Arnold Kling  

On "job creation"

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Mort Zuckerman writes,


the US lost 44m jobs in the last two decades of the 20th century, but simultaneously created 73m private sector jobs. A stunning 55 per cent of the total workforce was in new jobs by the turn of the century, two-thirds of them in industries that paid more than the average wage.

Pointer from Mark Thoma.

The headline placed on the op-ed was "The free market is not up to the job of creating work." And, indeed, Zuckerman points to the dire employment situation and advocates two government policies: an "infrastructure development bank," and a research and development tax credit.

Some thoughts on job creation:

1. As Bryan Caplan points out, it is bad economics to think of jobs as scarce. He calls it the "make-work" fallacy. Thinking of jobs as scarce inverts the notion of unlimited wants and limited resources. Our labor time is one of of the limited resources. We should not be rooting for lower productivity and more work. Instead, we should be rooting for higher productivity and less work. However, in a complex, modern economy, it is very difficult for individuals to view their own situations through the lens of unlimited wants and limited resources. To an ordinary individual, particularly right now, it does indeed look as though jobs are scarce and the creation of a job is a wondrous thing.

2. To me, a "green job" means substituting labor for energy. Do not root for "green jobs" unless you would like to see a much lower standard of living.

3. As Zuckerman's statistics demonstrate, the free market does a fantastic job of reallocating labor in ways that tend to increase earnings. In that sense, "job creation" is something that the free market does really well.

4. Right now, the free market is Recalculating how best to use labor (and other scarce resources), following the collapse of a financial and real estate bubble. The challenge for government policy makers is to out-smart the market and come up with ways to use unemployed resources. In the simple Keynesian model, all the government has to do is increase spending. In the Recalculation model, it actually has to think about where and how to spend. Or, better yet, cut payroll taxes and let the market figure out where to expand. So far, I would say that the simple Keynesian approach is working only in the minds of the simple Keynesians.


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CATEGORIES: Macroeconomics



COMMENTS (18 to date)
Jeremy, Alabama writes:

I love your Recalculation theory, but clearly it is not a binary function but going on all the time. Sometimes it is the defining process in the economy - such as right now.

A quantitative theory would work along the lines of your Zuckerman quote, with some coefficient representing the rate of job creation, and one for destruction. Then, Recalculation would be set at some arbitrary level or ratio of the two.

So then one can ask - is it possible to have recessions that are not Recalculations? Or Recalculations that are not recessions?

Bill writes:

Bruce Bartlett is skeptical that reducing the payroll tax would lead to job creation.
http://www.forbes.com/2009/10/15/payroll-tax-social-security-opinions-columnists-bruce-bartlett.html

Brent Buckner writes:

Newmark's Door had a link to what looks like a good illustration of recalculation, commenting "A big part of our macro problem is a micro problem. What else is new?"

Prof. Kling writes - 2. To me, a "green job" means substituting labor for energy. Do not root for "green jobs" unless you would like to see a much lower standard of living.

This seems counter-intuitive to me. I searched your blog for other references and didn't find much in the way of explanation.

Couldn't policies that encourage creation of green jobs just as easily result in a higher standard of living? (eg. focus the tax credit Mr. Zuckerman mentioned on green R&D)

Innovations that reduce the cost of energy or that reduce the cost of energy needed to produce a dollar of GDP would increase income rather than destroy it - wouldn't they? It seems to me the question is whether policy-makers can be effective in their goals, not whether the goals are wrong.

I'm interested to read more about why you've come to a more pessimistic conclusion about green-jobs.

Thanks,

Jim

matt writes:

ultimately most of these job creation schemes call for what you refer to in #1 above which is a return to an earlier state of the division of labor. ultimately, all governmnet stimulus programs work against a further broadening of labor division and higher productivity. If full employment is the aim, let's just give everyone 40 acres and outlaw trade.

Richard A. writes:

"Right now, the free market is Recalculating how best to use labor (and other scarce resources), following the collapse of a financial and real estate bubble."

The free market would be doing a much better job of Recalculating had the Fed maintained proper growth rate of nominal GDP. Had GDPn not faltered, the financial bust would actually be causing shortages in the non-financial sector, allowing labor (and other scarce resources)to move to the non-financial sector at a faster rate. Also, loss of GDPn growth almost certainly made the financial bust worse.

Bill Woolsey has posted some good graphs that illustrate the slow down in nominal GDP growth.

Ned Baker writes:

2. To me, a "green job" means substituting labor for energy. Do not root for "green jobs" unless you would like to see a much lower standard of living.

Could you elaborate? Is there some economic mechanism at work here that I'm missing? Or should I just interpret this as typical conservative skepticism of environmentalism?

One type of green job I remember Obama mentioning was weatherization of federal buildings. He didn't say he was going to pay countless workers to run treadmills to power said buildings...

guthrie writes:

graniteViewpoint and Ned Baker,

I wish I remembered the specific date where he's written of this issue before, but I'd say keep looking, he’s blogged about this before.

The shorthand version, as I understand it, is that the whole reason we use energy is to reduce the need for labor. This was the point of the industrial revolution. Replacing hand/horse labor with energy produced from steam increased efficiency and productivity. To him, 'green' jobs don't mean 'reduction in cost' as much as 'reduction of use', which in turn means we must work harder than before. This would seem to be a step backward.

The costs associated with many 'green jobs' don't seem to be matched by their output. Solar cells, wind farms, hybrid and Hydrogen vehicles, don't come close to matching the efficiency in energy output of coal-fired steam, or internal-combustion engines. That means the green jobs represent a draw on the system, taking resources (funding and manpower) away from efficient energy industry into an inefficient one, increasing energy’s cost, and making 'labor' your option. Perhaps not in terms of ‘treadmills’ but in terms of having to work more to pay for the higher costs. There’s always a trade-off.

I doubt I'm making his point as eloquently as he has but hopefully I didn't boggle it up enough to be completely incoherent!

...that the whole reason we use energy is to reduce the need for labor.

But that ignores the efficiency factor. It seems to me that like the state of technology, the current level of energy efficiency is an input to both the productivity of capital and the productivity of labor.

As with any other innovation, energy efficiency innovations (either new devices or new processes) that decrease the cost of energy per unit of gdp should be income enhancing as long as they don't require greater additions to either labor or capital in order to implement.

Granite26 writes:

1. As Bryan Caplan points out, it is bad economics to think of jobs as scarce. He calls it the "make-work" fallacy. Thinking of jobs as scarce inverts the notion of unlimited wants and limited resources.

Question about this:

Isn't it a valid position to say that a society should value X increase in total jobs in exchange for Y reduction in net productivity for some values of X and Y?

Hopefully everyone would agree that a society that employed 100 extra people (full time) and produced 1 fewer candy bar would be both inefficient and yet better for the society. (Yes, this is a strawman, and not a feasible outcome. I'm just saying there's a line, not where it is)

Can we even come close to determining the lost value of production caused by these boondoggles?

Even worse; Given A: Imperfect substitution of inputs, and B: a minimum wage, it's likely that the optimal employment is significantly less than 100% and possible that it's unacceptably low. That makes public works seem like a good way to mitigate the damage of wellfare.

Daublin writes:

It's a good question, Granite, and one I wish was thought about more. What exactly is the "cost" of unemployment?

To add another extreme to your scenarios, suppose we had 99% unemployment but that 1% of gainfully employed people had 10,000x more productivity. This "superman" scenario looks pretty good to me so long as he actually shares the wealth with his countrymen.

Extreme examples aside, it's important to factor in that not working is actually pretty pleasant, so long as you're still taken care of. Like with the superman example, this comes down to asking whether the working people share the wealth. Also, like with Arnold and Bryan's analysis, it reminds us that the goal is *not* to work, but to enjoy the fruits of that work.

That's as far as I get. I can believe there are other costs of unemployment than productivity. For example, I suspect that as a matter of human psychology, once you're sitting around doing nothing at all, it's hard to jump the hurdle into doing anything gainful, even something minor. That is, perhaps the first rung on the career ladder is a real doozy. Then again, much of the reason it's so hard is because of all the minimum wage and wrongful termination laws, so it's easy to fall into trying to solve the problem that previous "solutions" created.

At any rate, I at least find it an excellent question.

Ryan writes:

Granite26: Isn't it a valid position to say that a society should value X increase in total jobs in exchange for Y reduction in net productivity for some values of X and Y?

Sorry, but this makes no sense at all. Essentially you are saying that it's better to have formerly unemployed people dig ditches and occasionally break shovels than do nothing.

Daublin: I can believe there are other costs of unemployment than productivity.

There are benefits as well. The threat of being evicted or going hungry can motivate a person to take work below what they consider their worth. That's a good thing.

guthrie writes:

GraniteViewpoint,

I'm having a little trouble understanding how I'm ignoring the efficiency factor, if you wouldn't mind helping me. I'm looking at it from a historical standpoint. I'm guessing Arnold is as well (I feel like I'm speaking for him, sorry!).

I look at it this way... Once upon a time a field had to be plowed by a driver and a team of horses. The horses had to be fed and properly trained to work with a harness as well as work as a team (which takes some time). 40 acres could take weeks depending on the soil. Harvesting and threshing were done by hand by the whole family, neighbors, and hired hands. This is almost all labor/time intensive activity on a relatively small parcel of land.

All this changes with the internal combustion engine. 40 acres can be plowed in a few hours, and harvesting and threshing are automated. The use of energy in the form of gasoline means lower time commitments, higher yields, and fewer hands working to complete the job, freeing those hands to do something else (in the shop, or the barn, or another field). So labor is more efficiently spread, and there may even be more ‘work’ being done, but the labor on that one field has reduced significantly due to the tradeoff with energy (terms such as ‘horsepower’ and phrases like, ‘does the work of 10 men’ reflect this tradeoff).

John Henry died at the end of the folk tale. The Machine could be fixed and be productive for years thereafter.

Don't get me wrong. I geek out as much as any greenie when it comes to alt-energy tech. When wind farms sprouted like weeds here in Wisconsin, I cheered (though they are horizontal axis, and I understand that vertical axis mills might be more efficient). I love the ideas behind flexible solar cells, portable, low-temp sodium batteries, Hydrogen fuel, et al. I’m happy there are so many looking into these things (for my own reasons).

I think your last sentence is the point however. These items *do* take a large amount of capital to produce without significant energy cost savings. Places other than Earth, say the Moon which doesn’t have fossil fuels, such tech will be extremely important (but also extremely expensive). Here, not so much. Here, in order to switch everyone and everything over at this point would require 'forcing' people to do so (by increasing incentives like taxation and so forth). People don't like to be 'forced' to do anything. This affects productivity (which will, in turn, affect our standard of living).

If there really was a market for alt-energy... meaning if there were a legit, tangible cost-savings to use solar/wind/Hydro, etc... the market would have produced it already. With thousands looking to make a buck and millions looking to save a buck on energy, something would have been figured out by now. It's like the urban myth of the 100 mpg carburetor. If such a thing existed, there's no power in the world available to stop it from being made and sold.

But if we’re forced to change, forced to use expensive energy, we will work harder (trading energy for labor) and our standard of living will decrease. We probably won’t go back to living in mud huts, but we might not be able to drive when/where we want, or have as many items available to purchase at the market, or be able to afford our cell phone plans, or have cheap running water, or a warm home in the winter (important up this way!), or cooler home in the summer, or what have you. It may be trendy to think that would all be ok, even preferable (and this is hardly a comprehensive list), but trends end at some point, usually after a short time. These changes would probably affect us for decades.

Plus there are all kinds of marginal and external issues that I think Arnold ties into the concept of 'green jobs' that have nothing to do with alt-energy per se (which I think you alluded to in your original post). Government certification, state-enforced utility monopolies, ‘green’ policies, and things that have nothing whatsoever to do with increased energy efficiency and lower energy cost all seem to factor into his pessimism (again speaking for him).

Pardon my loquaciousness! Arnold, feel free to jump in anytime!

guthrie,

Wow. Thanks for the detailed explanation. I think I understand where you're coming from.

I was questioning the blanket assertion that "green jobs" are a bad thing and necessarily reduce national income. I'd suggest an amendment to that assertion that at least excepts "green jobs" created by market forces. These, like any R&D jobs, should be income enhancing at least up to the margins.

Anyhow, I'm not so much of a market fundamentalist to assume that there's zero chance of exploiting unfunded technology opportunities through government intervention, but that's a case that I'm sure I can't prevail with in this forum.

Not to mention - there's a difference between claiming there may be opportunities and claiming that our government could effectively mobilize resources to capture them. These days, I'm not so sure about making that case myself.

Granite26 writes:

Sorry, but this makes no sense at all. Essentially you are saying that it's better to have formerly unemployed people dig ditches and occasionally break shovels than do nothing.

Assuming that the 'formerly unemployed' were receiving welfare/unemployment anyway and that the ditches to (shovels + wage increase over welfare) ratio was a net plus, sure. The ditches don't have to be worth their actual cost, just their marginal cost (in this case the welfare or unemployment that you'd otherwise be giving your workers doesn't count)

The problem comes when this form of welfare crowds out other jobs, either by taking up people who could more profitably be used elsewhere (but to less personal profit for them), or being a tax funded cheaper option than private enterprise.

Anyway... I'm not saying 'Let's replace Mean with Median as our measure of wealth', just that I could see a world where the marginal value of labour is negative, even without full employment. Is it a law of economics that the marginal value of labour is always possitive?

Larry writes:

I'm gloomy.

While I completely buy that resources and wants will find each other if they're not blocked, and that dumb-green jobs are nonsense, I see a big problem.

It's that there is a huge pool of low-priced labor offshore that is working past all of the obstacles that have prevented it from competing against our workers. Meanwhile, our labor force has failed to meaningfully increase its average skill levels for decades, while government does stupid things like increase the minimum wage and encourage unionism, all of which make our labor less competitive.

After the tech bubble, we stopped creating many net new jobs outside of government, health care, and education, partly for these reasons, while losing millions of manufacturing jobs. And the sectors where we did succeed, such as construction and finance, are going to be job dead zones for many years.

The crisis has forced every private business (and state and local government somewhat) to prune its workforce. When many of those jobs reemerge, they'll be offshore.

Truly new industries (a la tech) require capital and a supportive political climate, the reverse of what we have now. We are adaptable, but we've broken lots of the things that set us up to win, not least by complicating the immigration of tomorrow's entrepreneurs. Gak.

So what do we do with our now 7 million person-mostly-men-larger army of the unemployed?

If we "permanently" subsidized low paying jobs with taxes (a direct wage subsidy seems best because it obscures the marginal rate implications of the EITC), the labor market might have a chance to clear.

Otherwise, unless there's a dollar crash, it's hard to see.

guthrie writes:

GraniteViewpoint,

Yeah, sorry for the length! I wish I could remember Arnold's other posts because he did kinda throw that statement out there without a link to his justification.

And don't sell the regular readers here short... you might those who would rather fund NASA or worthy research rather than war... more than you'd think perhaps!

Eventually oil and coal will run out. Not for a while, but it is finite. We will have a human presence on the Moon and Mars, because (I'm predicting) there will be a market here for the raw materials that can be developed up there. These are the pressures that will really kick-start alt-energy (IMO). And when that happens, then absolutely there will be lots of work available and lots of income and lots of new products and services as a result.

I just hope the current attempts to shortcut these developments don't hamper our current attempts to 'recalculate' as a country on the one hand and hinder legit current research into important-but-not-quite-'sexy'-enough technologies on the other.

I am (and I think Arnold is also) afraid that's just what will happen, however.

Mark Nejmeh writes:

It is the nature of how modern investment pundits measure returns that have lead us to this employment dead end. Our investment culture believes that only those connected to prestige or employing a big name Ceo is worth investing in. We need a new barometer on investments that measure the gain value to GDP a job creates and be prepared to re-measure the pie consistantly. As the pie grows so does the room for additional technology implementation,(and more jobs).

For instance the Gov'ts current approach to infrastructure spending does not include the measurement of productivity growth from reduction of traffic or greater efficiency of electric transmission. The gov'ts approach is to "build comb factories for a nation of bald men".They don't implement technology and they don't manage technology markets fairly.

Regarding the Gov't,on job creation, don't expect politicians to do anything more than try to get re-elected or support their parties, because that is what they do. That is their job.They will continue hiring more people to work in those comb factories.

Investment culture has to get out of the way of the new ideas and think beyond their Alma maters. Not taking away from brilliance that rises from Universities, but is that now, the only place innovation can occur? If these great Universities were doing their job we would not be here. They have failed the test of leadership for our economy too.

Educators should educate and stop worrying about building their coffers of endowments. Universities should be working towards lowering their costs , educating more , and learning more themselves. The debt they have created for goal oriented students is a disgrace and a perfect example of the "customer forgotten". They may not realize this but they are almost dinosaurs as more people move towards on-line educations.

A quick note, Tax incentives are just more turmoil for growth, our nation should work with what we have in place.

These times should open all investors ears and eyes. The Job Creation solution is right under your nose,... more risk investment for all in American innovation.

What I have read here thus far is mumbo jumbo and I do not see any solutions presented.

The Foundation for Job Creation
www.jobcreation.us
www.liftamericaup.com
Mark Nejmeh

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