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Hire, Outsource, or Automate?
The finalized updated thresholds for the Fair Labor Standards Act (FLSA) rules governing overtime were announced this week. On net, they are only slightly less damaging than was rumored last year, and — true to form with this administration — they are set to take effect December 1, 2016, less than two months before President Obama leaves office. Consider them a parting shot at any successor who, thanks in no small part to the many state and local pushes to raise the minimum wage, will doubtless have to deal with even more anemic employment.
The new rules state that anyone with a gross annual income under $47,476 from a particular job, whether considered management or not, must now be treated as an hourly worker and be paid overtime for any work over 40 hours a week. Further, the new rules automatically ratchet every three years, to make sure that at least 40 percent of all workers are always hourly. The Department Of Labor claims that this will somehow add $12 million into the economy per year (a paltry amount), but ignores how any gains will likely be eaten in added administrative costs for every business out there. This act will likely not add any jobs to the economy and, in fact, provide even more justification for businesses to automate everything they can. They have certainly made my decision to add more automation that much clearer.
As I have previously discussed, I manufacture electronics. Given the growth we have had in sales over the prior couple of years, the Surface Mount (SMT) line we put in four years ago is approaching its capacity. Right now, we only run a single shift. To alleviate our capacity problems we have four options:
- Hire a second-shift crew to keep the line running another eight hours per day. This means adding three additional people: a line operator, a shift manager (you always need a manager present), and a third person to assist (best to have at least three people always around, for security reasons). Factoring in gross salaries, benefits, payroll taxes, insurance, and utilities (keeping the lights on), this would cost my business anywhere from $150,000 to $180,000 extra per year.
- Scheduling overtime would cost only slightly less than hiring a second crew, as I would not have to pay for additional benefits, but a four hour shift at time-and-a-half costs the same as eight hour shifts at net.
- Outsourcing to local contractors has its own issues, particularly as it requires keeping a larger inventory on hand to cover lead teams from contractors, and quality control is one-step removed. There is also the issue of increased costs as, right now, all costs are captured internally and I’m not paying for someone else’s price markups. In essence, the costs would be about the same as adding a second shift, or running overtime.
- Adding additional capacity to the SMT line. Even adding a single extra machine would effectively double throughput, and that machine can be had for $150k, the same price as adding a second shift, or running overtime, or outsourcing.
I run a small business. Counting the owners, there are 15 people working here so, if I do not hire anyone, that’s only three jobs never created. But how many other small businesses are out there? Thousands? Tens of thousands? How many of them are making the same calculations I am? How many other small businesses will see the FLSA updates as just 1 more reason to avoid hiring?
It is a basic principle of micro-economics that, when the costs of a good or service go up, the demand will go down by some amount. The Obama administration has raised employment costs again and again these last seven years, sometimes through major legislation (Dodd-Frank, Obamacare), but more often through rule-making edicts like this and picayune legal harassments. Is it any wonder our economy still seems so bleak? Is it any wonder that middle-class jobs are scarce? Edicts like the latest FLSA ruling just keep piling on the reasons for business to avoid hiring, and automate everything they can.
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I find myself in the exact same conundrum.
People who don’t understand how money works and/or have never run a business (i.e. Democrats) shouldn’t be allowed to meddle in this manner.
I’ve come to the conclusion that Democrats are actively trying to push people out of the workforce and onto welfare so they remain reliable votes for the Democratic Party.
Add to the automated equipment. 12 hour shifts are just going to be more errors. Sourcing out is a bunch of headaches. More employees is more headaches–it looks like the new guys are going to come with a heavy training cost, right? All three of the human solutions also come with the risk of the cost going up drastically. Whoever gets elected could easily drive health care benefits up even worse. The price of the machine is known, and fixed.
Does the machine cost 150K per year, or as a one time investment, plus upkeep?
Because unless your machines become outdated very quickly, I’d think the answer is obvious.
$150k, one time. In other words, compared to hiring, the machine pays for itself in 12 months, which is an easy justification. Heck, it’s usually considered worthwhile if a capital investment pays for itself in 3 years, so this is a comparative bargain.
Automate. In all things automate. Besides, if you add the new machine you can make more money through a capital investment that will pay off quickly. You can then pay your current employees more and they can pass on the economic prosperity to other.
Aren’t the overtime rules covered under statute law? Is this another Obama ruling without the consent of Congress? If so, Trump should have the guts to tell businesses that on January 20, 2017, the rules are invalid. Try to get the bureaucracy to prosecute or fine companies at that point.
All it takes is one honest judge to put a hold on implementation or to rule against this monstrosity.
I hate to nit-pick here but the principle is that the quantity demanded falls whereas the demand relationship between price and quantity doesn’t change.
Sorry, but I taught 101 at the college level and my knee jerks out on this subject.
As a perpetual loaner and general misanthrope I approve.
Sounds like you can add the additional SMT machine without need for any additional employees to tend it…I’m curious how this scales up…could you for example add 2 additional machines with no additional people? 3?
Hate to be overly pedantic, but all you are saying is that as the price rises, demand declines along the demand curve versus the demand curve shifting down.
The statement that as price rises, demand falls is still an accurate statement.
One person could easily run4 or 6 machines, depending on the setup.
Right. Skipsul specified an increase in manufacturing costs which is a leftward shift of supply and a movement along the demand curve. Quantity demanded falls and “demand”, the demand curve, doesn’t change.
Edit: to further belabor the point my objection is using the term demand interchangeably with quantity demanded. I understand why people do it and it’s not unreasonable but in the precise language of Economics it’s technically incorrect.
I wish that were true of programmers :/
Floppy is technically correct. The best kind of correct.
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Caption: “Ricochet…”
Automate all the way. I think society is going to have some long term problems from the way we’re systemically strangling all possible entry level jobs, but I don’t think that makes my top five for existential worries.
Also, on a personal level, automate automate automate. You’re always gonna need people who know how to fix those things, and that’s a thing I can do. Don’t know what the rest of y’all are gonna do for a living, but I intend on gettin’ mine.
I know a UAW machine shop that prints money. They are so thoroughly automated that the output per employee is orders of magnitude higher than it was a decade ago.
How much do you think your employees would cost without regulations?
Don’t forget to give proper acknowledgement to the following Republican senators who voted for cloture so Thomas Perez’s nomination could come to a vote:
Lamar Alexander (Tennessee)
Bob Corker (Tennessee)
Susan Collins (Maine)
Mark Kirk (Illinois)
John McCain (Arizona)
Lisa Murkowski (Alaska)
To be perfectly crass, I’d say my job is pretty safe. Bad parenting ain’t going anywhere, and as government entitlements increase, so seemingly does substance abuse and irresponsible behavior.
I’d be happy to see a revival of morality that makes me unemployed, but I’m not betting on it.
Does anyone besides me read Coyote Blog? He runs a small business (managing private campgrounds that operate on public lands), and he frequently posts about his frustrations with how much of his time is increasingly taken up with complying with government regulations, not just on the federal level, but state as well. I think he has, or is about to, give up operating in California altogether, for all the grief he has received trying to comply with regulations there. Some of the posts are highly specific as to the problems and are quite interesting. I recommend it.
There are several jokes just hanging there, waiting to be plucked.
Tough to say exactly, but definitely less. For instance, if I did not have to have a member of management (as defined by the FLSA) on duty (which, by law, you have to), that would be only 2 people running the line. Without Obamacare and the benefits mandates, I could offer less comprehensive insurance that would save me anywhere from $6000 to $12000 per year per employee. Better still, were hiring itself not so risky a proposition, I could hire utter rookies at entry-level rates, and train them to do the work without worrying so much about the risks of firing them if things didn’t work out (risks including lawsuits, especially if female, a minority, or member of another protected class, and a worsening unemployment tax rating).
And somebody to program them… that’s me!
I don’t read him, but when you mention operating in the state of California…
Going off topic briefly, do you program PLCs directly or do you work on a slightly more abstracted level?