Using the BSIM/PI Models to Evaluate Mandated Paid Sick Leave Programs on Small and Large Firms Prepared for the Annual REMI Users Meeting, Sante Fe, New Mexico, October 15-17, 2008 NFIB Research foundation, Washington, D.C.

Executive Summary (1). New, mandated benefit costsespecially paid sick leave-will harm small business owners, either directly or by placing costs on larger firms. Small firm owners cannot increase prices in most markets; instead they simply reduce hours, cut overtime or lose profits. New laws are stacked against small owners- they can be sued in court for not providing a mandated level of benefits.

Executive Summary (2) Communities will lose large numbers of jobs, sales and output from imposing mandated social costs on business. The BSIM/PI models demonstrate how costs can be entered into PI by firm size and then analyzed in EXCEL. After the elections, there will likely be renewed calls for new benefits to be delivered to workers through present employers and higher taxes. Is this kind of social engineering fair?

Outline Legislating Additional S/L Costs By State During a Period of Slow Growth--Wage growth vs. Benefit growth. Using BSIM/ PI to Measure Costs by Firm sizeInput Costs from Government program, including required regulations--explain assumptions Output Costs by Private Sector and Firm Size – expressed as changes in jobs, output, sales, and productivity by industry (66). Run the Model and Save Output in EXCEL; Express descriptively.

Background: In both CA and Ohio: Three-quarters of workers without paid sick leave are in seven sectors: retail trade, accommodations and food services; administrative and waste services; construction; health care; social assistance; and miscellaneous manufacturing Variance by state is low About 13 states have proposed paid sick leave programs Voluntary high turnover employees and many employed part-time: e.g., students, contract or seasonal workers, others working part-time for personal reasons

Sample Mandate(1) Employees working 30 or more hours per week are eligible for seven days of paid sick leave Leave may be used for illness of the worker, a parent, a child or adopted child under 18, or a guardian Employers violating the law may be sued civilly, including court costs, attorneys fees and interest Employers must keep written records of hours worked and leave taken

Sample Mandate(2) Firms with under 25 employees are exempt from the paid sick leave requirement An employee need only provide certification of the leave by a health care professional if the leave is more than three days at a time Use of sick leave may not be regarded as a negative factor in hiring or promotion

Cost Factors - Mandated Sick Leave Management Time: 10 hrs. annually at $75/hr. for personnel decisions related to staffing = 10 x $75 = $750* Record-keeping Time: Estimated 2 hours per employee per $35/hour (i.e., $280 for a 4-person firm = $70 x 4 = $280)** Cost of Overtime/Temporary Worker: Estimated 0.5 employee, half-time per $20 per hour = $200 per week per 5-employee firmnot directly used in modeling, but shown for illustrative purposes **The numbers above are used for illustrative purposes only. In the table on the next page, no costs are entered in the model for firms with fewer than 25 employees because they are exempt from the mandate. * Data Source: NFIB Research Foundation, National Small Business Poll, Paperwork and Record-keeping, 5 (2003), Washington, D.C.

OH Per Firm Cost of Mandated Sick Leave Firm Size$Wage Tax(1) $Owner Cost (2) $Admin Cost (3) $Over- time Cost** $Total Cost-Sum (1-3) < , ,660 10,647 14, , ,940 42,038 56, , , , ,642 All264,262 2,250 38, , ,392 ** not available without additional survey. Data shown for illustrative purposes only-see limitations section

Simulation Summary: OH. Job Change by Firm Size (1) Small firms in OH (less than 500 employees) lose an estimated 42,000 jobs (about 0.4 percent annually) from under the proposed mandate Note: Although exempt, firms with less than 25 employees experience job and financial losses, below The distribution of job loss by firm size averages: Firm %All %Job Firm %All %Job Size Jobs Loss Size Jobs Loss

OH Simulation Summary: Index of Employment Change by Firm Size Smallest Firms Lose Most New Jobs on Relative Basis, Firm Size Index* Index = Percent Jobs Lost/Percent Jobs in Base Year (2005)

Simulation Summary: Ohio Job Loss/Gain by Selected Industry, Losses: (000) 1. Food Services, Drinking Places Administrative Support Services Professional Technical Services Wholesale Trade Real Estate -5.5 Gains: (000) 1. Retail Trade (excluding Food, Drink) Ambulatory Health Care +7.2

Simulation Summary: Ohio Sales Changes (1): Ohio firms will lose an estimated $9.4 billion in sales from as a direct result of mandated leave Ohio firms (under 500 employees) lose an estimated $4.4 billion (47 percent of total loss) in sales from 2008 – 2012 Ohio small firms ( employees) lose an estimated $1.60 billion in sales, or about $72,600 per firm from Ohios smallest firms (under 10 employees) lose an estimated $810 million in sales cumulatively from ; about $6,191 in sales per firm

Limitations (1) Data on the precise amount of sick leave used by firm size is not available by state. Mandated sick leave is assumed to cost 1 percent of employee compensation, in the lower range of BLS estimates. The precise amount of sick leave that will be used under the proposed new program cannot be calculated from available data. The needed elasticity is the percentage change (increase) in sick leave usage for a given percentage change (increase) in income. Data was also not available on the precise industries requiring temporary workers to compensate for an expanded paid leave program. It is likely that some professional service firmsa computer software firm or a medical research firm for example- might be able to continue without an increase in temporary help. But a grocery store or a gourmet restaurant may have to use temporary workers. Local labor market conditions as well as necessity will determine how each small business owner makes this determination.

Limitations (2) The inclusion of overtime/temporary worker costs are a subject for future research The total costs of a mandated sick leave program - in addition to bookkeeping and record-keeping costs - include the increase in sick-leave usage among firms presently offering the benefit plus the increase in costs caused by firms newly offering the benefit Simulation models like NFIBs BSIM need accurate industry and firm size detail to produce realistic results. Firm size surveys for purposes as the present can be expensive, time-consuming and often have poor response rates.

References (1) Hanauer, Amy. Policy Matters Ohio. October Provided an estimate of sick leave provision by sector Phillips, Bruce D. Mandated Sick Leave in Ohio-An Unaffordable Idea, Draft, NFIB Research Foundation, January 2008 Phillips, Bruce D. The Economic Costs of Expanding the Family and Medical Leave Act. To Small Business: Well Intended Public Policy May Have Some Unintended Consequences. Business Economics, April 2002 Regional Economic Models Inc, Amherst Mass. BSIM Model Version 3.5, June 2008

References(2) Sloan Work and Family Research Network, Boston College, Policy Briefing Series, Work-Family Information for State Legislators. 2008, Issue 13 State of Ohio, The Healthy Families Act. Bill Submitted to the General Assembly, March 29, U.S. Small Business Administration, Office of Advocacy, Washington, D.C., U.S. Department of Labor, Bureau of Labor Statistics, Employer Cost of Employee Compensation. December