The Fallacy Of “Creating Jobs”

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If you read the financial news or listen to anyone talk about the state of the economy, you almost certainly have heard about the virtues of “job creation”. Politicians are always talking about how many jobs this or that program they’ve spearheaded has created. The Bureau of Labor Statistics will release data saying that the economy added several hundred thousand jobs in the past month.

The way the term “job” is bandied around these days creates the impression that a job is a product, like a car or a computer. There is a perception that by pushing the right levers and dials, government policy can “create jobs” – the same way that a car company can produce a car. This ridiculous and false perception is responsible for numerous popular economic fallacies.

 

What Is A Job?

While it may seem like a silly question, it is important to pin down what exactly a job is. More importantly, why do we even want jobs?

A job is any arrangement where an employer agrees to provide some remuneration for a service provided by an employee. In other words, a job is just an interpersonal relation where someone is paying someone else to perform a task. In the case of entrepreneurs or the self-employed, the employee and employer can be the same person. Here is a definition provided by Adam Stover:

“A job is a voluntary contract between two parties, a capitalist and a laborer, to perform a service for an agreed-upon wage. This allows the capitalist or entrepreneur to take the risk of fronting the money to develop and make a product while the laborer assumes no risk and is paid regardless of profit or loss. A capitalist is a slave to the price structure in the economy, and these dictate whether she can turn a profit. The capitalist is speculating that his or her product will fetch a profit on the free market by satisfying consumer wants.”

This definition is important. From an individual perspective, the employee doesn’t care so much what they are doing so long as they get paid. Obviously people have preferences, such as preferring to work in one industry over another. What I mean is that the individual employee doesn’t determine what aspect of their work is important. It is up to the employer to decide where their employees’ efforts should be put to use on task X or task Y.

Let’s say a construction company hires some employees to do some digging. From the employees’ perspectives, it doesn’t matter whether they are directed to dig holes and fill them back up, or whether they should dig out a foundation for a building. They are paid to perform a task, and they are still doing their job.

But from the employer’s perspective, there is a very big difference between telling their employees to dig holes to fill back up or to perform meaningful work towards constructing a building. The goal of the employer is to maximize profits, and chances are good that their clients are interested in having them make a building, not to spin their wheels digging holes.

There is another critically important thing to consider in this analysis. Imagine that instead of a construction company in a complex, modern economy, we have an individual who has washed ashore on a deserted island. This Robinson Crusoe needs to “get a job” on the island. But he doesn’t work just in order to fill his time; he needs to transform the resources around him into things he can use to survive. For instance, he needs to build a shelter, catch fish, and so on.

In this case, you can see how the “employee” would in fact care about what he was doing for his job. He could still just dig holes and fill them back up, but what would that accomplish? It would be a waste of time and energy. It is important that Crusoe’s time and energy be used as efficiently as possible so that he can survive and perhaps even live comfortably.

And that’s the key point that is missing from the mainstream discussion of jobs. Reducing unemployment and “creating jobs” for as many people as possible is entirely beside the point. Hell, the Soviet Union boasted of having an unemployment rate of 0%! Clearly, the hullabaloo about jobs is at least partially misplaced.

What would happen if everyone were “employed” without actually producing? Keynes (in a different context) and his followers have legitimately suggested burying money in the ground and employing people by having them dig for it (or worse, digging holes and filling them back up; or worse than that, Paul Krugman’s suggestion of responding to a fake alien invasion). But obviously, if this were what people were doing, they wouldn’t be producing anything meaningful, and it isn’t economically justified.

Jobs are not what matter; the production of real wealth is. Jobs are a means to an end, not an end in and of themselves.

 

Unemployment And Unemployment Statistics

In a pure free market, there could be 0% involuntary unemployment. Other than people who choose to leave their jobs or to hold out working for higher pay, everyone would have a job.

There is always work to be done. So long as we live in a world of scarcity (certainly for the foreseeable future!), there will always be steps that people can take to improve their lives and reduce any perceived uneasiness. Therefore, were it not for some tiny percentage of people who are voluntarily unemployed, the unemployment rate in a free market should be zero.

As such, we can reasonably view the unemployment rate as a kind of measure of government failure – due to various policies instituted by government (which we will go into in more detail below), people who would otherwise be gainfully employed are now unable to find work. There is a disconnect between those offering jobs and those seeking them, and somehow government policy is getting in the way. The government and their statisticians have a very strong incentive to keep this number as low as possible.

Unfortunately, that means that the unemployment rate is a number that is used more for propaganda purposes than to convey accurate information about the state of the market. Bold claim, yes, but hear me out. Even Jim Clifton, CEO of Gallup, agrees.

There are a couple of ways the unemployment numbers and employment numbers/job reports are doctored or used in order to make the economic picture look rosier than reality. The two most important ways these numbers are misleading are:

  • The reported unemployment number does not include workers who are “discouraged”, in that they have given up looking for a job for whatever reason.
  • The number of jobs reported are aggregated, and thus the composition of the jobs is not emphasized despite being equally if not more important.

We’ll look at each of these in turn, but let’s start with the methodology for computing the unemployment rate. The rate that is normally reported is called the U-3 rate, but there are other measures as well, including the far more relevant U-6, which includes discouraged and marginally attached workers. This means that the U-6 is both a better representation of the actual state of the economy and it is significantly less optimistic.

John Williams of ShadowStats has a good overview of the methodology used in these job reports. He says:

“Up until the Clinton administration, a discouraged worker was one who was willing, able and ready to work but had given up looking because there were no jobs to be had. The Clinton administration dismissed to the non-reporting netherworld about five million discouraged workers who had been so categorized for more than a year.”

In other words, huge numbers of people who had previously been considered unemployed suddenly disappeared. As soon as you’ve given up and haven’t actively looked for work in the previous four weeks, you are no longer considered unemployed based on the U-3 measure.

If you work at least one hour per week and collect at least $20, you are no longer considered unemployed. Even if you would like to work more – and I think most people would – you would be considered employed from the perspective of the Bureau of Labor Statistics.

Not only that, but even people who are severely underemployed do not count as unemployed. If you have a PhD in chemical engineering but work ten hours a week at McDonalds, you are not unemployed.

Take a look at this graph of the labor force participation rate:

labor force participation rate

This number has clearly been plummeting for a while now. The unemployment rate has been steadily decreasing not because more people are working, but because more people aren’t working.

Take the December 2014 jobs report. The reported unemployment rate for that month was 5.6%. Only counting short term discouraged workers (those who haven’t looked for a job in the past four weeks), the unemployment rate was 11.2%. But if you include all discouraged workers (including those who stopped looking for work for over a year), the actual unemployment rate is 23%. Remember – this is how the unemployment rate was calculated prior to 1994. These are almost Great Depression level numbers!

To further demonstrate the absurdity of the current propagandistic unemployment numbers, let’s look at the most recent jobs report. As ZeroHedge reports:

“According to the most recent Bureau of Labor Statistics release, the UE (unemployment) rate fell to 5.5% as of February.  The last time the UE rate was this low was May of 2008.

What I’m fascinated by is the fact that the US population grew from February 2008 to February 2015 by 16.8 million persons, or a 5.5% increase in total population, and on a net basis, not a single one of those 16.8 million persons got a FT (full time) job… while a net 2.7 million were lucky enough to get a (or multiple) PT (part time) job.

This means that 14.3 million persons, or 4.4% of the current US population, were added without a single job among them (chart below).  This makes for fascinating math when a 4.4% increase of the total US population without jobs can nearly halve the UE rate down to 5.5%, equal to 2008’s UE rates?!?” [emphasis in original]

Also see more here and here.

Besides the outright manipulation and fudging of the numbers, the aggregation of the jobs numbers is incredibly misleading. By saying “X new jobs were added to the economy in February,” they are able to obscure the distribution of those jobs. If most newly “created” jobs are as part time waitresses and bartenders, this is very different from adding jobs as engineers or manufacturers.

So, how does this play out for the most recent jobs report, which claims that the US economy added 295,000 new jobs in February? Paul Craig Roberts brings up several inconsistencies in the jobs reporting numbers, but also has this to say about how the jobs are distributed:

“All of the goods producing jobs are accounted for by the 29,000 claimed construction jobs. The remaining 259,000 new jobs–90%–of the total–are service sector jobs. Three categories account for 70% of these jobs. Wholesale and retail trade, transportation and utilities account for 62,000 of the jobs. Education and health services account for 54,000 of which ambulatory health care services accounts for 19,900. Leisure and hospitality account for 66,000 jobs of which waitresses and bartenders account for 58,700 jobs.

These are the domestic service jobs of a third world country. ”

This aggregation creates the perception that certain actions reduce unemployment in a meaningful way when they do not. The government can institute some policy or “stimulus” package and then say “look how many jobs we’ve created for you!” This is all just a blatant lie.

Speaking of blatant lies, I only just recently learned that not only are the numbers themselves fudged in a highly misleading way, but the actual methodology used to find the unemployment numbers has serious problems as well. Now, the stated methodology used in the Household Survey (one of the ways that data is collected for finding the unemployment rate) is fine; the problem is that they don’t follow it. As the New York Post reports:

“Rather than collect fresh data each month as they are supposed to do, Census workers have been filling in the blanks with past months’ data. This helps them meet the strict quota of successful interviews set by Labor.”

And later on in the article:

“This whole controversy began when a Philadelphia Census worker, Julius Buckmon, was caught falsifying surveys and — most important — his wrongdoing was covered up.

Worse, Buckmon alleged that supervisors told him to cheat.

Other Census sources have also told me that data is falsified all the time. And since Census polls for lots of different government agencies, including the Justice Department, the problem could be bigger than anyone can imagine.”

Don’t trust the unemployment numbers. They have zero basis in reality.

 

Government Can’t Create Jobs

Politicians regularly try to convince the public that this or that policy initiative that they supported has created gazillions of new jobs, and that we should all be eternally grateful for the prosperity that their programs have brought us.

We’ve already gone over this on a more theoretical level in an earlier section; production is more critical than the number of “jobs” that exist, and a healthy economy ought to have people employed in the ways that best help satisfy consumer wants.

Government actions can certainly “create jobs” in the sense that policies can lead to people being employed in a way such that they would not have been absent government intervention. Think about all the jobs as Congressmen that wouldn’t have existed if it weren’t for government action!

This is all fairly obvious stuff, but extensive propaganda peddled by the likes of Paul Krugman has managed to convince most Americans otherwise. People think that government spending via “stimulus packages”, public works spending, and so on, can actually work to improve the economy and “create jobs”. But people fail to see that any newly created job that is due to government action is just a job that was taken away from someone else, somewhere else in the economy.

Think of it this way. Government can acquire the funds that they would use for any kind of “stimulus” in only three ways: increasing tax revenue, debasing the currency, or through deficits.

If the money is raised via taxation, then it is obvious how funds are simply being moved from one part of the economy to another. Rather than people getting to spend their money satisfying their own wants and leading to employment in those sectors, it is the government that gets to decide where this employment should be. Since the people get less choice, the economy is worse off.

If the funds are acquired via debasing the currency by printing money, there is a similar result, though it is more sneaky and hidden. Printing money does not cause new production to magically pop into existence, so again, all the government is doing is redistributing jobs and income – generally from the poor to the rich. Government prints money and then gets to decide where that money is spent, which will often include things like the military-industrial complex and huge bank bailouts. Jobs are being taken from those who are worst off and given to favored sectors of the economy.

The last way that government can raise revenue for its projects is via deficit spending. “We owe it to ourselves,” they say. But government borrowing increases the price of loanable funds by increasing demand for them, which then reduces the amount of investment done by the private sector. With less private investment, economic growth will be slowed, and there will be additional unemployment in those industries where loanable funds have been displaced from. Sorry Keynesians, but there ain’t no such thing as a free lunch.

No matter what the government does in an effort to “create jobs”, it will be a horribly inefficient failure. To take a recent example, let’s consider the American Reinvestment and Recovery Act, Obama’s “stimulus” bill. According to a study from the NBER, each new job “created” by the ARRA came at a cost of $170,000. Do you really think that’s how much these new jobs are paying?

 

How Government Creates Unemployment

As I mentioned earlier on, without government, there would be no involuntary unemployment. There are quite a few ways that governments get in the way of people successfully coming together in some kind of employment relation, and I’m surely missing a few. Nevertheless, abolishing all of the following would go a long way towards allowing as many people as possible to have some form of gainful employment.

Minimum wage. Somehow, the idea of the minimum wage simply refuses to die. Despite whatever many leftists may say, the minimum wage creates unemployment. It can be no other way. A minimum wage of $7.25 is like saying: “If you are willing to work for a wage lower than $7.25/hour, too bad, you’re not allowed.” People who would have been able to find a job for only, say, $5/hour (perhaps because they are disabled or completely inexperienced and not particularly productive) are no longer able to. I wrote an extensive post railing against the minimum wage here.

Unemployment “Insurance” (UI). I put the term insurance in quotes, because employment status isn’t something that is actually insurable. One can only insure against events that one has no control over…but I digress. Unlike the minimum wage, UI doesn’t directly eliminate the opportunity to find jobs. What it does do, however, is subsidize unemployment. If you lose your job, it creates an incentive for you to delay accepting a new one. Whether UI is a good policy or not is a separate question (I say bad), but it is certainly true that it increases unemployment.

Payroll taxes. Social Security and Medicare taxes that are deducted from your paycheck are another serious impediment to employment. Some people don’t realize that while they see a certain amount deducted from their pay, the employer is paying more as well. Of course, the entire burden of this taxation falls on the employee – whatever the employer pays the government is taken out of the employee’s wage. By taxing employment, the government creates less of it, just like any other tax.

Mandated employee benefits. When an employer is legally obligated to provide certain benefits to employees, this automatically raises the cost of hiring them. This would include things like worker’s comp, unemployment insurance (the employer must contribute to this), disability insurance, and leave benefits. The laws for these do tend to vary by state, but to the degree that these benefits are required, either wages decrease or hiring does.

Child labor laws. People under the age of 16 cannot work more than a certain number of hours, and they are forbidden from working in certain occupations. In general, youths under the age of 14 are forbidden from working in general (except in some agricultural jobs). While it is not politically correct to want to repeal child labor laws, it is a fact that child labor was decreasing rapidly before these laws came into effect. Many families depended on child labor in order to get by, but as prosperity increased, the need for children to work decreased. As with the minimum wage, it was the unions that lobbied most passionately for child labor laws; cheap child labor was competition which drove down wages.

Pro-union legislation. There is nothing inherently wrong with unions, but giving them powers that they wouldn’t otherwise have in a voluntary society is problematic. These laws transform what ought to be a simple matter of free association into the creation of what are effectively labor cartels. Labor unions do raise wages…but only for those who are members of the unions. But by raising wages for union members, labor unions reduce the number of employees that can be hired in general. In other words, it is a simple matter of rent-seeking behavior.

Comparable worth laws. These laws are based on the idea that men and women should receive equal pay when they perform work that involves comparable skills and responsibility or that is of “comparable worth” to the employer. Women often work in jobs that pay less than jobs that men take, and these are efforts to equalize this. Wage rates would get set not by market forces, but by a “scientific” analysis of what jobs are inherently “worth”. But by determining wages in this way, there are reduced employment opportunities for the women who people are attempting to help with these laws.

Mandated working conditions. This would include things like occupational safety regulations. Like other policies on this list, laws that require certain working conditions be met increase the cost of hiring employees. While everyone wants to be working in pleasant, healthy conditions, ceteris paribus, mandating that everyone get these conditions either leads to reduced wages or unemployment. The market itself was improving workplace safety before any of these laws were passed, so their negative effects were surely masked.

Laws that regulate firing employees. There are certain things that you cannot legally fire an employee for. Regardless of the positive intent behind these laws (not being able to be fired for discrimination, for instance), they create additional unemployment. These laws create an extra consideration before hiring any employees – there is a risk of being sued if you fire them. Consider laws against firing based on discrimination. If you fire a black man for any reason, you are at risk of being sued and having the employee claim it was discrimination. That risk makes you less likely to hire black people.

Occupational licensing. There are all kinds of occupations which you are not legally allowed to partake in without specific permission from government. Oftentimes this is done with the stated intention of improving consumer safety (say, by having doctors licensed). It is highly debatable whether licensing requirements actually make people safer (they don’t, and perhaps even reduce quality/safety), but it is clear that the real intent behind these regulations is rent seeking. After all, why are there licensing requirements for hairdressers, massage therapists, teachers, interior designers, or florists? If people could simply take a job or start a business without needing to pay a gazillion dollars for a taxi medallion or spend hundreds of hours in “official” cosmetology trainings classes, it would be significantly easier for many to find jobs.

The Federal Reserve. This one is a bit different from the others on this list, but no less important. The Fed, by inflating the money supply and setting interest rates below their market price, causes investors to think that there are more real resources available for investment than there actually are. As such, they sink their money into longer-term investments that there aren’t enough real resources available to complete. As such, there is eventually a crash, and resources need to get moved around to areas where they would be used more efficiently. This boom-bust process leads to workers moving into industries that they otherwise would not have, and then being forcibly dislocated from those jobs when it turns out they were economically unjustified. For instance, during the fracking boom, tons of people went into the energy industry and moved up to Minnesota for work – but as it comes crashing down, these jobs disappear. The same is true for, say, the housing boom. Or the dot-com bubble.

 

Conclusion

It is clear that almost every time you hear a politician or pundit utter the word “jobs”, you are being swindled or lied to.

Governments simply do not have the power to “create jobs”, no matter what anyone may tell you. The only thing governments can do is to destroy them by getting in the way of peoples’ own mutually beneficial relationships. And then lie to you about it.

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  1. […] in 2008 were a corporate subsidy (and unfortunately, one that the left tended to support, based on the fallacious idea of “creating jobs”). This includes hundreds of billions of dollars going to giant entities such as Bear Stearns, AIG, […]

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