The Fallacious Notion of Job Creation

"any country can have heavy unemployment if it is willing and able to pay for it." - Benjamin Anderson, Economics and the Public Welfare

With unemployment presently on an upward tilt, politicians on both sides of the aisle have unsurprisingly made job creation their number one priority. It’s almost a tautology that politicians can’t create jobs, but this reality has not deterred them.

President Obama has pointed to a near trillion dollar stimulus program as the path to creating over 3 million new jobs, while House minority leader John Boehner has tied past Republican opposition to Obama’s plan because it would create too few jobs.

But when considering work, it should first be said that it always exists wherever there are people. Given the basic human need for the necessities of life, absent an ability to draw on the gains or productivity of others, people must necessarily work in order to consume.

In that sense the word “unemployment” is a logical falsehood. Individuals aren’t so much out of work because there are no jobs as they’re unemployed for failing to supply their labor at the going market rate. Better yet, people are frequently unemployed owing to the belief that available jobs aren’t worth their time, or worthy of their skill set.

One certain way to foment a rush into new employment would be for politicians to abolish welfare and other forms of employment insurance. Both are anti-work because they make it easier for the unemployed to stay on the sidelines. Without financial backstops provided by the government, the need for employment would become far more pressing and many new workers would be added to payrolls. The work of politicians with regard to job creation would be done.

And for those who buy into the illogicality that unemployment results from too many people chasing too few jobs, one way for legislators to create more would involve them simply outlawing productivity enhancements such as the ATM or the tractor. If so, millions of new jobs would quickly materialize. Jobs themselves are the easy part because if that which makes us more efficient is abolished, lots of new work is created.

To this day drivers in New Jersey and Oregon are not permitted to pump their own gas. Even though the majority of Americans today drive up to the self-service bay at filling stations nationwide, in these two states “self-serve” at gas stations is against the law. As a result, a lot of their residents are employed at gas stations.

Years ago politicians in France abolished the 40-hour work week as a job creation measure. At first such a measure might have seemed a winner for new work popping up that was previously completed by a lower number of laborers. But despite this legislation, the measured rate of unemployment did not drop.

Indeed, the problem with these public policies is that they fail to acknowledge the role of capital when it comes to job creation. Adam Smith observed in the Wealth of Nations that money “cannot long remain in any country in which the value of the annual produce diminishes.” Simplified, without capital there are no wages. And if rules meant to lower worker productivity are put in place, wage-enhancing capital that is mobile will go elsewhere.

This is important when we consider some of the solutions that are presently being floated in Washington to fix our economy. As has been shown by the Cato Institute's Alan Reynolds in the Wall Street Journal, part of the Obama stimulus plan involves the government spending $214.5 billion in order to create 330,400 government jobs.

Sadly, however, that’s only the seen. The unseen in this equation has to do with the government effectively taking over 300,000 potentially productive workers from the private sector in order to place them in unproductive work created by the government. In this case the private economy loses the human capital that might work in productive ways if not employed by the federal government.

And in order to make existing jobs more secure, there's been discussion about attaching “Buy America” provisions to spending bills. This will principally apply to infrastructure projects, and firms that receive government contracts will be required to buy materials from U.S.-based companies.

At first glance it’s easy to see the major problem here, and it’s one that does not bode well for all-important job creation. Simply put, we can’t be sellers if we’re not buyers. So if we subsidize American companies at the expense of their foreign competitors, we’ll be impoverishing some important customers. And if our trading partners are hurt by our unproductive obsession with job creation, any gains made through “Buy America” will be lost thanks to lower demand for our goods overseas.

Worse, and this is where capital comes into the equation, if government largess essentially supports stateside work that could be done overseas, the investment necessary to pay workers in the U.S. will dry up. Much as government jobs frequently misuse what is limited human capital, so do employment subsidies place workers in the wrong kind of employment that repels capital.

Where jobs and wages are concerned, the only sure path to wage gains involves a process whereby industrious individuals constantly enhance their work output in ways that attract capital. More to the point, capital seeks out industrious workers, and when government programs subsidize work that could be done better by others, this eventually shows up in a falling prevailing wage.

The paradoxical truth is that the best way for companies to create new jobs is for them to shed the ones that over time prove superfluous. It can’t be stressed enough that jobs themselves are not output. Instead, it is when businesses are operating most efficiently that investors supply the very capital that funds the creation of new jobs to replace those made obsolete. Absent this essential process there will still be jobs for those who desire work, but the work will surely pay less.