Tuesday, February 05, 2008

Mandatory Sick Days?

Apparently, there’s a movement underway to force Ohio businesses with at least 25 employees to pay 7 sick days for each employee.

Sounds good on paper – as long as you don’t take more than a couple of seconds to think about the consequences, because the law of unintended consequences is what’s being proposed. Well, you also have to lay aside the notion that employers should be free to offer whatever compensation packages they feel will get good employees, and employees should be free to either accept, reject, or negotiate different terms.

Time to meet our friend, Mr. Marginal Cost, and his cousin, Mr. Barrier to Entry:

The most obvious consequence is the cost associated with hiring the 26th employee. Consider: Employees 1 through 25 have no mandated sick days. Let’s say the business has a 5 day per year policy. Once employee number 26 comes on, the business is now forced to pay for 182 sick days (26 * 7), and increase from the prior cost of 130 days (26 * 5). That’s an increase of 52 days, or 40%.

Let’s say that the business already provides for 10 holiday days (Thanksgiving, Christmas, Labor day, etc.), and 2 weeks of vacation. On an average year, that leaves 240 working days (52 * 5 = 260 – 10 (holiday) – 10 (vacation) = 240).

Hiring the additional worker now only generates roughly 60 - 65% of an additional worker-year. The business is now paying full time wages and fringes for a slightly over half time employee. That one new worker comes with a pretty steep cost curve. Consequently, they won’t be hired, or the employment mix will change to use more part time and less full time help.

Conversely, if your business employs slightly more than 26 – say 30 or so – there’s an immediate incentive to layoff those workers to get below the 26 employee threshold.

So, small businesses will be provided with extremely steep costs associated with growth. From the “big” business perspective, that’s a plus for this legislation, since it means less competition. And there’s nothing business hates more than competition (well, they do like it when their suppliers have to compete, not so much when they have to compete for customers).

From the union perspective, this has advantages as well. Smaller companies are tougher to organize – mostly because they’re small, and there are significant fixed costs associated with an organizing campaign. Additionally, with smaller companies, the ownership usually has a stronger management interest, and is more sensitive to the long run corrosive impact of unionization. Ownership and management is also usually much closer to the employee at small firms. Where everyone knows everyone else, it’s easier (at least theoretically) to manage discontent before it builds to the ‘let’s get a union’ stage. So the union interest is often synonymous with big business – keep out the competition, have only a few entities to negotiate with, and protect your share.

Hmmm, state enforced high marginal cost per employee… leads to less employment… leads to increased union agitation for more intervention… leads to another round of lower employment.

Sure sounds like a recipe for a healthy economy.