The Silver Lining within Rising Jobless Numbers

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Last Thursday's news of yet another increase in the national rate of unemployment was predictably met with quite a few downcast headlines. The Wall Street Journal led with "Rising Job Losses Damp Hopes of Recovery", while top Pimco investment strategist Mohamed El-Erian penned a piece for the Financial Times titled "American jobs data are worse than we think."

In times like these it's hard to minimize the pain felt by many Americans. For those who are jobless, every day they're out of work likely combines humiliation with fear that nothing will materialize. And for those lucky enough to be working, each day likely begins with perilous thoughts of an axe that is soon to fall. Still, as with everything in life, there are positive tradeoffs to our present economic difficulties.

For one, it has to be remembered that successful companies remain on top by virtue of destroying jobs.  They attract investment not because they create jobs, but because they seek profit. Contrary to bipartisan blabbering among politicians about job-creating companies, the best ones regularly figure out how to do more with less.

Indeed, one reason Wal-Mart is able to pay its retail workers somewhat low wages has to do with the fact that it pays technologists handsome salaries to create inventory management and self-service checkout stands that make the retail aspect of its operations relatively prosaic. No doubt Wal-Mart has destroyed some low-wage jobs in the process, but high paying positions were created that generated the kind of productive gains that will lead to a greater number of Wal-Marts offering lower prices to more and more Americans.

But far from a job killer in total, the firms that figure out how to produce more with less regularly attract the kind of capital that enables them to enter new lines of business that will require the hiring of new workers. In that sense, it should first be said that the shedding of workers among large companies - if done correctly - will pay long-term dividends as their prospects improve and they seek to expand. Looking at Wal-Mart yet again, its success in general retail has enabled it to enter into other lines of business - including movies, music and groceries - that has and will create new positions that will need to be filled.

What's also exciting about the above is that when consumers are effectively given a raise due to leaner operations on the part of retailers, the monies saved hardly lie in wait. Instead, when consumers are able to save more of what they earn those funds are then lent to hiring businesses eager to grow.

It also has to be remembered that one company's laid off worker represents another firm's opportunity to expand on the relative cheap. Last week the Wall Street Journal reported that Mollie Culligan, founder of handbag and leather-accessories maker Jack Rabbit Collection LLC, "was able to snag a large rival's design development executive after that person was laid off." Going back further in time, Michael Bloomberg being let go by Salomon Brothers likely showed up in jobless statistics at the time, but it's also true that his creation of the eponymous Bloomberg LP led to the creation of exponentially more jobs.

The Culligan and Bloomberg stories reveal an economic reality that belies the coverage from the Wall Street Journal suggesting that rising rates of unemployment point to an even bleaker future. More realistically, the rising jobless claims foretell a strong economic turnaround as companies small and large essentially get to purchase top-quality labor at fire-sale prices. Lest we forget, the last time unemployment hit these nosebleed levels was 1982, ahead of one of the longest economic booms in modern history.

Furthermore, when we read in the newspapers about unemployment falling by 467,000 jobs - as we did last week - it's important to look past the headline numbers. For one, it can't be stressed enough that productive companies regularly shed jobs. Figure the personal computer is arguably the greatest job killer in the history of man, but the productive gains it wrought have created all manner of new and better paying lines of work that we all enjoy and benefit from.

More important given the painful uncertainty we all presently face is the reality spelled out by economists Clair Brown, John Haltiwanger and Julie Lane in their 2006 book Economic Turbulence. In it, they observe that "In any given quarter, about one in four job matches either begins or ends, one in thirteen jobs is either created or destroyed, and one in twenty establishments closes or is born."

Politicians, and in particular presidents, regularly talk about the number of jobs created on their watch. This is good political theatre for sure, but what they rarely note is the broader truth that jobs are created and destroyed all the time, with job growth itself most frequently the result of the number of labor-force entrants. What goes unmentioned is how many jobs were destroyed in order to create new ones, but as the Cato Institute's Brink Lindsey observed in a 2004 paper, from 1993 to 2002 "a breath-taking total of 327.7 million jobs were added, while 309.9 million jobs were lost. In other words, for every one new net private-sector job created during that period, 18.4 gross job additions had to offset 17.4 gross job losses."

When reporters cite headline numbers as evidence of job loss, what they leave out is how frequently what is termed "job loss" really involves workers switching jobs. Readers can expect to read a lot in the coming months about mass layoffs and plant closings, but as Brown, Haltiwanger and Lane remind us, "workers anticipating business failure may leave before the business fails." More simply, we can count on a great deal of stories chronicling the decline of all manner of businesses, but we won't read about the many Americans who moved on well ahead of same.

Most important is the basic truth that jobs are the easy part. If we wanted more of them that could be accomplished with ease through abolition of labor-saving devices such as the personal computer on which this article is being read. The computer's demolition would create all sorts of work, but it would do so at the expense of productivity.

And that's what's being forgotten amid all the understandable discomfort over job loss. Without capital, there are no wages. The pain that results from mass layoffs by definition forces companies to be more productive in ways that will attract capital for future growth and hiring. Hard as it is for politicians to do, they must let this natural cleansing process run its course free of bailouts and other alleged forms of "stimulus" that ensure a weaker recovery.

Indeed, if politicians and establishment economists would simply leave the economy alone, today's painful stories of failure and unemployment would morph into tomorrow's stories of economic rebirth. In short, the silver lining of job loss is future job creation; that is, if Washington sits back and does absolutely nothing.

 

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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