By Chuck DeVore
Every month U.S. employers hire nearly 2.5 million new workers as they start new businesses or expand existing ones. But about 2.2 million workers are also laid off, quit or retire, according to the U.S. Bureau of Labor Statistics.
This churning of employees being hired and separated is a good thing for the economy, even if it can be unsettling or disruptive for individuals surprised at being let go. It’s good because it results in a more efficient use of labor, as businesses that need more help hire people while businesses that fail to effectively compete—in many cases because they are inefficient in the use of their resources—either go out of business or lay off their workers.
As China is finding out, keeping workers employed at obsolete or unneeded factories is a drag on the economy.
Further, with today’s strong economy, boosted by the tax cuts President Trump signed into law almost a year ago, combined with his administration’s sustained effort to roll back costly red tape, the job market is hot, giving Americans the freedom and confidence to look for employment that better suits their aspirations.
That America still produces entrepreneurs and small business people willing to take a risk to supply goods and services can be seen in the government’s “Private sector establishment births and deaths” data. This report shows that every month, people take the initiative to start 250,000 businesses, hiring as many as 850,000 workers—on average, that’s a business with an owner and two employees.
Unfortunately, government actions, including taxes, regulations, labor law and land use restrictions, all contribute to decisions people make as to whether to open a business, expand an existing one, or call it quits.
The astute French observer of America, Alexis de Tocqueville, saw this “network of small complicated rules…” as a danger to the entrepreneurial spirit , warning that it would reduce citizens to sheep with the government their “shepherd.”
In California’s case, the regulatory compliance burden on small business was estimated to be about $134,000 per year a decade ago, not including taxes.
But large businesses are affected as well. They generally hire regulatory compliance specialists (often lawyers) to keep them out of trouble with bureaucrats who can fine them or threaten to put them in jail. But they also have an added layer of federal, state and local rules that they must follow.
An example of a law that applies to big business is the WARN Act. The Worker Adjustment and Retraining Notification Act (WARN) was passed by Congress in 1988 after the Democrats took control of the Senate in the 1986 elections and thus controlled both houses of Congress. The bill passed into law without President Reagan’s signature. With exceptions, the WARN Act applies to companies with more than 100 employees, requiring them to give 60 days’ notification for permanent layoffs. The penalty for violating the WARN Act is making back pay and benefits to the laid-off employees for the period of the violation, up to 60 days.
Many states have their own versions of federal law, and in many cases, applying a more stringent standard. California’s version of the WARN Act applies to companies with 75 employees, rather than 100, and includes part-time employees as counting towards the total. The most recent California WARN Act report for fiscal year 2018 showed 644 notices affecting 59,192 employees. Over the same period, a total of about 3.6 million Californians were either fired, quit or retired, so the WARN Act provided notice to 1.6% of workers who lost employment in California.
Several of California’s WARN Act notices were filed to announce the layoffs of only one or two employees. This is likely not what the authors of the law intended, but it nevertheless costs money to comply with, resulting in the employment of more lawyers and compliance staff and fewer workers. The largest layoff notices from July 1, 2017 to June 30, 2018 were for 964 Oracle employees in Santa Clara, 1,330 Centerplate employees in San Francisco, 1,975 Seneca Foods Corporation employees in Modesto, and 1,231 Qualcomm employees in San Diego.
In some cases, WARN Act notices trigger public statements from elected officials. This was likely seen as a feature of the law, not a bug, as it benefits politicians, not workers—there is little most individual legislators can do to fundamentally change business decisions and the unyielding math of a corporate balance sheet.
This was seen recently when United Technologies Corp. (UTC) announced plans to lay off about 300 workers from its Chula Vista manufacturing facility near San Diego. The International Association of Machinists labor union complained to their federal representatives and soon local Congressmen Juan Vargas (D-Chula Vista) and Scott Peters (D-San Diego), as well as U.S. Senators Dianne Feinstein and Kamala Harris, were pressuring the company, an aerospace and defense contractor, to reconsider the action.
UTC wants to close the factory by 2020. It has turned out aircraft engine components since 1940.
U.S. Representatives Vargas and Peters noted in a letter to UTC Aerospace Systems President David Gitlin that the company website says that it serves one of the “fastest growing industries on the planet” and that UTC’s statement about the strong market conflicts “with the decision to the decision to eliminate hundreds of production jobs.”
The machinists union claims that UTC is moving its work to Mexico to take advantage of cheaper wages.
But UTC officials instead say that the layoffs are due to the winding down of several old aircraft programs and that they are encouraging employees to apply for other positions within the company at other locations.
Regardless, the intervention of two U.S. House members and two U.S. Senators, all four of whom voted against last year’s federal tax cut, is ironic in the face of their pleas to keep a 78-year-old factory open. Reducing taxes and trimming regulatory burdens would do far more than sternly worded letters to encourage UTC and other businesses, both larger and smaller, to expand or even start up.
Instead of increasing government’s load on employers, elected representatives should first ask themselves “How will my words, actions and legislation affect the decisions that create hundreds of thousands of businesses and millions of jobs every month?”