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Jobs are not Scarce

March 13, 2012

The buzzword in politics these days is “jobs”. It seems all anyone can seem to talk about is how to increase the number of jobs available. The underlying theory seems to be if we don’t pass enough laws, all the jobs will disappear and everyone will sit around unemployed. While this is a common paradigm, it is a rather strange way to look at an economy.

The purpose of an economy is to satisfy as many wants and needs of human beings as possible. All the natural resources of the world have been sitting around since the dawn of time, but the process of arranging them takes work. The whole point of technological progress is making more of the stuff people want with fewer resources. Popular rhetoric would have you believe that the best system is one where the most labor is used to produce the fewest goods. Ideally, everyone would work 100 hours a week and produce barely enough to survive. And yet, when people are offered the chance to live in places that resemble that system, they decline.

Jobs vs. Production
When people say “jobs”, they don’t mean any job. They usually mean well-paying jobs, but well-paying jobs require productive workers. Firms can’t pay their workers a lot if they don’t produce alot. But coming up with productive uses of labor is hard, especially with constantly shifting technology, consumer demand, demographics, prices, etc.

At low enough wages, people can be employed doing almost any job.
At low enough wages, there are always jobs

Whereas, at high wages, it’s more efficient to use capital.

When one form of production is disrupted, whether by a new technology or pattern of trade, resources are freed up which can then be used to produce other things. In the long run, the workers will move to their next best use, and, since productivity has increased, overall workers will be better off. However, as Keynes said “Economists set themselves too easy, too useless a task if in tempestuous seasons they can only tell us that when the storm is past the ocean is flat again.” In the meantime, people need new skills. Perhaps they will also need to move to a new area, or suffer through a long period of unemployment. In my view, easing the pain of reallocation is justified if it increases political support of a policy which leads to long run growth. Better to do that than throw away all the gains from trade or technology.

Government Jobs
If the government simply creates jobs by hiring unproductive people at high wages, all they do is shift money from one group to another. Everything the government spends, it must first take away. Whether through taxes, borrowing, or inflation, one more dollar of government spending translates, in the long run, into one less dollar of private spending (in real terms). The money to pay for the new jobs must come from other workers, which means that the overall pool of good jobs won’t increase. Government programs should thus be evaluated based on their outputs, not their inputs.

Why Jobs Seem Scarce
All this theory is no good to someone who is unemployed. Job hunting is more like dating than any other market transaction. You need to find a job right for you, and you need to be right for the job. Normally, when a market is in surplus, a drop in price will clear it. However, if you offer to work for less than the going rate, you will send a signal that you are a low quality worker. The same goes for long periods of unemployment, which can cause a worker to be stuck without a job. Regulations, minimum wage laws, and contractionary monetary policy make it harder for wages to fall as well. Jobs may be hard for the individual to get, but thinking about them as a scarce resource clouds perception of how an economy works.

Further Reading
Mike Munger
Steve Horwitz (video)

6 Comments leave one →
  1. March 13, 2012 6:05 pm

    So where is the system that will let everyone live a life of both luxury and leisure? 😛

  2. March 14, 2012 8:01 am

    In a sense, you already have it. Throughout America’s history, our ancestors made choices to advance technology and open trade, when those of other countries chose the opposite. That’s why we are so rich. An unskilled laborer in America can earn $16,000 a year, whereas the same worker would only earn perhaps $500-$1,000 per year in the developing world.

  3. July 15, 2014 5:08 am

    Armen Alchian, in his great textbook with Bill Allen, liked to say that there are always plenty of jobs. Timely information on what job opportunities there might be, their whereabouts, how much they pay and what other options there are in the workforce can only be acquired slowly. they explained unemployment as the result of people having to discover what new opportunities there are in a changing labour market.

    In a recession, employers and workers do not immediately know that demand has fallen elsewhere as well as in their own local markets and recognise the need to adjust to their poorer prospects everywhere, and it is not known how long the drop in demand will last (Alchian and Allen 1973).

    The cost of learning about available opportunities restricts the speed of a recovery. Workers and entrepreneurs must gather information on the new state of demand and the location and nature of new opportunities. This information is costly and is quickly made obsolete by further changes, and the cost of acquiring information is more costly the faster the information is sought to be acquired (Alchian 1969; Alchian and Allen 1967).

    The process of recovering from a recession would be a faster process if the new constellation of wages and prices that are the best alternative uses of resources was known immediately and was credible to firms and workers (Alchian and Allen 1973).

    Workers and employers must first have sufficient time to discover what new knowledge they now need to know to serve their interests well, leave enough room for the unforeseeable and keep their knowledge fresh in ever-changing markets. New wage levels must be created by workers and employers testing and retesting in the labour market the new relative scarcities of labour.

    Imbalances between the allocation of labour supply and demand to different firms and sectors and the new level and pattern of consumer demand are gradually remedied by changes in relative prices and wages, lay-offs, business closures and job search.


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