The Job Creation Myth

Down and out

Down and out

In observing the discussions taking place on this site and across the country regarding the auto industry bailout it seems to me that there is a fundamental misunderstanding about the economy underlying the arguments for such interventions.  There is no stock of jobs.  There is a stock of labor. Therefore it’s not accurate to talk about “losing jobs” or “creating jobs.”  The auto industry is failing because it is an inefficient allocation of resources (including labor).  This is largely due to oppressive government regulation such as CAFE standards which force these companies to operate inefficiently (and also somewhat due to oppressive labor contracts but that’s an issue for a separate study).  If we want to save the auto industry we need to set them free.  That said, if we’re not prepared to do that we’re not doing ourselves any favors by propping up an unprofitable industry.

There is a lot of talk about the effects on industries which support the auto industry.  Let’s consider what would happen to the steel industry for a moment.  Imagine that half the steel produced in the country goes to producing cars (I have no idea what the actual amount is).  If the auto industry goes away, it’s not as though half the steel in the country will just sit there because there is no use for it.  There are all kinds of other uses which aren’t profitable because that steel is being demanded by the auto industry.  If that industry goes away, the price of steel will go down.  This will make a bunch of other uses profitable and those products will get made instead and there will be a whole new industry (or expansion of an existing industry) created.

Middle ages steel production, a high labor cost

Middle ages steel production, a high labor cost.

The situation is the same with labor.  If the auto industry goes out of business a lot of people will lose their jobs.  But when you hear people talk about this you would think that this means they will just sit there and waste away until they can’t buy another loaf of bread and then curl up and die.  What really happens is people are unemployed for a while and collect unemployment benefits (which they have paid for while working) and then find another job.  Labor is a valuable resource just like steel.  It won’t just sit there wasting away we will find a way to make use of it and these ways will be more profitable (productive) than the current allocation.

Will the lives of laid off workers be difficult for a few months? Probably.  Will they end up with a worse job than they had originally?  It’s certainly possible.  But the reason they may have to do this is that they currently have a job with a union contract that pays too high a wage for their employers to be profitable.  It shouldn’t be surprising that they want to maintain this situation but it’s a situation where the rest of us are subsidizing their higher-than-market wage.  Are we willing to set the precedent that if you can negotiate too high a wage for yourself at any time you and your children and your children’s children are entitled to keep it for the rest of eternity on the taxpayer’s dime regardless of the ability of your employer to generate a profit?  I’m not.

There are certainly costs associated with realocating a large amount of resources.   If the auto industry goes down, it will probably make GDP go down significantly for a year or so.  But the economy will come back leaner and more productive.  The alternative is to let it keep dragging the economy down a little bit every year indefinitely.