Small Matters: Sick-days mandate could further hurt job creation

Trying to bring awareness to the need for paid sick days, demonstrators wrapped a string of postcards around City Hall last month.
Trying to bring awareness to the need for paid sick days, demonstrators wrapped a string of postcards around City Hall last month. (ALEJANDRO A. ALVAREZ / Staff Photographer)
Posted: June 13, 2011

Not too long ago, Philadelphia undertook a campaign to keep more graduates of our many fine universities here in the area. It should be noted that people in Michigan do not keep all the cars made in Detroit. They "export" them to other states and countries in exchange for other goods and services.

Philadelphia universities clearly produce more graduates than we can use, so we "export" them. The Philadelphia region specializes in the production of drugs and graduates (among other things). It is silly to think we could keep most of them.

Graduates will stay only if there are jobs to be had. Yet Philadelphia is hostile to new business creation. The wage tax, the gross-receipts tax, the Department of Licenses and Inspections, and poor city services are just a few of the things that discourage job creation.

Now, City Council wants to put another nail in the job-creation coffin - a requirement that firms provide each employee a "paid sick days" benefit. Legislation is being drafted by Council and could face a vote this week.

For the smallest firms (under 11 employees), five paid sick days would be required. For those with 11 or more, nine paid sick days. There is no doubt that Philadelphia's workers would immediately become "sicker" if this passes. It's human nature.

For a small restaurant with 10 employees, paying $10 an hour on average, this could add up to serious dollars. Let's say it creates $7,000 in additional annual expense. To make this up, firms with, for example, a 10 percent profit margin, would need to generate $70,000 in new business to cover the increase in costs.

For the small competitive firms that provide most of our jobs, this is not chump change. Not hiring workers becomes more attractive; it is cheaper to have fewer workers working more hours, or to reduce the hours of operation.

Here are the rules of common sense (economics and business) that will shape the impact of this bill:

(1) The higher the price of anything (including labor), the less of it will be taken. This is called the Law of Demand in economics. A firm can't pay a worker more than the value he or she brings to the firm. "Pay" includes unemployment taxes, Social Security taxes, Medicare taxes, health care and other benefits, and, of course, the take-home pay.

(2) The Law of Demand applies to employees, as well. This bill would reduce the cost of taking a sick day to zero (up to the benefit limit). Just as we eat more pizza when it is free, workers will take more sick days when they are paid for by the employer.

(3) The bill would raise labor costs, especially for firms that must hire substitute workers when regular employees are out sick. These costs will have to be absorbed in a competitive market through increases in prices and/or reductions in service and product quality. In a typical year, 500,000 small firms nationally will "terminate" because they can't produce enough revenue to cover their expenses.

(4) This would also reduce employment opportunities, inducing owners to use more hours from existing workers and to reduce operating hours. This is especially true for the "11th employee." Increasing employment from 10 to 11 workers means providing nine more paid sick days.

(5) This legislation would make Philadelphia an even less attractive place to start a business, especially in the nonprofessional sector, where many of our less-skilled workers find employment. The job of a firm is to produce a valued service or product for consumers, creating jobs and wealth along the way. Forcing them to be the government's agents of social policy is detrimental to their task.

Estimating the total economic impact of such a bill is difficult, since we would need to know the benefit packages of all firms in Philadelphia and the number of employees. But reasonable approximations can be made: There are roughly 32,000 firms in Philadelphia employing about 516,000 workers, an average of about 16 workers per establishment (Pennsylvania Department of Labor & Industry, 2010 data).

More than 16,000 have fewer than five employees, and nearly 30,000 have fewer than 50 employees.

Nationally, there are about six million employer firms, and 90 percent of them have fewer than 20 employees. According to the federal Bureau of Labor Statistics, about 60 percent of the employees at these firms have some sort of sick-day benefit (this drops to around 50 percent for firms with fewer than 50 employees).

Assuming that only Philadelphia firms that currently offer no benefit would have to comply and that employees take full advantage of the benefit, costs would be about $350 million annually.

The impact on employment is difficult to estimate, but we know it would not be positive. The average cost-per-employee-hour is estimated to be 30 to 40 cents. Using studies of the impact on employment when the minimum wage is raised to estimate the impact of this increase in labor costs, it would appear that job losses would number in the thousands.

Most employers, particularly small businesses, work out employment terms with their workers. The more government dictates the terms of employment and the wage and benefits that have to be paid, the harder it is to create job opportunities and the harder it is for workers to find compensation packages they prefer.

It is difficult to quantify the damage of this bill, but the costs would be passed on to the customer in higher prices or reduced service and quality, and it certainly would not stimulate job creation.


Bill Dunkelberg is a professor of economics at Temple University and a nationally recognized expert on small business. Contact him at dunk@temple.edu.

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