J is for Jobs

The NZ Initiative hits J in their series on economics:

During the last American presidential election, Mitt Romney bragged that he had created around 100,000 jobs. The Obama campaign claimed Romney had actually destroyed jobs. Regardless of which was true is irrelevant; both feed into a common mistake in voters’ understanding of economics. That is, the belief that government should create jobs.

Jobs in this case refer specifically to job creation as opposed to productive employment and the labour market. Jobs are, and always have been, a critical concern across the globe. Whether young or old, skilled or unskilled, for billions of people jobs are essential for their economic and social development.

It is perhaps not surprising then, that job creation is often touted as the main impetus behind myriad government policy initiatives.

However, contrary to such popular opinion, job creation is not – and should not – be the goal of government policy.

This is a critical fallacy; a misunderstanding that government should be responsible for job creation and that job creation should be pursued as primary evidence of ‘economic growth’.

In The Myth of the Rational Voter: Why Democracies Choose Bad Policies, prominent economist Bryan Caplan identifies the ‘rational irrationality’ of this ‘make-work’ bias. There is indeed a tendency to underestimate the economic benefits of actually conserving labour rather than creating more jobs for the sake of more jobs.

In the early 1930s, the Soviet Union proudly declared itself the world’s first country to put an end to all unemployment. While the Bolsheviks ardently claimed unemployment was a disgraceful product of capitalism, what they failed to divulge was how they attained their zero-unemployment figure. Everyone was given some job or function, no matter how mundane or unproductive. The USSR may have succeeded in eliminating unemployment, but it came at the cost of reduced efficiency and productivity.

Ironically, the public often believe labour is better used than conserved; that producing more with less labour is a danger, rather than progress. This is a very real belief among the majority of non-economists, who interpret efficiency gains as the destruction of jobs while economists see real growth manifested through the production of more with less. 

Government policy should be focused primarily on achieving real economic growth, growth that is attained via increases in labour productivity. The creation of jobs should not be the overarching goal of fiscal expenditure, but rather a by-product of stimulating economic growth.

Government may not be good at creating good jobs, however, they are certainly capable of destroying them. But that is an entirely different matter.

The previous letters can be found here.

Any Government can achieve full employment if they want to. They just create make-work jobs for everyone. But that is never sustainable. The best way to create jobs, is to have a growing economy and a private sector that needs to and can afford to hire more staff,