Commentary

Governments Can’t Create Jobs

This article originally appeared in The Washington Times on January 29, 2003.

The American Survey asked “of all the challenges and problems facing our nation, how many can the federal government solve?” It turns out 18 percent of conservatives and 20 percent of liberals think the federal government can solve many or all of our problems. An additional 39 percent in both camps look to the Feds to fix some problems, but not everything.

The Washington Times’ columnist Gary Andres thought these poll results showed “widespread recognition of the limitation of the federal government.” To me, they display much too much blind faith in the federal government, too little skepticism and too little self-reliance.

Unemployment is one problem most Americans probably expect the government to fix. Federal, state and local politicians are constantly promising to “create more jobs.” Before announcing his surprisingly promising new tax plan, President Bush told reporters: “What I’m worried about is job creation…. I will talk about how to create jobs, how best to create jobs.” His father likewise summarized all economic issues as “jobs, jobs, jobs.”

Democrats are no different. They talk about the “millions of jobs President Clinton created,” as though Bill himself had signed all those paychecks. Asked what they would do now to “stimulate” employment, leading Democrats reply they would raise the minimum wage and pay unemployment benefits for a whole year — two thoroughly reliable devices for pushing unemployment higher.

Is our 6 percent unemployment rate really a national crisis? Liberals and conservatives have an incentive to define almost anything as a crisis, because crisis-mongering provides a handy excuse for every pet project they hope to get taxpayers to pay for. Although today’s unemployment is surely quite troublesome for certain industries, cities and families, defining the overall national unemployment rate as a crisis requires a total loss of perspective.

It is normal for the unemployment rate to keep rising during the early stages of recovery, and not evidence the recovery is slipping into a “double dip.” Unemployment was 6.8 percent in March 1991, when that recession ended, yet it kept rising to 7.8 percent by June 1992. By contrast, December unemployment was only 6 percent after less than a year of recovery — lower than the 6.1 percent average of 1994 or the 6.3 percent average of the past 30 years.

Part of the reason unemployment is slow to fall after a recession is that productivity usually jumps. When businesses produce much more output per hour, they don’t need more hours. The White House rightly boasts that output per hour in the third quarter of last year was 5.8 percent higher than a year before. Since business output was up only 3.8 percent, however, than meant hours of work fell by 1.9 percent.

Impressive gains in productivity and a “jobless recovery” are just two ways of saying the same thing. Yet these oversized productivity gains are very good news. Increases in real output per hour translate into increases in real compensation per hour (up 1.9 percent) while simultaneously improving profit margins by reducing employer’s labor costs per unit sold (down 2.2 percent).

Not long ago, prominent Keynesian economists argued that unemployment could not fall much below 6 percent without causing inflation to accelerate. The “non-accelerating inflation rate of unemployment” (NAIRU) was said to be around 5.7 percent as recently as 1997, according to Robert Gordon of Northwestern University and the Congressional Budget Office. The fact that 5.7 percent was so recently thought to be as low as unemployment could safely go helps put the current 6 percent rate in a better light.

Since an unemployment rate near 6 percent is nothing to hyperventilate about, a few innovative journalists have tried making a big fuss over the long time it takes to find a job. The median duration of unemployment spells is 9.6 weeks, meaning half the unemployed find work in 9.6 weeks or less. That figure is relatively high, but only slightly higher than the 9.2-week average for 1994.

Others say what makes a 6 percent unemployment rate so unusually painful this time around is that massive layoffs have supposedly devastated the white-collar elite, particularly in tech and telecom industries. Actually, fewer than 42 percent of the unemployed have suffered any permanent job loss, so the unemployment rate for job losers is actually 3.2 percent. The rest of the unemployed either quit, are new to the job market or are on temporary layoff.

As for those white-collar blues, unemployment is only 3.2 percent among managerial and professional workers, 3 percent among college grads and, for that matter, only 3.6 percent among married men. If you crave job stability, it also helps to grow older: Unemployment was 9.7 percent at ages 20 to 24 but 5 percent at ages 25 to 54.

Unemployment is higher in manufacturing, at 6.8 percent, but there are only 11 million production workers in manufacturing. That is little more than half the 21.4 million working for government.

The fact that 10 million more people work for government than work in manufacturing highlights an important point. When government officials talk about “creating jobs,” they usually mean creating government jobs. The trouble is that those in “public service” expect to be paid well, and their perks are fabulous. Unfortunately, any method of paying salaries and benefits in the government sector has to destroy jobs in the private sector.

Governments have only three ways of paying employees — taxes, borrowing and printing money. Each of those reduces income and wealth among those paying taxes, servicing debts or stuck with shrinking greenbacks. In short, governments can’t “create jobs.” Adding government jobs is never a net addition to employment opportunities, because it means a heavier burden on private employers and employees.

I have a feeling Mr. Bush understands, almost intuitively, that the best any government can ever do to “create jobs” is to minimize the burden of taxes and regulations. As Henry David Thoreau once explained, “Government never of itself furthered any enterprise, but by the alacrity with which it got out of its way.”

Alan Reynolds is a senior fellow with the Cato Institute.