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Thursday, August 26, 2010

Not All Job Destruction Is Creative

Inflationary booms bring busts.

In last week’s column I argued that we should not worry about saving jobs, but rather should celebrate the job destruction that comes with technological and economic progress.  Finding ways to accomplish our goals with less labor almost defines “economic growth.”  When digital switches and cellphones destroy the jobs of telephone operators, and ATMs replace bank tellers, we should see this as part of the process that enriches us all.

That column caught the notice of some folks at, who invited me on one of their shows. To my surprise the questions quickly turned to the current unemployment rate and what we should be doing to bring it down.  Toward the end of the interview I began to realize the source of the confusion: The host was thinking that the “creative destruction” of jobs I had described is the same thing as “unemployment.”  This week, I’d like to try to untangle those ideas.

Economists recognize that there are multiple reasons for unemployment.  We normally divide them into frictional, cyclical, and structural.  Frictional unemployment refers to people between jobs for the short term.  Think of the waiter whose restaurant closes and is now looking for a new job at a different eatery.  Cyclical unemployment refers to changes in the macroeconomy, such as the boom and bust we’ve experienced in the last decade.  Structural unemployment involves a longer-term mismatch between the skills of workers and the kinds of jobs that are in demand.

It’s often difficult to determine how much of the unemployment rate is represented by each type, but certainly we can make some broad observations, including that the current 9.5 percent rate includes a significant degree of cyclical unemployment.

Frictional unemployment is, of course, unavoidable in a dynamic, growing economy.  People want new jobs, businesses fail (except for banks and auto companies, apparently), and some folks just get fired.  Structural unemployment is also, to some degree, unavoidable.  Most of us are trained for a range of future jobs early in life, and if our skills are overly specific and become outdated, we will need time to retrain for the new jobs in demand.  Such retraining happens continuously, but people often will be unemployed, or underemployed, in the transition.  Both forms of unemployment are likely unavoidable in a free market, which means we should never expect the unemployment rate to be near zero in a healthy economy.  However, both are usually signs of economic progress: Bad businesses should fail, unproductive employees should be fired, and people should be free to find new jobs. As last week’s column pointed out, even though technological change has short-run costs, over time it improves life for everyone, including those who lost jobs.

Avoidable Unemployment

By contrast, cyclical unemployment, is largely avoidable.  The boom and bust of the business cycle are products of misguided government monetary and fiscal policies.  The recession we are now experiencing could have been avoided had the Fed not driven interest rates down too low after 9/11 and had other government policy not channeled the new money into the housing market, which then became the basis for a host of problematic investment vehicles.  Suffice it to say that a 9.5 percent unemployment rate is no cause for celebration.

Undoubtedly the recession destroyed a lot of jobs created during the boom. But those are jobs that never should have been created in the first place! So given the boom, it’s a good thing the bust destroyed those jobs: They represented misallocated resources.  However, from a broader perspective, we should not be cheering this destruction, as the whole boom-and-bust process that it represents involves a great deal of wasted resources, not even counting the trillions spent on the bailouts and “stimulus” plans.

In an economy suffering from an inflation-induced boom, too many of the wrong kinds of jobs get created, then the bust comes and destroys them, leaving us with high unemployment.  In a healthy economy, growth and technological progress destroy jobs first, then create new kinds of demands that lead to new, sustainable jobs — more than were destroyed.  A healthy economy creates more and better jobs by destroying ones we don’t need.  A sick economy create jobs only to destroy them.

Thus not all job destruction represents economic health.  When government policy generates booms and busts, it creates unsustainable jobs that eventually will be destroyed, harming millions in the process.  That’s not the “creative destruction” of the market. That’s just destruction, pure and simple.

  • Steven Horwitz was the Distinguished Professor of Free Enterprise in the Department of Economics at Ball State University, where he was also Director of the Institute for the Study of Political Economy. He is the author of Austrian Economics: An Introduction.