How the US government incentivizes businesses to invest in robots over people

Most “future of employment” discussions are about robots replacing people due to technology. As the prevailing logic goes, the robots are coming whether we like it or not, employment will suffer, and the only question is how we’re gonna deal with it. What I think gets overlooked is that government policy is driving this trend just as much as the smarties over in Silicon Valley. Why? Because government policy makes hiring people more expensive than it should be. Depending on where you work, your employer is likely paying 18–50% of your salary to the government or insurance agencies in addition to your salary. If you make $60,000 a year, your employer is paying $70,000 to $86,000 a year to keep you employed. The extra costs come from three buckets: health insurance, payroll taxes, and workers compensation.

Healthcare insurance. This is the big one. 55% of all Americans, and 71% of Americans with jobs, get their health insurance through their employer (or parents’ employer). Most businesses who offer health insurance subsidize it in some way, because a) it’s expensive and b) they’re expected to. Here’s the total monthly cost of health insurance, for the cheapest option possible, in New York City.

Even if you switched healthcare providers 3 times in 3 years (and my company did), you’re still paying $100 — $300 more a month in 2018 than in 2016 (and not switching would incur another ~$200/month on top of that).

Employers pay, on average, 83% of the premium for individuals and 72% of the premium for families. For an employee who doesn’t have a spouse or kids and who doesn’t have significant medical needs, that’s $4,748 / year. For an employee with a family without serious medical needs, that’s $11,740 / year.

Payroll Taxes. The “payroll tax” is actually a bundle of taxes, imposed by state and federal authorities, paid by employees and employers. While payroll taxes vary based on state and salary level, here’s what gets taken out of the paycheck of someone in New York City making $60,000 / year. On the employer side, it comes out to 10% of the paycheck.

* Withholding tax, besides being dependent on salary like all the other taxes, is also dependent on the number of withholdings you claim on your tax return. As a result I’ve just included what gets taken out of my paycheck for reference. I’m single with no dependents.

On the employee side, it’s 16%, which is a decent chunk. In fact two thirds of US households pay more payroll tax than income tax. Mitt Romney’s statement about 47% of Americans not paying taxes was only referring to income taxes, not payroll taxes.

Workers Compensation. Every job in the US falls under a workers compensation code that has a corresponding tax to it for every $100 you get paid. The tax is based on workplace injury rates, so office workers have low fees and construction workers have high fees. For example, for every $100 earned by a ”clerical office employee,” the New York State Insurance Fund charges employers $0.12 (technically it’s 20 cents with a 40% discount applied in the final tally). For electricians, it charges $5.00. For carpenters, it charges $13.16, or 13% of their employees’ salary. Put another way, employers who build things pay ~110x more in workers compensation than they would if they were Facebook.

One benefit to this scheme is that employers are incentivized to keep employees safe. Companies with track records of injury have higher rates than those who don’t. Take a look at a salad processing plant.

For bagging lettuce, why are people wearing hard hats, insulated gloves, hair nets, mouth guards, coats (which were sanitized the night before), steel toed boots (not shown), and cinched arm bands to cover the nexus of coat and gloves? Partly for food safety reasons, but also due to workers compensation. By wearing all this personal protective equipment, the employer can save on their workers compensation premium when they get audited.

Some companies take it a step further. There’s a whole industry called “professional employer organizations” (PEOs) that will employ your employees and then lease them back to you. Employees are paid by the PEOs and the operating company cuts a check to the PEO to cover employee costs. Companies do this because the PEO can shave a half percentage point off of workers compensation costs by combining employees from multiple companies. Insurance costs, in other words, are changing how entire companies structure themselves.

As an aside, because workers comp is tied to pay, workers comp also discourages paying construction workers (or anyone doing risky work) well, but that’s another rant…

Adding it up.

Clearly the cost per employee depends on a lot of factors, but let’s take two archetypes. Archetype one is a construction worker with a family making $60,000 a year. Archetype two is a single person who works in an office, also making $60,000 a year. Both are on their employer’s bronze health insurance plan, which the employer contributes the average amount to (83% for individual plans, 72% for family plans). Both live in NYC.

How much does it cost the employer to employ them?

So the employer is paying 43% more than the construction worker’s salary to employ him/her and 18% more for the office worker. If we added in higher coverage for better healthcare, both numbers would be a few percentage points higher.

What this means.

In short, we tax labor more than we do robots. The labor tax comes in at 18% — 43%, while purchasing robots and equipment get a sales tax of 8.875% in New York City. And if you spend less than $2 million on equipment (i.e. you’re a small to medium sized business), this equipment expense is tax deductible. In short, labor is way more expensive than robots.

The upside to this is that businesses invest in productivity which theoretically should raise employees’ wages. And we are indeed more productive than other countries:

The downside is that productivity increases aren’t leading to real wage increases. Real wages have been stagnant since the 1970s. As a result, taxing labor at 18–43% means we’re shooting our labor market in the foot here. I mean no shit employers opt for robots — the robots don’t even have to be that good when people are so much more expensive. I have no problem incentivizing productivity, but not by taking money out of the salaries of people we’re trying to help in the first place. If we want to improve employment and wages in the US, lowering healthcare, payroll, and workers compensation costs are the most direct ways to do that.

And just one last chart for fun…