Monday, May 25, 2009

What Does It Mean to Create a Job?

Obama claims that various government spending programs create or save jobs, but what does that really mean? Can the government prevent GM from going bankrupt and save hundreds of thousands of jobs? Can the government raise taxes on carbon and create jobs? Can the government stimulus package create jobs just by throwing money around willy-nilly?

It is important to define first what we mean by a job. The common definition is an activity which a person performs on a regular basis, which produces something of value, and for which that person receives compensation in the form of money and other benefits.

Under this definition, the government can create jobs by just hiring people to do something useful (e.g. picking up litter on the Washington Mall). It can also subsidize private sector employers in order to avoid layoffs of otherwise money-losing employees or to prevent the elimination of money-losing positions.

Finally, if you loosen the meaning of the word "value" in our definition of "job" above, the government can create jobs out of thin air by paying people to do whatever, e.g. see

As a pseudo-economist, I prefer an alternative definition of the word "job." A job should be self-sustaining in the sense that the value produced by the employee exceeds the all-in cost of his employment (which includes compensation, benefits, taxes, insurance, and the marginal cost of maintaining and supervising that employee).

According to this definition, government subsidies and direct spending are unlikely to create jobs. They perhaps might save jobs if there is a temporary dislocation which could be mitigated through government action. Arguably, various government programs to stabilize the banking system have saved real jobs in the banking industry and throughout the economy.

But a job created by an artificial boost in demand for the goods and services produced by that job (i.e. through increased government spending) is, well, artificial. The value of the goods and services is inflated by arbitrary government action, and so the net benefit to society of that job is illusory.

My sense is that the private sector is much better than the government at finding profitable employment opportunities and thus creating real jobs. Even if a government bureaucrat were to think of a great new business opportunity which would gainfully and profitably employ dozens of people, you still wouldn't need the government to bring it to fruition. If such a business could create real jobs, then by definition it would be profitable and somebody in the private sector would be willing to seize the opportunity.

One way in which the government can create real jobs (under either definition) is by imposing new regulations. New regulations force businesses to hire people just to ensure compliance with those regulations. In the financial industry, the resources devoted to compliance with existing state and federal regulation is staggering, and the number of employees dedicated to compliance issues easily reaches into the tens of thousands. And of course even financial regulation pales in comparison to the income tax code in terms of complexity and cost and the number of workers who make their living from it (numbering in the millions). I suspect the coming tweaks to the income tax and banking regulation will directly create tens of thousands of jobs over the next two years.

Of course, there is an obvious problem with this method of job creation. New regulation creates new jobs, but not necessarily NET new jobs. Existing jobs may be lost at the same time if certain businesses become unprofitable under the new regulatory scheme.

The new Carbon Cap and Trade Plan is a case in point. Its implementation will certainly drive the creation of new jobs devoted to researching, implementing, and managing so-called green technologies, as well as managing the transition to the new cap and trade system itself, but there is no doubt that a great many current jobs will disappear as a direct result. Claims of the administration notwithstanding, nobody really knows what the final tally will be. And that's just for jobs. The tally in terms of our productivity and our standard of living is even more difficult to calculate, although I predict that it will be very large and negative.


Anonymous said...

In a sane world, no definition of "producing value" should include the dubious "value" of working around dead weight government regulations. Under your definitions (either of them), the government could declare that as part of its "Green Initiative" it requires all employees to wear green face paint while at work, while removing that face paint before leaving work. This would create a number of jobs for those who would test the paint for safety, manufacture the paint, and possibly apply and then remove the paint each day as employees arrive and leave.

For a free people to accept such regulations in the first place (let alone call for them) is, for me, the greatest outrage.

Such will be the case with Cap and Trade, which is no different in principal than my face-painting scenario (dead weight, serving no useful purpose, and reduces quality of life), except that its costs will be far larger, and its impact on our quality of life far more terrible.

-- DAB

ESM said...


I agree with your sentiment, but not every government regulation is dead weight, and not every job created by regulation has the mandate to "work around" the regulation. Some regulation is needed in every industry. Whether it needs to be imposed by the government is another question. I think that non-government regulation is often referred to as a "standard" or a "certification." And of course you do need a mechanism to address externalities. People are need to monitor these standards and mechanisms and regulations and find the best way for their companies and businesses to comply. I would claim that many of those people are gainfully employed and producing something of value.

I'm being a little pedantic here, since I wholeheartedly share your opinion of the vast majority of government regulation, especially the stuff that is coming down the pike.