05 December 2011

Where do Jobs Come From?

The Information Technology & Innovation Foundation has just issued a report on anemic U.S. job growth in which it provides a concise overview of various diagnoses for persistently high unemployment.  The report outlines seven different explanations:

1. A classic Keynesian contraction (implication: government stimulus)
2. Financial crises are different (implication: wait it out)
3. Regulatory uncertainty (implication: finalize legislation, lighten regulatory burden)
4. Unskilled workforce (implication: train workers, streamline immigration)
5. Not enough innovation (implication: invest in R&D, innovation-friendly policies)
6. Too much innovation (implication: put brakes on productivity growth)
7. Weakened U.S. competitiveness (implication: strengthen manufacturing, invest in skills, R&D)

Number 7 is the favored diagnosis of ITIF. But, what if all seven are in some way correct? That is how it looks to me.

This debate is not unique to the present crisis or the United States. Consider that every year for the next decade India is expected to add to its workforce a number of workers equivalent to the entire population of Sweden. Over the next decade the global economy will have to add jobs at the rate of the total German population every two years (based on the rate of job growth of the last 20 years). Job growth is an important and shared global priority.

Where do jobs come from? How do we get more? These are questions that I'll be exploring in the near term, starting from some very basics, mainly to sort out some of these issues in my own mind. Assistance welcomed.


  1. It probably varies across the economy. In some sectors (e.g. chemical manufacturing) the regulatory burden is a nightmare. It's probably a lot lighter in software-based high-tech, where shortage of highly qualified workers is more of a problem.

  2. I think you've asked the wrong question. The proper questions is how do you generate wealth and income? Jobs are just one of the ingredients needed to create wealth and income from the creation of goods and services that others want to buy.

  3. The author makes the elementary mistake of confusing net manufacturing job loss with a decline in the sector. American share of global manufacturing has actually held steady for the last 30 years (around %21).

    This mistake alone leads me to believe the author had no idea what he was doing or was seeking a particular outcome.

  4. -2-Sean

    Thanks, the questions are definitely related, but not the same. The generation of wealth and income does not guarantee job creation ... see, e.g.,


  5. When an economy goes into contraction there is an opportunity to reduce the workforce. A large number of white collar jobs simply do not exist anymore due to technological innovation. (Remember the typing pool anyone?) Matters are made worse by innovations in communication technology that permit affordable outsourcing to second world economies.

  6. You are right, generation of wealth and income does not guarantee job creation. However, generation of wealth and income is a necessary condition to create jobs. Has anyone on this blog worked in a small business or owned a small business? Creating something of value, marketing it and selling it are not easy. If you don't create sufficient income to cover costs and make a buck or two, lack of cash flow will force you to close up shop. Companies love to say that people are our most important asset. That may be true but they are also the largest expense. A employee going to work everyday sees their cost to a company as what they get in their paycheck. An employer sees their salary, their benefits, payroll taxes, employment taxes, workers compensation, etc. Several of these items are charged based on headcount rather than salary. So a disproportionate amount of the compensation for low wage workers ends up in other people's pockets. Then there's each employee's contribution to overhead. The actual cost of an employee to a company then is often at least 2-3 times their earnings. And when a recession hits and business is down, the government actually drives these costs higher, putting further downward pressure on wages.
    Finally the recent health care law is probably the biggest wet blanket put on job creation in a long time. With the cost of health care per person in the US closing in on $8000 per capita but the health care law setting fines at $3000 per employee that's not covered and plans to sell coverage for less than half the cost of services provided, most business owners I know are hunkering down. I expect that law to add $2 to $3 per hour per employee. Automation never looked so good.

  7. Without Ketnes' Animal Spirits there is no job growth.
    "Even apart from the instability due to speculation, there is the instability due to the characteristic of human nature that a large proportion of our positive activities depend on spontaneous optimism rather than mathematical expectations, whether moral or hedonistic or economic. Most, probably, of our decisions to do something positive, the full consequences of which will be drawn out over many days to come, can only be taken as the result of animal spirits - a spontaneous urge to action rather than inaction, and not as the outcome of a weighted average of quantitative benefits multiplied by quantitative probabilities."
    The more folks look to the government or somebody else to somehow create their jobs the less likely they will manifest the Animal Spirits needed to drive the economy.

  8. Sean it has always struck me as deeply dysfunctional for private companies to directly fund government welfare (free healthcare). Free or government assisted health care is an admirable goal in principle, but does any other economy other than the US have this peculiar employment disincentive? Even the Japanese have a far more rational approach.

  9. -6-Sean

    Thanks -- I get what you are saying, but what would happen if the government printed a bunch of money and hired people to dig holes and another set to fill those holes back in?

    No wealth generation but jobs created.

    (See James Hamilton:

    Alternatively, what if every job in an economy was split into two jobs? There I've just doubled the number of jobs with no wealth generation! (In fact Germany has laws along these lines to mute the impact of economic contraction/recession.)

    Underlying your comment is the notion that per capita wealth should increase, which makes good sense to me, but it is a political commitment, and not a necessary feature of job growth.


  10. -9- Roger,

    Sure, you've created a few jobs, but at what cost?

    Splitting the pie into smaller pieces certainly creates more pieces, but a bigger pie can have more and bigger pieces yet.

    Obviously this is all over simplifying, but in a simple discussion, I'll go with the wealth creation over redistribution.

    Shovel ready? Use spoons!

  11. -10-Matt

    Well, understanding costs and trade-offs is one of the points of make things clear. There are multiple variables at play here -- total wealth, per capita wealth, wealth distribution, etc. In all cases it is not "either/or" but shades of grey ... Thx!

  12. Roger,

    Let's look at each item you just mentioned.

    If you did holes then just fill them in they you are expending a lot of energy making no progress. You waste energy, money and the workers aren't fooled. They are likely to prefer staying home and just getting an unemployment check. Neither pointless work and getting money that's not earned is not sustainable. Somebody else is a little poorer for the charade.

    If every job was split into two jobs, lets say for just the wages earned, the employees likely won't have enough money to get by and all those costs that get assigned per employee like health care, unemployment insurance and the like, they probably will still be just as high per employee. So for the same number of hours spent productively making product that has value, the employer likely say his costs rise by 30% or more. Not a good deal.

    The head count costs are in fact moving employment in exactly the opposite direction. Most small companies I know, run with the minimum staffing and handle surges in workload with overtime. That is today's reality.

  13. I'm also a little sceptical that an advocacy group set up to promote technology and innovation discovers through it's research that the root cause of unemployment in the US is lack of innovation and technological initiative. Who would have thought...

  14. -12-Sean

    You are confusing an exploration of the issue with advocacy of a position. You argued that generation of wealth is a necessary condition for the creation of jobs. It is not -- that is all I am arguing. Thanks!

  15. Job growth is anemic because of debt load and deflation caused by a 7-8 period of almost unrestrained credit issuance coming to an end. All the jobs related to supporting the bubble which was mostly in real estate both commercial and residential are gone and won't be back for a long time. That wiped out a huge chunk of the economy and it did so worldwide as much of the world did the same thing. Until the debt which cannot be repaid is defaulted or forgiven and debt loads and prices can be allowed to come down the anemic economy will continue.

  16. Roger,
    There is no free lunch. I you "create" jobs that produce no value, someone else pays for them. If its a small company with a cleaver new idea, the investors lose. If its the government doing make work, either taxpayers lose when the money is used un-productively if the government had the revenue to begin with. If the government prints money through the fed, the values of everyone else's earnings and savings is reduced through inflation. If the money is borrowed, someone will have to earn more later to pay it back or you end up owing your soul to your lender. Someone's wealth is consumed to create a job that produces no value.

  17. By email from Tom:


    "There is another explanation for lack of job creation, related to regulation, but not to uncertainty.

    That explanation is higher costs of doing business.

    For instance, we are about to raise electricity rates over 10% nationally, due to about 5 new EPA regulations which raise the cost of electricity. According to recent economic literature on the cross elasticity of electricity prices and unemployment, these electricity price increase (spread over a few years) will cause somewhere between a million and 2.5 million unemployed. It is a wide range, yes, but it is a lot of jobs."

    The reference for this Deschenes, 2010.

    Deschenes, Olivier. 2010. “Climate Policy and Labor Markets.” Working Paper 16111. Cambridge, MA: National Bureau of Economic Research. Available at http://www.econ.ucsb. edu/~olivier/w16111.pdf. "

  18. Can someone clarify how innovation creates jobs if those innovative products are then manufactured overseas in second world economies that are more price competitive?

    Or by 'innovation' is the idea to create entirely new market opportunities?

  19. Roger:

    All I know is that for every job "created" for a government employee or a subsidized entity (like Solyndra), we lose more than one job in the true job-creating industrial sector, and the "bottom line" is disaster (there is a study from Spain that provides good evidence for this). I just can't imagine how the "brains" of folks like Krugman work.

    We could turn this economy around tomorrow by doing four things:



    3.) KILL "Obamacare."

    4.) Put Obama in jail where he belongs, since we have NO idea who the hell he is.

    You would see a tremendous surge in our economy, overnight.

    BUT, I think we still have to go through more pain, so that the elitist environmentalist jokers realize that "greenthink" and "government" can't solve everything. In FACT, it is DESTROYING everything.

    Hope those in the towers of elitism have SOME sense of this problem, but I really, really doubt it, since they are immersed in their own "importance."

    OK, moderaters, let's see if you can allow the truth to go forward!

  20. Jobs come from employers who don't sit on huge piles of cash, squeeze all labor costs out of their business whenever conceivably possible, and look to make short-term gains through capital machinations, marginal tax gains, stock buy-backs, etc. Jobs come from employers who look to make reasonable amounts of profit from developing a good long-term business plan and employing people to make quality products they can sell at a good price.

    We used to have those kinds of employers in this country.

  21. Two hundred years ago 90% of the population worked in agriculture. If you had voyaged back to that time and told the citizenry of the time that two hundreds later that agricultural technology was such that the country could be fed with the labor of only 1% of the population they would have assumed that the rest of us were jobless. But in fact we have "created" an immense number of jobs since then. Perhaps if we figure how to describe that process, what it was, why it happened, how it happened, we can develop a feeling for might happen over the next century,

  22. Conversion of natural and human resources are the processes which provision products and services. The latter conversion is the source of employment. The conversion rate is influenced through supply, demand, and availability. The quantity, quality, and cost of energy underlies the foundation of economic development. The productivity of economic enterprises is influenced by stability. The emergence of economic enterprises is influenced by risk assessment.

    It's worth considering that there are at least four classes of economic actors: capitalist (i.e. investor), pioneer (or entrepreneur), manager, and worker. These classes are not rigid and are often malleable, especially as we develop throughout our lifetime, and may, in fact, be interchangeable. Each class is necessary for optimal functioning of an economy.

  23. It seems to me that you need to make a basic distinction between jobs in the private and public sector. The former are paid from capital and the purpose of the job holders is to make a profit for the employers. The latter a paid from tax revenue and the prupose is not primarily to make a profit but to provide public goods. There is a limit to the ratio of public sector workers in the total workforce because of the shrinking tax base if you shift workers from private to public, everything else remaining the same.

    If companies perceive they cannot make profits they will not hire workers (or not start a business in the first place). If public bodies have no revenue to spend they will not inrease their workforce, unless it is acceptable to use deficit spending.

    Much depends on the disgnosis of the current crisis. If it is a problem of lack of demand, growth would lead to jobs, not the other way round. You could create demand not only by digging holes or giving it to the banks but by giving it to the consumers directly.

    There are good reasons to believe we have such a situation of overproduction/underconsumption today as the gap between productivity and real wages has increasded dramatically ever since 1980 or so.

  24. Here’s the short answer:

    An enterprise creates a job when it believes that an ably staffed position will 1) generate profit directly, 2) increase productivity indirectly, 3) enhance administration, or 4) improve control sufficiently to justify its costs.

    “Enterprise” may be an individual, group of individuals, or other entity, public or private.
    “Ably staffed” means appropriately trained and equipped.
    “Profit” means revenue greater than the sum of all costs; in a non-profit / public it may be zero, but there must be revenue sufficient to equal the costs.
    “Administration” includes security, safety, compliance, support, accounting, finance, legal, security, retirement, and other indirect functions that add to costs but assure effective organizational operation.
    “Control” includes management, supervisory, and other indirect functions that add to costs but allow direction of resources toward maximizing profitability and efficiency.

  25. We may well be creating jobs but not here in the US. A key to creating jobs is the multiplier. In the 1930s and 1940s, Government deficit spending worked because the multiplier was sufficiently large that a $ of deficit spending created $3 of economic activity which mainly occurred in the US. Now, since we import so many of our manufactured goods from China and elsewhere the multiplier is much, much lower when there is largely non-targeted deficit spending. (I would be interested if anyone has recent estimates especially for stimulus spending like cash for clunkers.)
    This would not be such an issue if the Chinese had open markets and did not manipulate their currency ...but they do.
    Interestingly I predict that cuts to defense hardware procurement and NASA which has a relatively high percentage of made in America content will result in a much greater reduction in emloyment than cuts in spending elsewhere.

  26. Digging holes and filling them in again could work under certain circumstances. The logic is the same as if you decided to build add another lane to an existing highway. If the current highway was already under-utilized there would be negligible benefits. If however the existing highway was congested and the newly expanded highway stimulated developers and businesses to consider new economic opportunities then the multiplier of the same $ of expenditure would be far greater in the second situation - all other things being equal.

  27. Specialization and innovation create wealth.
    They may not create jobs.

    As has been previously mentioned..not very long ago most of the US/Europe lived and worked on farms and we weren't very well fed.(A large portion of the world still lives on farms and isn't very well fed)

    Obviously more farmers doesn't make for either more food or affordable food.

    Jobs are created when someone spends money on something requiring human input.

    Regulation can create jobs but is a doubled edged sword in that regulation may also hinder innovation and specialization. As an extreme example I would note the training requirements for someone who oversees administration of Oral Polio Vaccine.

  28. Expanding a bit on my short answer, I see that folks here have injected a fair amount of politics into the discussion, but I’d like to step back and survey the current environment a bit.

    Note that job creation is prospective, based on a belief of increased profit (or one of the other factors, or that costs will be covered in a public enterprise). For public enterprises, a budget line item and a pool of qualified individuals may be all it takes. So when federal stimulus funds went directly to the states, the states were able to maintain or increase staff because the budgets were sustained or augmented.

    For private enterprises / entrepreneurs a form of calculus exists that has to be solved by tackling the set of uncertainties present in the potential job’s environment. Before we take a look at that, let’s focus at the intersection of public contracting for private services.

    Complex procurement codes govern government contracting at all levels. The regulations are in place to assure fairness in the process, so there’s great benefit to them. But generally they do slow the process because they require the development of specs, advertising the bids, allowing adequate time for bid preparation, and so forth.

    Federal money can involve an additional set of wickets when socioeconomic set-asides are required or the dreaded Department of Labor (DoL) standards are invoked. Thus stimulus funds allocated to insulating / weatherproofing homes got stuck because the law requiring “market wages” invokes DoL wage determinations (WD), and WDs did not exist for the labor specialties required in the geographic areas to which the funds were directed. There was a nine-month or so delay while DoL performed the surveys to generate the WDs. Then many found that the labor specialties were defined in a manner that required some degree of training before candidates could be hired to fill the jobs. In the end the companies that got the poorly prepared contracts after a year or so spent a lot of money on doing very little, such that little improvements were gained at a considerable cost. Were jobs created? Yes, but there was little stimulus and little wealth because they were short-term positions that generated little economic benefit. This is not that far from hiring folks to dig holes with spoons instead of shovels.

    Turning back to the purely private sector, two companies that have been creating jobs domestically, Amazon and Google, have been scouring the country in search of cheap real estate and labor, Google needs lots of cheap power for server farms, Amazon needs good transportation links for warehouse / order fulfillment centers. As gorillas, both companies have been having their way with state and local governments, extracting tax and other concessions in exchange for the jobs, but they are jobs the companies believe will expand their profitability.

    These companies and a few others see and are seizing opportunities for profit. Why don’t others follow? Uncertainty, otherwise defined as a lack of belief in the ability to improve performance.

  29. - 24 - Reiner

    "If companies perceive they cannot make profits they will not hire workers (or not start a business in the first place)."

    This is an incomplete statement, IMO. There has been a shift in our economic environment such that companies can and do eschew hiring employees - when they can make a profit in doing so - and instead seek to make their companies more attractive to investors by squeezing out costs, buying back stocks, extracting marginal tax gains, etc. The financial officers then amass personal fortunes through short-term increases in stock prices.

    We have seen profits and corporate value increase w/o a corresponding increase in output as the result of increased employment.

  30. Folks above and elsewhere identify several causes of uncertainty in today’s economy and make interesting charges about enterprises sitting on their money, but the fact is that investors want to purchase growing concerns, they are buying future profits.

    On the horizon consumers and investors see only one certainty, higher energy and other prices. For example, I’ve seen a rollercoaster of prices since I purchased my vehicle in early 2008. I get 25 mpg and average 51 miles per day, so this is what I’ve seen:

    Date Per Gal Per Mo
    3/28/2008 $3.16 $191.12
    11/2/2008 $2.09 $126.38
    1/21/2009 $1.60 $96.74
    10/31/2010 $2.60 $157.24
    11/11/2011 $3.40 $205.64

    In like manner, food prices as well as energy prices in general have increased. My view of medical expenses is somewhat clouded by recent age-related maladies my wife and I have suffered, but we are spending a lot more.

    Enterprises are facing similar price increases. Suppose you want to build something here in Vespucciland; as Steve Jobs and even the Chinese have found, it’s hard to build things where raw or process materials and supplies include designated hazardous materials even if you have comprehensive plans for safely handling that stuff. Can you get reliable power? That’s in doubt even in Texas where new regulations will shut down reliable coal-fired plants leaving natives to the whims of the windmill gods.

    Increasing natural gas is providing a respite to locals in several areas, but not New York state, where the state itself is limiting extraction, nor in Ohio where the feds have put the kibosh on new wells.

    Finally, the housing market remains roiled, there are few stable area in the country. Until the real estate market shakes out and stabilizes, it looks like the overall economy remains uncertain.

  31. One last note about investment and the hesitancy of enterprises to move forward: what’s allowed and what’s gonna work? I mean that seriously, because the nation’s sole manufacturer of high-capacity commercial airlines invests over $1B in a new plant and finds the National Labor Relations Board on its tail.

    Or the two industrial giants that were rescued by the federal government under terms inconsistent with long-standing bankruptcy laws. One has to produce an electric vehicle that may now spell its doom because of poor sales, the other is handed over to a foreign firm formerly known as Fix-It-Again-Tony (Fehler In Alle Teilen auf Deutsch), that is trying to sell its 500 model at over $15K per pop to an obese populace that values the number of cup-holders over maneuverability. I’ve owned several Fiats over the years, the first a 1962 1200 Roadster I restored in 1970 that was a joy to drive, even after the driveshaft fell off on scenic Highway 1 near Big Sur, the last a 1979 Fiat Brava (the first Fiat build to last) that saved my wife’s life when she nailed a beer truck that ran a stop sign in Germany, a message from God as clear as they get. I switched to Peugeots with only slightly better results… Maybe they’ll step in to rescue Chrysler…

    But I digress. What about the evil fracking firms that are trying to bring low-cost natural gas to market and find that half the promising fields are off limits? The message is clear, cheap power is done for, the head of Duke Energy proclaims such, so we should all believe. Why invest in plant and equipment here?

    You can’t build it.

  32. As my teacher used to say, I could give you the answer but you'll understand it better if you figure it out for your self. Look at this chart


    Then answer these questions.

    1) How much has the housing downturn affected US employment including both the direct and indirect affects? (Hint: it takes about 4 man-years of labor to build and equip a house and the indirect jobs which follow are some multiple of this.)
    2) How do the job losses due to the housing downturn compare to losses from other activities such as reduced R&D spending, lack of innovation, etc.?
    3) To what extent have the actions of the US Government and the Fed been positive or negative with respect to the unemployment problem and why?
    4) Is the current unemployment problem more likely to stretch out than the unemployment typical of past recessions?
    5) What should be done about leaders who cause bubbles and contribute to the problem in other ways while pretending to solve the problem with ineffective and costly actions?
    6) Are academics as a group having a positive impact on this issue?

  33. Matters are made worse by innovations in communication technology that permit affordable outsourcing to second world economies.

    Matters are made worse by the federal government's worldwide (as opposed to territorial) corporate taxation policy that favors foreign multinationals over those based domestically.

  34. "6. Too much innovation (implication: put brakes on productivity growth)"


    "Put brakes on productivity growth"???

    Does that mean like, "Have long prison terms for anyone found guilty of coming up with something that improves productivity?"

  35. Maybe it would be worth asking Apple why they make iPads in China instead of the US.

    SC Mike and duwayne have just about nailed it. US unemployment is a result of the collapse of the building industry combined with a capital strike by companies who cannot see a way to make profits in an overregulated and uncertain environment.

    This is compounded by the obsession of Americans with squandering their money on cheap Chinese junk, even to the extent of borrowing up to the hilt to do it.

  36. @ heyworth

    you are forgetting deflation which is a far bigger component than anything else

    Regulation is almost irrelevant and uncertainty? I run small businesses and uncertainty isn't a problem, customers with money is.

    Credit continues to vanish from the system while equity is falling due to the bubble bursting. Credit is the largest component of our money supply.

  37. @pedex, it depends a lot what sort of small businesses you run and what part of the country you are in. I'm happy to concede (and indeed celebrate) that regulation and uncertainty are irrelevant to your businesses. But that doesn't mean they're irrelevant to everyone. Some businesses have the EPA breathing down their necks 24/7. Others are trying to find land for a new plant, but can't because of red tape and planning delays, or because land isn't being released fast enough to keep the price affordable.

    I agree that customers with money is the number 1 starting point. Surely though, the rich in America ought to have plenty of that after all the tax breaks they have got in recent times. Maybe they are just feeling poor because the unrealistically inflated asset prices have dropped to a more sensible level.