redding.dev
	economics Jobs Any time a politicians suggests spending more or taxing less, you can bet your bottom dollar that one of their main justifications will be that it will create jobs. This argument is usually terrible. Two Examples Suppose the economy consists of a labor force of 10,000 people. Each worker can produce 1 widget per day, which are all sold to the laborers for $1 a piece. GDP per day is, therefore, $10,000. Then, one day, the government decides to build a road to "create jobs". Suppose building this road will take 1,000 widgets per day. Case 1: no one is unemployed Each laborer is still paid $10,000 per day, but since the government is buying 1,000 of the 10,000 widgets, we now have $10,000 chasing 9,000 widgets, which means the price will rise from $1.00 to $1.11 (assuming no one saves money), and consumption per laborer falls from 1 widget per day to 0.9 widgets per day. The government will spend $1110 per day on their road. No jobs are created, because everyone is already employed. Eventually, once the bridge is completed, the price of widgets will fall back to $1.00, consumption per day will rise back to 1 widget per laborer. Case 2: 1,000 people are unemployed In this case, these 1,000 people are brought into the labor force to supply the government's demand for widgets. The price of widgets remains $1, and the government only ends up spending $1,000 per day non widgets instead of $1,111. Later, when the government finishes the road, those 1,000 people are fired. Background The above examples are obviously oversimplified, but they demonstrate and important point: the government only creates jobs when there are people who aren't already working at their potential. In the long-run, the labor market acts like any other market: it tends towards equilibrium. This means, if there are people who are (a) want jobs and (b) are employable at above minimum wage, then wages will fall until they can work. Like most other markets, the labor market can run into issues in the short run, because prices (wages) are sticky. However, the central point remains: in the long-run the economy tends towards full employment, with or without government spending. For this reason, the government is incapable of creating jobs in the long-run except at the expense of private jobs. In the short-run, the government can create jobs, particularly during a recession. It does this using two mechanisms: Monetary Stimulus - the central bank prints money, increasing the money supply Fiscal Stimulus - the government borrows money from investors, and either spends it or gives it to people who spend it. This increases the velocity of money. Per the money equation, both these actions will increase some combination of prices and real output. When there are unemployed people, some of the change will be an increase in output, but when cyclical unemployment is near zero, real output can't increase, which means the above stimulus will only create inflation. This leads to a simple but powerful rule: During a recession, short-term spending creates short-term jobs and is good. Any other bending is basically neutral in terms of job creation. For instance, if you're in a recession and the government proposes a 20-year infrastructure project, ~90% of that spending will happen well after the recession ends, and will therefore mostly just crowd out private jobs.

economics

Jobs

Any time a politicians suggests spending more or taxing less, you can bet your bottom dollar that one of their main justifications will be that it will create jobs.

This argument is usually terrible.

Two Examples

Suppose the economy consists of a labor force of 10,000 people. Each worker can produce 1 widget per day, which are all sold to the laborers for $1 a piece. GDP per day is, therefore, $10,000.

Then, one day, the government decides to build a road to "create jobs". Suppose building this road will take 1,000 widgets per day.

Case 1: no one is unemployed

Each laborer is still paid $10,000 per day, but since the government is buying 1,000 of the 10,000 widgets, we now have $10,000 chasing 9,000 widgets, which means the price will rise from $1.00 to $1.11 (assuming no one saves money), and consumption per laborer falls from 1 widget per day to 0.9 widgets per day. The government will spend $1110 per day on their road. No jobs are created, because everyone is already employed.

Eventually, once the bridge is completed, the price of widgets will fall back to $1.00, consumption per day will rise back to 1 widget per laborer.

Case 2: 1,000 people are unemployed

In this case, these 1,000 people are brought into the labor force to supply the government's demand for widgets. The price of widgets remains $1, and the government only ends up spending $1,000 per day non widgets instead of $1,111.

Later, when the government finishes the road, those 1,000 people are fired.

Background

The above examples are obviously oversimplified, but they demonstrate and important point: the government only creates jobs when there are people who aren't already working at their potential.

In the long-run, the labor market acts like any other market: it tends towards equilibrium. This means, if there are people who are (a) want jobs and (b) are employable at above minimum wage, then wages will fall until they can work.

Like most other markets, the labor market can run into issues in the short run, because prices (wages) are sticky. However, the central point remains: in the long-run the economy tends towards full employment, with or without government spending. For this reason, the government is incapable of creating jobs in the long-run except at the expense of private jobs.

In the short-run, the government can create jobs, particularly during a recession. It does this using two mechanisms:

Monetary Stimulus - the central bank prints money, increasing the money supply
Fiscal Stimulus - the government borrows money from investors, and either spends it or gives it to people who spend it. This increases the velocity of money.

Per the money equation, both these actions will increase some combination of prices and real output. When there are unemployed people, some of the change will be an increase in output, but when cyclical unemployment is near zero, real output can't increase, which means the above stimulus will only create inflation.

This leads to a simple but powerful rule:

During a recession, short-term spending creates short-term jobs and is good. Any other bending is basically neutral in terms of job creation.

For instance, if you're in a recession and the government proposes a 20-year infrastructure project, ~90% of that spending will happen well after the recession ends, and will therefore mostly just crowd out private jobs.