Tuesday, September 06, 2011

How Not To Create Jobs

I returned from some time away just before Labor Day to read and hear that the administration is now really focused on jobs!

Nice, but it demonstrates a predictable, lamentable failure to comprehend the nature of job creation.

Many politicians of both parties speak of jobs as if they are simply units of income-production which magically appear if and when government does things with taxes. Currently, the thinking is to spur job creation by lowering the after-tax cost of employees with various employment tax reductions.

As it happens, I met a genuine small businessman on last week while hiking in New Hampshire's White Mountains. While discussing the recent behavior of US equity markets, social welfare programs and the economy, I asked him if lowering the costs of hiring and paying workers would lead him to bring on more people.

It would not. He owns and operates a picture-framing business. Over the past few years, he's had to lay off most of his small staff. As is often the case, family members will assist him to meet peak demand. But he only has one remaining full time employee.

He confirmed that he could only hire another worker if demand for his services rose and remained steady. That might take 6 months to a year. But there's simply no way, in this economy, that a reduction in payroll taxes will have any effect on his hiring plans.

The current political thinking about reversing causality, and the confirmation of my view which I received from my fellow hiker, led me to recall the words of an old grad school professor.

Morris Gomberg, one-time labor leader and, many years ago, management professor at Penn's business school, was lampooning federal inflation-fighting efforts. I remember Gomberg laughing at the notion of government capping prices, thus expecting that by manipulating an output, inputs would react accordingly and fall, too.

He quickly offered a comparison that went something like this,

'It's like you want someone to eat less, so you shove what comes out of them back in. What you would get, instead, is a very foul and disgusting mess.'

So it is with this equally backward notion of attempting to game payroll taxes, which is a result of hiring, hoping that by temporarily lowering them, hiring will magically appear. It is a sad statement on the state of government that the best economists federal money can buy don't have a clue regarding what drives job creation. At best, their tax reductions could affect the prices at which additional labor would be hired, meaning a total after-tax cost could be maintained and more paid to workers, or the savings kept and workers paid no more. But the payroll tax gimmick won't spur raw demand for hiring.

It's the prospect, for a business owner, of steadily rising demand for his products or services which cause him to add employees. Not a totally unrelated cost element being temporarily lowered.

Of course, the federal government tried several times in the past three years to stoke demand via its stimulus programs. Nothing worked.

So now it's on to completely unrealistic fantasy schemes which display a gross lack of appreciation for how businesses actually function.


TallIndian said...

Technology is both a problem and a solution.

Banks (the industry with which I am most familiar) can outsource jobs to India for a fraction of the cost of a US employee and actually see an upgrade in productivity.

I too worked at Chase back in the mid 1980s.

There were hundreds (if not thousands) of non-officer grade jobs that offered steady employment and decent salaries with full benefits.

They had no college degree or had a degree from a some continuing ed program or night school.

These people did have to pay for their lunch at the cafeteria. They also suffered indignities from hot shot traders/marketers half their age but with Ivy league MBAs

The jobs were clerical, repetitive but critical to the functioning of the bank. These were the kind of people who showed up for work every day and were grateful for that paycheck.

They raised families and perhaps their offspring earned Ivy league MBAs.

I would dare say that at least 95% of these jobs are now outsourced to India.

It is hard to argue with free markets but surely there is a lesson here.

C Neul said...

While your personal experience may be true- and I accept it as such- I don't know what your comment has to do with my post.

It would have seemed more appropriate to one from last month wherein I wrote about global trade creating a permanent lowest 10-20% structurally unemployable of every nation's workforce. Particularly in advanced economies like our own.

Many of those undegreed former Chase employees are precisely those people- lower-skilled, lower-educated and lucky to make so much money as such, until global trade lowered the cost of providing those services.

I can't honestly say I'm all misty-eyed that those days are gone. How do you think we get higher standards of living and productivity gains- from the tooth fairy?

Your verbiage belies your bias when you write of "hot shot traders/marketers". My own recollection is that Chase, in that era, had few really hot shot traders because, as a commercial bank, it wasn't taking large positions in most exotics. And really good traders would have fled to an IB or broker where they would have doubtless made much more money.

The lesson, btw, from your anecdote, is that those non-officer employees benefited from an era of relative unproductivity, and should have been grateful for it. Like it or not, everyone in a competitive economy must either see to their own career and value, or expect to be devalued over time financially, as the market finds less expensive substitutes for their expertise.


TallIndian said...

I apologize if I wasn't clear, but my post was in response to your statement:

It's the prospect, for a business owner, of steadily rising demand for his products or services which cause him to add employees. Not a totally unrelated cost element being temporarily lowered.

The business need not add employees in the US, but overseas. A tax benefit to add employees in the US would change the equation.

Agree that we are each responsible for maintaining/obtaining the needed skills.

But what happens to a nation when profits can be obtained by sending jobs overseas and generating unemployment domestically?

FWIW, Chase was a major player in FX, Bonds, Money Markets and Commodities and had some of the best traders on the Street. The gold trader had a reputation for making the tightest markets in NA.

True, many traders fled to Saloman or GS. However, Chase's access to low cost funds allowed traders to execute arb trades not feasible at Salomon or GS.

For the most part, investment banks didn't get into FX until post 1987.

C Neul said...

Yes, Chase had FX markets in their grip- because it was a large US money center bank. Probably a few other desks, but I do not recall fixed income being one. And my group saw P&Ls.

As to your point about overseas job creation, that's for large firms. Most economists and other pundits believe that the bulk of job creation is in firms with less than, I believe, 100 employees.

So your point is fairly moot in the context of my post. Tax-based cost reductions, esp temporary ones, may affect the price of employees, but probably not whether they are actually hired. That's a function of demand, first, then cost of supply.