Who Creates Jobs?

The right answer isn’t the government.    The government only can redistribute jobs from one sector or firm to another.  They do this via taxation, making the taxed less profitable and subsidizing someone who is less efficient than the taxed.  Nice, huh?

The government, though, through its tax and regulatory policies can either create an environment that encourages entrepreneurial activity or it can stifle it.  Typically, it opts for the latter.  It is easier to deal with (read: control) a handful of big entities: big business, large labor unions, etc.; that are beholden to the government than it is with an enormous group of smaller firms that don’t like to schmooze or be schmoozed by them.  As such, most of the US’s economic policy is directed towards making life easy for large firms and, consequently, more difficult for small firms.

Regulation can be thought of as equivalent to a property tax; you pay it regardless of the income generated.  Large firms can spread the costs of regulation over many more units than a small firm can.  In fact, big firms like regulation because it allows them to compete with the more nimble small firms.

Okay, then, who does create most of the new employment?  Big firms employ a lot of people but that isn’t the same as expanding employment.  It is small firms who tend to be in the growth stage of their life cycle and add employees as they grow.

A simple example will explain why big firms, on balance, won’t add employees.  Think of the auto industry.  I use this because most are familiar with it.  Assume that all of the autos purchased are made in the US.  Prior to the recession that was about 18MM vehicles.  That is close to maximum that will be purchased every year.  Most vehicles purchased now are replacements for ones that are scrapped.  There is no need to increase employment in this industry if the total volume of output is constant (maxed).  However, if the manufacturers want to give raises to their employees without having to raise prices, which they couldn’t do very well in a non-inflationary environment, they will have to increase productivity.  With higher productivity, it will require fewer workers to produce the 18MM vehicles.  Therefore, it is easy to see that with increasing productivity the workforce at the auto plants will decrease.  They will be well paid but there will be fewer of them.

On the other hand, small businesses will be expanding output and have a need for more inputs, especially workers.  There are many more small businesses than there are big businesses, so if every small business hired even one additional employee the overall employment in the US would increase.  It is also important to note that large businesses tend to be capital intensive, while smaller firms tend to be labor intensive.

Unfortunately, the government: federal, state, and local; inflicts policies that strangle initiative in the small business sector.  They do this through a variety of mandates: health care, OSHA, workmen’s comp., building codes, etc.  One can say that the workingman /woman needs protection from big bad businesses.  I would submit that small businesses need protection from big bad mandates.  The elected officials who pass these bills don’t bear the consequences of the damage they wrought.  In fact, it allows them to come up with some additional legislation to address the damage.  The option of repealing the underlying culprit would never occur to them.

If the US expects to recover from the current recession and expand employment opportunities on a more consistent basis, it needs to radically revise the way it addresses economic issues.  It should do less, much less.  I know that the knee-jerk reaction is for the government “to do something”, every time there is a hiccup in the economy.  It needs to resist that impulse.  The fix stays forever, even though the “crisis” has passed.  The legislation should be designed to create a framework within which firms can compete on as level a playing field as possible.   Most legislation is crafted for favored groups, regardless of the impact on the economy as a whole.

Doing less can result in much more being achieved.

 

Posted by Jim

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