New Research Study: Profit Per Employee Is Better Metric To Determine Business Impacts
By Americans for a Modern Economy
May 31, 2022
The free enterprise system requires a network of regulations to protect firms, consumers, and markets from the dangers of unbridled self-interest. It is no surprise that compliance with these regulations can be quite costly, especially for new and/or small businesses. In recognition of these costs and of the fundamental importance of small businesses to the American economy, virtually every regulation provides an exemption for businesses that are sufficiently small by some objective standard. Many of these exemptions are based on the number of employees in a particular business, while some are based on such things as total receipts.
Clearly, exempting certain businesses from costly regulations or requirements certainly makes sense. This is especially true in light of recent efforts to require businesses to pay their “Fair Share of Health Care” or pay costly flat-amount “Head Taxes.” The fact remains that some businesses, and especially those in highly competitive sectors, are not able to afford the high cost of compliance. But although exemptions are necessary, the variety of exemption rules currently on the books is arbitrary, inconsistent, and unfair. Given the stakes involved in such things as employer requirements to offer employee health insurance coverage and other benefits and comply with costly regulations, it is important to step back and ask the fundamental questions of whether and how to most effectively determine business exemptions from major regulations.
As a result, Americans For A Modern Economy commissioned an updated study first released in 2010 to not only examine current exemption policies and briefly describe the ad hoc nature of many of them, but also to examine potential new exemption metrics, namely assess the ability of employers to bear per-employee costs based on the profitability per that very same employee. The study, An Economic Analysis of Business Exemptions from Public Policies, finds that profits per FTE employee (henceforth, PPE) would be a superior measure of a firm’s ability to bear the burden of regulatory compliance because it simultaneously captures ability to pay and size. It is also based on data elements (profits and employment) that are regularly reported by all types of firms on annual tax forms. A focus on PPE is motivated in part by a recognition that average employment and profits per employee appear to be inversely related. Some sectors are characterized by above-average profits per employee and below-average employment, while others have low PPE and high employment.
The study provides the economic and intellectual rationale for why PPE should be equally considered as a metric in determining impacts of public policy proposals and determining potential exemption eligibility. Americans for a Modern Economy looks forward to introducing this metric into current and future policy debates important to many employers and business owners.
Study: An Economic Analysis of Business Exemptions from Public Policies