I read an interesting article today. It’s really old (about 6 months) and was originally in Hungarian but has been translated into English. It was a huge hit in Hungary, went viral, trended like crazy. Here is the link to the English version: http://andorjakab.blog.hu/2012/01/06/this_is_why_i_don_t_give_you_a_job
It starts with the bold statement: I could hire 12 people with €760 net salary, but I don’t.
This is an entrepreneur writing. His name is Andor Jakab. He talks about how it is frustrating to run a company, how difficult it is to have employees, to have them do productive work, to take responsibility for their social obligations (for example giving maternity leave for up to 3 years) and how the huge level of taxation makes his business completely uncompetitive.
Interestingly, he runs the numbers and ‘proves’ that he has to work incredibly hard (if he stays within the law) just to make a very, very modest profit.
Here is a summary of his various claims, with my commentary:
1. “I wouldn’t hire a woman, …because she is entitled to take up to 6 years off on maternity leave.”
He starts off on the wrong foot because he’s not trying to be sexist here. You wouldn’t realize that unless you read the rest of the article, though, and most of the replies he got were actually responses only to this paragraph. His point is that he is willing to go with a socially responsible policy (which is mandated by the Government) only if it doesn’t hurt his competitiveness. And he finds that hiring women does hurt his competitiveness.
2. “For similar reasons, I wouldn’t hire anyone over 50.”
Same as above. The Government tries to protect certain sections of society that it considers ‘vulnerable’, such as women and people close to retirement. He finds it unacceptable that the burden of this protection is shifted to the small entrepreneur.
3. “Even other people, the taxes I have to pay means that you only get 50% of what I spend on you.”
In fact, he shows, for people who earn more, he ends up paying a greater percentage to the Government. But if he pays too low, though his efficiency his higher, his employee morale plummets. And since there is an entitlement in Hungary for up to 1 month’s vacation, he has to hire 1 extra person for every 12, just to account for vacation.
4. “If I sold my flat for euro. 90,000, start a company, and employ 13 people, I would end up spending euro. 25,627 each month.”
This is a pretty scary calculation. So for the money he would get selling his house, he could only run his company for three and a half months! And this is just fixed costs.
5. “To break even, make a profit of 20%, and pay VAT of 25%, I would have to charge at least euro. 37 per hour for our service. At this rate, I will be able to pay myself a salary with take-home of euro. 1521 per month, and the company would have euro. 507 per month in savings. It would take me 9 years to buy back my house.”
9 years – that’s a lot! He calculates this by saying he pays rent each month, calculates how much he would have left to save, and does the math. His assumptions are reasonable. 20% profit is not bad. But 37 euro is incredibly high. In India, I could run a company offering euro. 10 per hour for low-end work, and maybe euro. 20 per hour for high-end work. Much less than him.
6. “If I did all this, I am still competing with people who don’t pay tax and therefore can charge as low as euro. 9 per hour.”
This is the bit where the epiphany sets in. All his employees need to do in order to earn a 25% higher salary than he is giving them, is to work for euro 9 per hour for 5 hours a day, but not declare taxes.
I like this article. It is angry and passionate, but more than anything else, it takes the wind from the sails of the liberal left-winger, who likes maternity leave and employee empowerment. Both of which are good, but if a Government has to provide them, the person left disproportionately holding the can is not the taxpayer but the entrepreneur.
If I had to respond to Andor Jakab, I’d tell him, services is a mug’s game in the kind of economy that you are in. You just can’t compete! What you need is scale, that dirty word that entrepreneurs hear repeated to them ad nauseum by the business folks. You can get scale in two ways: run a 100-member team instead of a 13-member team (and deal with the management problems that would cause). Or build products.
You need incredibly large profit margins to run a successful services company in most parts of the world that have high taxation. It’s only in countries like India that it makes sense. And that too, maybe, not for too long.