Saturday, May 18, 2013

Job "Creation"

            Hardly a day goes by without somebody trying to take credit for “job creation.”  Politicians from local mayors to the President are the most prominent claimants to the title of job creator but many business leaders also trumpet their achievements in this area.  The implication is that but-for the efforts of these people jobs would not have been created and employment would be permanently lower.  That makes no sense whatsoever.  People want to work to enjoy the fruits of their labor and others want to employ them for the goods and services they produce.  It is the role of the job market to bring together the buyers and sellers of labor services.  It is the labor market that creates jobs by matching buyers and sellers of labor services.

            But there is one BIG mystery.  Why does the labor market take so long to clear?  In other words, why do we have extended periods of unemployment?  As the attached graph shows, unemployment does tend to return to a normal frictional level of “full employment,” but it does so slowly.  The mystery of this slow adjustment has been an issue about which virtually every practicing macroeconomist has written at one time or another and I have nothing to add here.

         But there are two related points worth stressing.  First, the market does eventually clear and second, it is not the number of jobs that determines our well-being but the productivity associated with those jobs.  After all, we could virtually assure full employment by foregoing all technology in agriculture.  Under those conditions, the numbers of “jobs” in agriculture would be immense, as they were in 1790, but we were hardly better off.  The long-run path to prosperity is not through job creation, but productivity enhancement.  From a policy perspective, that means focusing on policies, including tax policy, which maximize the incentives for productivity growth.  Unfortunately, this does not seem to attract the same attention as the misguided focus on job creation.

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