Arnold Kling  

What is Job Creation?

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Russ Roberts writes,


I'm not saying Keynes (or Obama or Larry Summers) is wrong because all spending does is bid up prices and wages. I'm not trying to prove that the stimulus failed. I'm challenging the standard macro textbook story that says aggregate demand leads to output that leads to employment.

I do not think of jobs as being created by aggregate demand. I do not think of jobs as being created by firms.

Market activity consists of patterns of specialization and trade. Two hundred years ago, a lot of people produced stuff that they could sell pretty directly. A farmer could sell unprocessed food in the nearby village. A tailor made clothes. A blacksmith forged horseshoes. A doctor billed a patient directly.

In a modern economy, these patterns are incredibly complex and indirect (or roundabout, as the Austrians would say). Today, many people have jobs that yield nothing that a consumer would buy directly: Logistics expert. Database administrator. Corporate event planner. Training co-ordinator. Media relations person.

How does one of these modern-era jobs get created? You might say that it gets created when an entrepreneur tries out a new method of satisfying some need in an efficient way. But the satisfaction and the efficiency are highly context-sensitive. Shake the kaleidoscope, change the pattern, and the satisfaction and efficiency disappear.

You do not fill the typical middle management position by picking up somebody hanging out in a parking lot. Modern jobs require substantial human capital investments on the part of both workers and firms. From this, it follows that patterns of specialization and trade need to be stable and well established in order for jobs to be created.

If you are going to speculate on developing part of a new indirect pattern of specialization and trade, you need to be able to extrapolate from the current economic environment to the future. How do you do that right now in industries like health care and financial services, where most of the specific regulations envisioned in the recently-passed legislation are "to be determined"? How do you do that on the basis of "stimulus funds" that are temporarily reshaping the opportunities for profit and loss in the economy?

I do not know how one can possibly determine the effect of the stimulus on jobs. The jobs that the CEA and the CBO say are created are nothing but figments of some model's imagination. Counting workers hired by some particular subset of firms is a mindless exercise. When it comes to the creation and destruction of patterns of specialization and trade, the process is very difficult to monitor and causality is very difficult to trace.

[UPDATE: See Greg Mankiw on the long duration of unemployment, and see Mark Thoma citing David Altig on the relatively high number of job vacancies relative to unemployment. I would explain both of those phenomena as being due to destruction of human capital. Under the 2007 pattern of specialization and trade, some workers had human capital which suddenly depreciated. It is difficult to create a new pattern.]


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CATEGORIES: Macroeconomics



COMMENTS (12 to date)
ThomasL writes:

Great post. I'd make one tweak:

The jobs that the CEA and the CBO say are created are nothing but figments of some modeler's imagination...
Chris Koresko writes:

@Arnold,

Another really good post. I hadn't thought about it quite that way before. It's clear that you've got Recalculation in mind when you describe it this way, and it feels right.

So who was it who invited you to testify before Congress? I want to know who to vote for (or support, since it's probably somebody outside my district).

david writes:

Shake the kaleidoscope, change the pattern, and the satisfaction and efficiency disappear.

Heterodox economists everywhere both right-wing and left-wing have complained for ages that the process of t√Ętonnement is not smooth, as you now point out.

It is worth remembering that one can walk away from this insight with statist or antistatist conclusions; e.g., if the kaleidoscope of economic activity is that fragile, is the significantly more stable hand of significantly more command and control perform that much worse? Should we go down the road of, say, Singapore or Hong Kong in essentially planning some illiquid markets, like housing, but completely leaving other sectors to the invisible hand? On the other hand, the insight does imply that planning toward optima is extremely difficult (Hayek!). But if we're giving up on optima either way...

Plausibly, more liquid markets composed of many small firms and frequent small transactions approximate idealized adjustment models better.

Tyler Cowen, in 2008:

Is the financial crisis -- which is rapidly becoming the "real economy" crisis -- somehow the "dual" of the socialist calculation problem? ... It's fine to talk about entrepreneurship but the net effect need not be equilibrating. The relationship between local adjustment, where we have decent Marshallian theories, and global adjustment, about which we know little, remains tricky.

Marco writes:

"the process is very difficult to monitor and causality is very difficult to trace."

I'd replace 'very difficult' with 'humanly impossible'.

bjk writes:

"Today, many people have jobs that yield nothing that a consumer would buy directly: Logistics expert. Database administrator. Corporate event planner. Training co-ordinator. Media relations person."

Without a DBA, the airline has no database to sell tickets, without the supply chain manager the diapers don't get to Target, etc. If you call customer service, you're consuming whatever the training coordinator is producing. Corporate events and media relations are special cases . . . I don't imagine there is much employment in the latter.

So I don't see Arnold's point that these jobs aren't involved in the production of consumer goods and services. He may be right that most jobs are overhead and ultimately are a form of new economy R&D . . . but not the examples he picked.

Hyena writes:
Modern jobs require substantial human capital investments on the part of both workers and firms. From this, it follows that patterns of specialization and trade need to be stable and well established in order for jobs to be created.

This line of thought is in tension with the reality that industries have been thriving since the end of World War II even as turnover has increased. If there was a need for such highly firm-specific human capital such that Keynesian monetary policy would fail to work, this should not have ever happened.

You've criticized, for example, the literature on signaling re education in the past on simple empirical grounds: no entrepreneurs are scrambling to create new signals. This falls into the same category but with a contrary, as opposed to merely absent, phenomenon: firms have invested less and less in employee retention.

If you're right, then the economy for 60 years has been deeply wrong about human capital.

guthrie writes:

Allow me to join the chorus of those who are finding this post exceptional.

bjk:
I think Arnold's point is that a DBA (for example) doesn't produce either the database or the ticket. His 'yield' is important, as you point out, but it's intangible. A Logistics person doesn't run Target, drive the delivery trucks, or make or sell the diapers. These jobs came about as market complexity grew and enterprising people filled 'needs' that simply don't exist when producers and consumers live within walking distance of one another. Does this make more sense?

Its as if the market were a puzzle where the pieces are getting smaller, but the picture itself is getting bigger.

JB.McMunn writes:

I believe James Madison put it very eloquently many years ago:

What prudent merchant will hazard his fortunes in any new branch of commerce when he knows not that his plans may be rendered unlawful before they can be executed?

JFox writes:

Yes yes yes. And, you also have to ask "Even if stimulus spending and other stimulants of aggregate demand do create jobs, is it worth it?" In other words, are these initiatives positive NPV investments. I look at it this way. If you make the simplifying assumption that there is no federal gov't borrowing, funds spend on stimulus are extracted from private industry. Does the supposed increase in jobs, wealth (or whatever your measure is) offset the jobs and wealth lost by taking these funds from taxpayers. You can even tweak the discount rate in your NPV question to reflect a Keynsian world. What I mean is, if you assume that in our current state tax payers are too conservative and won't deploy their capital effectively (but will keep it in a mastress instead) and therefore funds spent at the federal level will have better results, you just adjust the discount rate down to 0%. As any real world practitioner will tell you, using a 0% discount rate still gives you a negative NPV on a fundamentally lousy investment.

Robert Bell writes:

"How do you do that right now in industries like health care and financial services, where most of the specific regulations envisioned in the recently-passed legislation are "to be determined"?

True, but many industries are global, so U.S. regulations are just one of a number of regulatory frameworks that would be job creators contend with. There is also the entire mosaic of competitors (and competitive technology), suppliers, customers, etc that makes up the ecosystem in which firms operate. So even absent regulatory uncertainty, a landscape in which 20 percent or more of the economic activity was illusory (i.e. in construction, financial services etc) presents a daunting recalculation problem.

jfox writes:

My personal opinion is that HC Reform will be an absolute disaster. I would roughly estimate the NPV of HC Reform at somewhere between -1 trillion to -10 trillion. I know that is a very wide range. Just my opinion, but I think somewhat of an informed guess based on my observations of the inner workings and unintended consequences of Medicare. HC Reform to me looks very similar to Medicare.

John Fembup writes:

I have a few Qs -

Aren't jobs labor?

Isn't labor a cost of production?

So why all the attention on creating cost?

If it were just about jobs, why couldn't companies just say, let there be jobs? And problem solved?

Isn't that pretty close to what the government does anyway?

How's that been working out for us?

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