Last month I emphasized that job creation is not a sensible objective for economic policy. The purpose of economic activity is not to do work for its own sake. What’s the point of creating jobs to produce goods or services that consumers don’t want as much as other things that could have been produced? Yet there is a widespread view that having government create more jobs is the best way to promote economic progress. Wrong. Relying on government to create jobs invariably retards economic progress.
Productive jobs are created when people have the freedom to communicate and cooperate through markets. Consumers communicate the value they place on different jobs by how much they are willing to pay for products. Anytime a firm employs workers to produce a more valuable good than workers are producing at other firms, consumer purchases tell that firm: “We will make it profitable for you to expand output by offering higher wages and bidding workers away from less valuable jobs.” Workers end up cooperating with consumers by moving into the production of more desirable products until all gains from such a move are exhausted.
Similarly, firms communicate how much it costs to produce different products (including the cost of hiring workers) by how little they are willing to charge for those products. When firms can lower production costs by making more valuable use of workers, they communicate that fact to consumers through lower prices. This motivates consumers to buy more of the industry’s product and motivates the industry to hire more workers. Again, workers cooperate with consumers by moving into those jobs where they produce what consumers are most eager to have.
When government tries to create jobs it always interferes with market cooperation between workers and consumers. So even when jobs are created, people are directed into jobs in which they are producing less value for consumers than they could be producing. Government attempts to create domestic jobs by restricting imports is an example of undermining the market cooperation that creates the most productive jobs. By preventing people from buying products from the most efficient producers, import restrictions prevent the cooperation that guides workers into those jobs in which they have a comparative advantage; that is, where they produce the most wealth. Unfortunately, there are many other examples of how government job creation destroys wealth by distorting market interaction between consumers and workers. Consider one way that government attempts to expand employment.
Spreading the Work
France is currently attempting to reduce its high unemployment rate by making it illegal for any employee to work for more than an average 35 hours a week. That policy would make sense only if there existed a fixed amount of work and it was being done by fewer than the available workers; in that case, more workers could be hired only if the amount of work done by each were limited. If this is true in France, then it has pulled off an amazing feat. The French must have all the goods and services they want, with work and toil being the only scarce things remaining. But if work rather than desirable goods is what the French lack, there is a better way of taking care of the problem than restricting the hours of work. They could simply destroy a percentage of everything produced. This would create more jobs for people to replace the destroyed output, plus additional jobs to do the destroying.
Unfortunately, neither the French nor anyone else has overcome the problem of scarcity. If more of the things people value are produced, people will be anxious to consume them as long as market communication is undistorted by government restrictions. Imagine a technological breakthrough that allows one person to produce everything currently being produced in a country. Does anyone believe that the country would be worse off or that everyone but the one person would be unable to find work? Of course not. The country would become incredibly wealthy as millions of workers were freed up to produce additional products that consumers had been doing without. And in the absence of market distortions, the extra output would be consumed since it would result from consumers’ communicating their desire and willingness to purchase it.
Interestingly, it was the nineteenth-century French economist Jean-Baptiste Say who explained why expanding output should be no problem. Say’s explanation is often distorted as meaning that “supply creates its own demand,” which has become known as Say’s Law. But this is a straw man. Neither Say nor any other sensible economist believes that the production of any particular product, or bundle of products, will create the demand for it. Producing something that no one wants will not create a demand for it. What Say explained is that when market prices are free to respond to changing production costs and consumer preferences, then the decisions of suppliers and consumers are coordinated and there is no need to worry about unemployment caused by gluts of unwanted goods.
Drilling More Holes
Trying to reduce unemployment with government restrictions on the number of hours that people are allowed to work is like trying to sober up with more drinking. Such restrictions add to existing government policies (such as minimum-wage laws, regulations on dismissal, and mandated benefits) that are already reducing cooperation between consumers and workers. Also, enforcing these restrictions employs workers, who could be responding to consumer desires, to make sure that other workers don’t respond to those desires. For example, the French government hires “work police” to enforce the work restrictions. They do such useful things as note how long cars are parked outside businesses. This snooping is not merely a total waste of time. It is worse than that, having led to the detection of renegade executives who have committed the crime of working the extra hours required to negotiate complex deals that, if culminated, would lead to more productive jobs.
The more distortions governments impose on market communication and cooperation, the more problems they create—problems they can use to justify more distortions. It is as if you are on your boat and a government official comes aboard, announces he is there to help, and drills a hole in the bottom. But don’t worry. As your boat takes on water and starts to sink, the official reassures you that he is going to drill some more holes so the water can run out.
Government’s attempt to create jobs is almost always the economic equivalent of drilling holes in the bottom of a boat. The problem is that the costs are greater than we realize and commonly disguised as benefits.