated its potential credit, it is required to reduce the credit first to account for any excess employees over 10 and then separately reduce the potential credit to account for any excess average wages paid over $25,000. For many companies, the two reductions exceed the potential credit itself — meaning the business gets no credit.

That’s what happened to Carrie Van Dyck, who along with her husband owns the Herbfarm Restaurant outside of Seattle. Excluding its owners, the Herbfarm, which we profiled in June, employed the equivalent of about 21 or 22 full-time staff members, who were paid an average wage of about $35,000 — a few thousand dollars over the credit’s threshold for 21 employees. The result surprised Ms. Van Dyck, she said recently by e-mail, because “it would seem that we are a pretty typical small, mom-and-pop type business that this should apply to.”

Of course, by making the credit less generous, the senators who wrote the law made it less expensive to the United States Treasury. Now it is apparent that credit will be even cheaper than planned: initially it was expected to cost the Treasury $2 billion in 2010; instead it cost the government only a quarter of that.

The law also excludes owners and owners’ families from counting toward the credit, which can cut both ways. On the one hand, owners don’t count as employees and their salaries are excluded from the annual wages, exclusions that could make some companies eligible for a bigger credit than they might otherwise have gotten. On the other hand, premiums paid for the owners’ and their families’ insurance aren’t eligible for the credit, which for some companies, as You’re The Boss commenter JAB recently noted, “greatly reduces the incentive to provide coverage for employees.”

The White House has said that the number of businesses claiming the credit for 2011 has grown to at least 360,000, but that is still well below even the smallest estimate of eligible businesses. Some advocates for the law say that more businesses will take advantage of the credit in 2014, when it grows to 50 percent, especially if the new insurance exchanges make it easier and cheaper for small companies to offer insurance.

The Obama administration has proposed making more businesses eligible for the credit, in part by starting phase-outs at higher thresholds, and also by changing the way it is calculated so that every business within the limits, such as the Herbfarm Restaurant, can take some amount of credit.

But judging from the comments of Representative Sam Graves, chairman of the House Small Business Committee, the initiative is unlikely to pass a Republican-controlled House anytime soon. “This tax credit has already largely failed to attract small-business owners, and expanding it will not make the president’s health care law affordable,” the Missouri Republican said in a statement. “For small employers that do not offer health insurance, tax incentives are unlikely to cause many of them to choose a massive new expense they just cannot afford in the first place.” It was Mr. Graves who sought the G.A.O. report.

Of course, a business denied a credit has not been made worse off by the 2010 health law. But the law surely has raised and dashed a lot of hopes, and these are the early days — the sweeping changes that are the law’s hallmark don’t come until 2014.

*There are, of course, many caveats here, but the main one is that the company has to pay at least half of the premium.

Article source: http://boss.blogs.nytimes.com/2012/09/25/why-the-health-care-tax-credit-eludes-many-small-businesses/?partner=rss&emc=rss

You’re the Boss Blog: Why the Health Care Tax Credit Eludes Many Small Businesses

The Agenda

How small-business issues are shaping politics and policy.

The Agenda has now profiled three small businesses that are struggling in different ways with providing health insurance to employees. The companies are very different — they trade in very different parts of the economy, and couldn’t be located much further apart geographically — but they do have one thing in common: Though all three have fewer than 25 employees, not one has qualified for the tax credit in the Affordable Care Act that was intended to help small businesses pay for health insurance. Indeed, the credit is one element of the controversial health law that has already fallen short of expectations.

Estimates of the number of businesses eligible to take the tax credit have ranged from 1.4 million to 4 million companies, but in May, the Government Accountability Office reported that only 170,300 firms actually claimed the credit in 2010. Of these, only a small fraction, 17 percent, were able to claim the whole credit.

For eligible companies, the credit effectively refunds 35 percent of health insurance expenses between 2010 and 2013.* After 2014, the credit increases to 50 percent and is available for any two consecutive years. The credit is fully available to companies with 10 or fewer full-time employees and average wages below $25,000. It phases out as the number of employees rises to 25 and wages grow to $50,000. In 2009, there were about 4.6 million companies with fewer than 10 employees, according to the Census Bureau, and 5.7 million with fewer than 100.

The credit was aimed squarely at the smallest companies, which rarely offer health insurance to employees. However, as we reported two weeks ago, it appears not to have persuaded very many to start offering insurance. The most recent study of employer health insurance from the Kaiser Family Foundation found that just half of all companies with fewer than 10 employees offered insurance, a share that has not moved much since 2005.

So why has the credit fallen short of expectations? The G.A.O. concluded that the credit was too small to sway business owners. Moreover, it said, claiming the credit is a task so complicated as to discourage many companies from trying. Companies have to determine the number of hours each employee worked in the year, as well as compile information about their insurance premiums. “Small-business owners generally do not want to spend the time or money to gather the necessary information to calculate the credit, given that the credit will likely be insubstantial,” the report said, citing conversations with tax preparers. “Tax preparers told us it could take their clients from two to eight hours or possibly longer to gather the necessary information to calculate the credit and that the tax preparers spent, in general, three to five hours calculating the credit.”

The G.A.O. report hints at the complexity with this delicious example:

On its Web site, I.R.S. tried to reduce the burden on taxpayers by offering “3 Simple Steps” as a screening tool to help taxpayers determine whether they might be eligible for the credit. However, to calculate the actual dollars that can be claimed, the three steps become 15 calculations, 11 of which are based on seven worksheets, some of which request multiple columns of information.

It may be tempting to hold the Internal Revenue Service responsible for whatever burden accompanies the tax credit, but in this case, the complexity is written directly into the law. It turns out that legislators wrote the provision in a way that makes it appear more generous than it really is. Many businesses with both fewer than 25 employees and average wages below $50,000 are in fact unable to claim the credit.

Under the law, once such a business has calculated its potential credit, it is required to reduce the credit first to account for any excess employees over 10 and then separately reduce the potential credit to account for any excess average wages paid over $25,000. For many companies, the two reductions exceed the potential credit itself — meaning the business gets no credit.

That’s what happened to Carrie Van Dyck, who along with her husband owns the Herbfarm Restaurant outside of Seattle. Excluding its owners, the Herbfarm, which we profiled in June, employed the equivalent of about 21 or 22 full-time staff members, who were paid an average wage of about $35,000 — a few thousand dollars over the credit’s threshold for 21 employees. The result surprised Ms. Van Dyck, she said recently by e-mail, because “it would seem that we are a pretty typical small, mom-and-pop type business that this should apply to.”

Of course, by making the credit less generous, the senators who wrote the law made it less expensive to the United States Treasury. Now it is apparent that credit will be even cheaper than planned: initially it was expected to cost the Treasury $2 billion in 2010; instead it cost the government only a quarter of that.

The law also excludes owners and owners’ families from counting toward the credit, which can cut both ways. On the one hand, owners don’t count as employees and their salaries are excluded from the annual wages, exclusions that could make some companies eligible for a bigger credit than they might otherwise have gotten. On the other hand, premiums paid for the owners’ and their families’ insurance aren’t eligible for the credit, which for some companies, as You’re The Boss commenter JAB recently noted, “greatly reduces the incentive to provide coverage for employees.”

The White House has said that the number of businesses claiming the credit for 2011 has grown to at least 360,000, but that is still well below even the smallest estimate of eligible businesses. Some advocates for the law say that more businesses will take advantage of the credit in 2014, when it grows to 50 percent, especially if the new insurance exchanges make it easier and cheaper for small companies to offer insurance.

The Obama administration has proposed making more businesses eligible for the credit, in part by starting phase-outs at higher thresholds, and also by changing the way it is calculated so that every business within the limits, such as the Herbfarm Restaurant, can take some amount of credit.

But judging from the comments of Representative Sam Graves, chairman of the House Small Business Committee, the initiative is unlikely to pass a Republican-controlled House anytime soon. “This tax credit has already largely failed to attract small-business owners, and expanding it will not make the president’s health care law affordable,” the Missouri Republican said in a statement. “For small employers that do not offer health insurance, tax incentives are unlikely to cause many of them to choose a massive new expense they just cannot afford in the first place.” It was Mr. Graves who sought the G.A.O. report.

Of course, a business denied a credit has not been made worse off by the 2010 health law. But the law surely has raised and dashed a lot of hopes, and these are the early days — the sweeping changes that are the law’s hallmark don’t come until 2014.

*There are, of course, many caveats here, but the main one is that the company has to pay at least half of the premium.

Article source: http://boss.blogs.nytimes.com/2012/09/25/why-the-health-care-tax-credit-eludes-many-small-businesses/?partner=rss&emc=rss