Basic Employment 101

I recently read an article by Caroline Baum that very clearly describes the forces that result in job creation.  The article does a great job at describing why the current White House is completely "out to lunch" on job creation as indicated by our current unemployment rate that will not budge during this summer of recovery.  Caroline's article reviews the basic physics of job creation, that has been completely disregarded by the professors that make up the Obama administration.

Her first point is that job creation isn’t the president’s job.  It is the president's job to create an environment that encourages the private sector to provide work opportunities.  Contrary to popular opinion, the federal government is not some sort of employment agency.  When they try to be, new government jobs are the result.  Increasing government payroll is not sustainable.  Only private sector jobs create the tax revenue needed to fund the federal government.

So what does it really take to create jobs?  Fundamentally, a job is created when the skills of a worker match the needs of an employer.  Skills and needs -- supply and demand -- will find equilibrium.

Today, many businesses satisfy increased demand with little or no increased supply (new jobs).  They do so by leveraging improved productivity that allows companies to produce more (goods) with less (labor).  The current business environment is focusing on improving productivity in order to reduce the need to hire (increase supply).

Starting a business or stimulating demand entails coming up with an idea for a product or service, making sure costs are less than revenue, and figuring out how to address competition.  Businesses that accomplish this must increase supply to meet the new demand. The decision to hire depends on how a business evaluates the potential gain from adding new capabilities against the risks of carrying additional cost.

Obama killed the idea idea for a temporary payroll tax holiday to spur hiring.  Instead, he supported a temporary tax cut for businesses that hire new employees.  Since the man has never run a business as large as a Popsicle stand, he did not understand that a company would not assume a long-term obligation -- a permanent employee, who needs training and qualifies for health- care benefits -- in exchange for a temporary tax cut.   Businesses don't respond to short-term measures.  Result?  Obama's jobs program has been an utter failure simply due to his administration's complete ignorance of basic business behavior.

What is known is that lower taxes on income and capital provide more of an incentive to take risks and start a new businesses that create jobs.  The president and the Congress should do everything in their power to ensure taxes stay low.  Currently they are sitting on their hands as the so called Bush tax cuts expire.


The Obama administration continues to support the federal government as the central planner.  They want to specify what jobs and where.  This may put people to work in the short run, but it’s a proven loser when it comes to providing the goods and services people want at the price they are willing to pay. The Soviet Union’s 75-year experiment is perhaps the most glaring example. Earlier this month, former Cuban President Fidel Castro told the Atlantic’s Jeffrey Goldberg that “the Cuban model doesn’t even work for us anymore.”   This group in the White House believe they know how to do it right in spite of evidence to the contrary.