HOW ARE JOBS CREATED

Sunday, October 23, 2011

Zach Sheinberg

Last Monday, Joe Nocera of the New York Times wrote a column (http://nyti.ms/pzifyt) about the effort of Starbucks founder Howard Schultz to help create jobs (outside of Starbucks) in the United States.

As I read the article, I was reminded of how hard creating jobs is. And I started thinking about the process of job creation. My question is, how are jobs created?

Let’s start at the beginning.

An employer hires and pays an employee when that employer requires additional labor to produce the product or service that the employer sells. An employer requires additional labor when new demand (or the expectation of new demand) exists for the product or service that the employer sells. New demand exists when new customers place new orders (or existing customers place more orders) for the products or services that the employer sells. The expectation of new demand exists when the customer base grows.

There are two types of products and services: those demanded by consumers and those demanded by other businesses. Though the demand of other businesses for products and services are simply derivative of consumer demand. For example, if homeowners are not repaving their driveways, paving companies are not purchasing new paving machines; paving machine manufacturers are not purchasing new metal to make paving machines; mining companies are mining less metal and so on. Consumer demand for goods and services drives the economy.

New consumer demand occurs when consumers have money to spend on products and services and have the expectation that they will continue to have money to spend in the future. Consumers have money to spend when they are working and earning income. They have the expectation that they will continue to have money to spend in the future when they feel secure in employment (whether they feel secure at their current job or are confident that if they leave their current job they can find a new and similarly or better-paying job).

Such explains our predicament. In order to create new jobs, we must have people already working so they can make money to spend on new stuff that we need new workers to make.

So how do we break this seemingly hopeless cycle? We innovate.

Take the introduction of the iPod as an example. With the iPod, Apple innovated. The company changed and improved the way consumers listened to and stored music. The iPod made listening and storage so much easier than the best available options that existed at the time (remember carrying around a Discman that skipped constantly and dozens of CDs?). Therefore, consumers demanded the iPod. Consumers bought the iPod. Apple’s innovation created this new demand.

So Apple made more iPods, which required more employees (both internally at Apple and externally at Apple’s manufacturing partners). These new workers had new income that they then spent, which created new demand for other goods and services throughout the economy, which led to new jobs in those areas, and the ripple effects continued.

Now when the iPod first came out, there was a fixed amount of money in our economy. So consumer purchases of the iPod likely redirected money away from other goods and services that those consumers may have purchased if the iPod had never existed. Which means that the companies that sold those now less desirable goods and services probably had to lay off workers, order less materials from suppliers, who probably had to lay off workers of their own, and so forth. So when the iPod first came out, the new jobs at Apple were probably offset by the loss of jobs at other companies.

However, while in the short run, overall employment may have stayed the same (Apple added jobs, other companies lost jobs), in time, Apple’s innovation of the iPod created more jobs for the economy than it cost. As more consumers demanded the iPod, Apple started making more iPods, which required more workers; new companies started making iPod accessories, which required more workers; competitors started making iPod knockoffs, which required more workers; Apple spent more money on research, development and innovation, which led to iTunes, the iPhone and the iPad, which required more workers. While impossible to quantify, the ripple effect of the iPod without question was a net gain for jobs in our economy.

Our economy creates jobs by creating new demand for stuff. We create new demand for stuff by innovating, by giving consumers better and/or less expensive versions of old stuff and desirable new stuff like the iPod.

So the question becomes, how do we spur innovation? How do corporations spur innovation? How can the government spur innovation? Because only innovation will lead to sustainable economic growth and sustainable lower unemployment.

Some food for thought (and I’m not suggesting any answers)…

- Will reductions in corporate taxes sustainably spur the economy? Will corporations having more money in their coffers lead to innovation and/or sustainable new jobs?

- Will reductions in government spending and government debt sustainably spur the economy? Will the large chunk of government consumption eventually be replaced by equivalent or greater private consumption (and keep in mind the ramifications of reduction of the national debt)?

- Will increases in government spending and government debt sustainably spur the economy? Should the government fund (and continue to fund) organizations that undertake research and development (eg. the National Institutes of Health, NASA, the Defense Department, the Energy Department)?

- Will reductions in overall personal taxes (including income taxes, sales taxes, etc.) sustainably spur the economy? Will individuals having more money in their pockets lead to sustainable increases in consumer demand?

My point here is that the creation of jobs is not easy and cannot happen overnight. Steering the economy back on course is like steering a massive ocean freighter back on course.

Whatever your ideas on how to create jobs, please share them below. And feel free to agree or disagree with me on anything above.