You’ve probably began wondering many years ago why everything you find in a store seems to be made in China or why we import everything from China.
The short answer.
It’s a compilation of labor laws, minimum wage, regulations, and unions that make it impossible for some products to be made here. Because of all of these things, almost everything you find in the United States is now made in China or another country that does not have problems with any of those things.
It used to be that only cheap and low end items were made overseas but because of how inefficient and restricted US businesses have become, we’ve began heavily importing even high-end electronics from over seas. A lot of businesses that used to be US based have actually closed facilities here and re-opened them in another country.
Why do these things have such an impact on business?
Simply because people are in business to make a profit. If you can’t pay the workers and have enough left over to reward the shareholders that took the risk with their investment in the first place, then there isn’t any way to make a business function without subsidies.
The United States government has started providing subsidies for farmers to keep them in business because it’s a national security risk not to have our own farms and food supply here in the United States, but that’s another time and place.
Simplified for Understanding
Let’s say we want to make pencils in America. Let’s say a typical old-fashioned pencil costs $1.50 for a pack of 10 or 15 cents per pencil (these are the ones imported from China).
In America, we register our company, we license it, and we get insurance for it. We also hire a lawyer and an accountant because our taxes and legal issues are complex in America. This adds to startup costs. Let’s say we were able to get this company off the ground for $5000. Well in China, this amount is significantly less, making it easier to start a company.
Let’s then say that we get all of our equipment (from China of course) and we setup our factory to make pencils. We lease a building and all that fun stuff.
We find out that after ordering the materials and paying for the utilities that it costs us 14 cents to make a pencil that we can sell for 15 cents. That’s a 1 cent profit per pencil. We hire on 10 employees which we have to pay at least minimum wage.
Pretending minimum wage is $7 even and they work 40 hours a week, we’ll have to pay each employee $280 a week. God forbid they are in a union because they’d be fighting to make more than that all the time and we’d have to hire someone to negotiate with the union.
In addition, we also now have to pay half their social security and medicare tax and a bunch of other fees for having employees which also adds more paperwork to both our legal and accounting team. Thankfully we don’t have more than 50 employees or we’d have to pay for medical insurance as well — thanks to Obamacare.
At 1 cent profit per pencil just to pay for employees each week this company would have to make $2800 or sell 28,000 pencils just to break even on employee compensation, not to mention, they have to make a profit for the investors, pay back start-up costs, pay for legal and accounting fees, taxes, and so much more, but we’ll leave all that out for now to keep it simple, even though business in America is not simple.
What happens if this company can only make and sell 25,000 pencils a week with ten employees? What if, due to limitations in technology that this was all the number of pencils any company could really make and sell with current technology?
The obvious answer is they wouldn’t be able to stay in business without charging more per pencil but it gets harder to sell the same pencil for more money, after all we want things as cheap as possible. You wouldn’t buy the exact same car for more money, why would you buy the same pencil for more?
But we still need pencils in America. No problem, China to the rescue!
This is where global competition comes into play and the United States loses bad…and I mean real bad. The playing field for business in America is far from even compared to other countries, a pencil company in China is able to make a profit selling the pencils for 15 cents each, where an American company has no chance of being profitable or staying in business.
Here’s the difference:
China has almost no restrictions; no child labor laws, no minimum wage, less regulation, and a lot more advantages over the United States. This means they can hire children if they’d like and pay them 15 cents a day. They can hire more employees for cheaper, which means they can continuously produce more and more, allowing them to single-handedly produce enough pencils to meet the demand in the United States.
If a worker can produce 2500 pencils a week by themselves then it results in $250 profit for the company. It costs an American factory $280 to pay that worker, but in China they could pay a worker 10 cents an hour which would cost a whopping total of $4.
Even if they gave their employees $5 an hour, it would cost the factory $200 for that worker, leaving $50 in profit for the company to continue on. Not only can they continue on but they can afford to ship all those pencils to America and the Chinese company is still profitable when an American company cannot be.
Minimum wage in America forces a lot of industries out of America. Added in are all the regulations, insurances, taxes, and more.
Imagine a few hundred years ago when you went to the local black smith in town to repair something. He didn’t have people forcing him to get insurance or pay for his employees health insurance. There was no minimum wage or taxes to be paid. This model is what made american business take off and what made our country wealthy. Now the reverse trend is happening where we are becoming less prosperous over time.
It’s only a matter of time before we are working here for 10 cents an hour and shipping our products to China.
A lot of people in America feel entitled to receive a certain pay and unfortunately, government hand outs lessen the incentive for people to work, but with unemployment so high, the minimum wage law makes no sense at all.
Wages naturally increase once maximum real employment has been reached, and this doesn’t mean overall, this means per field or similar employment.
When you run out of Doctors and they are still in demand their wages go up. If minimum wage stopped existing today in America, companies would be able to hire employees for less. Eventually everyone who wanted a job would have one, but then a magical thing happens to balance the equation. Companies keep expanding and growing because they are making a profit but now there isn’t anyone looking for a job.
So how do you get workers when there are none?
Simple! You increase wages and offer more benefits. This is what was happening in America during our industrial boom but then somewhere along the way someone decided that workers were entitled to higher wages and benefits and with a few swift laws essentially destroyed jobs in America and shipped them over seas.
Unions, Regulation, Taxes, Labor Laws
Good or bad, all of these add costs to running a business and hiring people in America, we can all agree on that point.
As long as other countries have less of these things, they will continue to beat us in the market place. I’m not going to go and say we need to get rid of these things, but we really need to reconsider how strict or high we need these things to be because it certainly puts us at a disadvantage in business for reasons you can probably already figure out.
Obviously, you’d want to lessen or get rid of the things affecting business in America, at least until everyone is employed, then you’d find an equilibrium
People like Donald Trump have suggested placing an import tax on China to level the playing field.
We won’t get into all of that in this post but you should know there are some things that can be done!
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