The Economic Effect by Richard Sessa

Jobs Do Not Matter: An Economic Perspective

 Sunday, July 10, 2011

                        This week the Bureau of Labor Statistics released the Employment Situation Report for the month of June. It indicates that for the month of June 2011, the unemployment rate increased slightly to 9.2 percent. Economists are in agreement that a “healthy” unemployment rate should be somewhere between 4 to 6 percent. Political leaders, including President Barack Obama, have primarily focused on the role of jobs in this economic recovery. However, the objective of job creation has largely obscured the optimal path for the economic recovery. Every economic activity occurs to promote the end goal of consumption. In a free market economic system, efficient economic activity occurs when producers are creating goods and services that consumers highly value. Employment is merely a by-product of these productive services, and jobs alone cannot promote economic prosperity.

          Ever since the Great Financial Crisis of 2007, the “creation of jobs” has been an overused phrase by both the media and political leaders. Yet, only productive employment (employment which is producing goods and services that consumers value) will contribute to a healthy American economy. For example, the government could create a program in which it pays unemployed workers to pump water out of one lake and transfer it into another lake. Surely, this would require many workers and would provide more employment for those looking for work, but it would be producing nothing that consumers would be willing to purchase in a free market system. To the contrary, it would cost taxpayers more than they would be receiving in benefits. In addition, similar job creation programs simply transfer resources in the form of tax dollars from the private sector and into the public sector. This requires the government to raise more tax revenue or borrow money which tends to crowd out private sector spending. Ultimately, government efforts to create jobs have the effect of reshuffling jobs from the private sector and into the public sector, rather than causing a net increase in hiring. Although the above scenario may seem unrealistic, we need only to look at recent government programs to analyze their effects.

          The 2009 stimulus bill passed by the U.S. Congress to help aid the economic recovery did in fact create public sector jobs for unemployed workers. However, each job created has been estimated to cost taxpayers at least $225,000. Even more alarming is the fact that most of these jobs are temporary positions of questionable economic merit. Furthermore, the jobs created tend to hire individuals that would already have employment in the private sector (such as engineers, planners, and skilled labor). In a free market system, the creation of wealth is made possible by producers combining resources to produce goods and services that customers value relative to the cost of production. A business is only profitable if its consumers are willing to pay more for a good than the cost of the resources used to produce it. This profit and loss system is the engine that ensures that private firms use resources efficiently. Firms that waste valuable resources for shoddy products are quickly eliminated from the system. The government projects rarely have such checks on the efficient use of our nation’s vital resources. The value of a new bridge, or a new USDA project raising butterflies, is likely not going to be valued by consumers highly enough to cover the wasteful use of resources. The bottom line is that government projects are almost always going to be less economically efficient than projects funded by private investors.

          What should the government do to promote economic prosperity? The creation of economic value comes from private individuals engaging in productive activities as determined by a free market system. Rather than choking this engine of progress, the government should support the policies and institutions that foster rapid economic growth. These activities include: providing a legal system that enforces property rights; keeping tax rates relatively low; promoting competition by reducing corporate welfare and barriers to market entry; limiting regulations that reduce trade and are costly to firms; and allowing international free trade.

          As we follow the news headlines and political speeches, it is imperative to examine the merit of each government proposal with the intention of job creation. While these policies may have good intentions, the unintended consequences can lead to a reduction in private sector employment and an unnecessary burden on taxpayers. These higher taxes (or future taxes) also lead to a reduction in consumer spending which causes more private sector unemployment. The jobs which are “created” are highly visible and provide politicians with opportunities to claim credit for a job well-done, but this overlooks all the workers that are being unemployed as a result of government action. Ultimately, we must ask whether it is better to have workers serving the government bureaucracy, or serving American consumer demands during this recovery effort. Jobs are not the cure, but rather the result of a successful recovery.



About the Author: Richard Sessa holds a Bachelor of Science degree in Economics, Political Science, and a minor in International Affairs. He is currently a Graduate Teaching Assistant for the Department of Economics at the Florida State University.

     

Comments
Anonymous commented on 10-Jul-2011 12:24 PM
Very well said....
Anonymous commented on 10-Jul-2011 09:13 PM
Mr. Sessa do you have any idea or opinion on when we may expect to see a rebound in the economy, especially in the jobs sector? Not by created jobs but by a real bounce in the economy?
R. Sessa commented on 11-Jul-2011 04:22 PM
The economy is recovering from the recession of 2007-2008. Technically speaking, we are no longer in a recession because we have positive GDP growth each quarter(GDP is Gross Domestic Product, or the total market value of all final goods and services produced
within the US during a certain period). However, the recovery has been slow as housing prices are still adjusting downward, and one of the biggest determinates of consumer spending is the equity that consumers have in their homes. Unfortunately, the housing
bubble was caused by government malinvestment policies, and housing prices will not reach 2006 levels for quite some time. The recovery is happening, but it will continue to be slow and painful for the next year or two. The speed of the recovery is also dependent
upon domestic policy (which has not been conducive to economic growth) and international factors (such as the Greek debt crisis).
Anonymous commented on 13-Jul-2011 04:37 PM
Thanks for your timely response Mr. Sessa it seems to make sense.

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