Creating the right jobs is harder than it looks

 
Anthony Evans
BARACK Obama realises that the key to keeping his own job is to start creating them for other people. The US unemployment figures are high (above 9 per cent), sustained (the recession officially ended almost two years ago), and deepening (half of the unemployed have been out of work for more than 6 months). His $447bn “American Jobs Act” intends to create jobs through a mixture of tax cuts, public works, and training programmes, but is severely flawed.

The UK is facing a similar problem to America, with unemployment rising from 5 per cent at the beginning of 2008 to almost 8 per cent in the summer of 2009, staying at that level until now. Why has unemployment remained so persistent?

Some economists will point to a collapse in aggregate demand – a lack of spending that is keeping output below its full employment rate. Some will focus on the supply side – the regulations that make it prohibitively costly to hire new workers, or a deficiency of the right skills. Others might stress expectations, and how it is unlikely that firms will make long term hiring decisions based on temporary policy changes. All of these views are important, but there’s another to consider.

Part of the problem is looking at the unemployment rate itself – of trusting the ability of a single, aggregate figure to summarise the entire labour market. This masks the mechanisms of change, the complex process by which some jobs become outdated and unproductive, while others emerge to take their place. Bundling all jobs together implies that they are comparable, or that they are homogenous. But hiring is an investment decision. Workers have their own unique abilities and aspirations, and are better suited to some tasks than others.

The puzzle is not why unemployed people don’t take the first available job they can find, but – as economist Steve Horwitz has stressed – what factors are blocking the creation of the complementary capital goods required to fit together with human capital as profitable entrepreneurial plans. That is harder to solve. And as economic development increases specialisation, it makes the matching of workers and jobs even more complex.

This might all sound a little abstract – after all, aren’t the jobs being subsidised by government often in low-skilled industries where labour is relatively homogenous? Perhaps, but things like construction projects take time to come to fruition, and the employment of low skilled workers occurs late in that process.

Obama’s jobs plan assumes that any job is better than no job – that the goal of public policy should be to employ idle resources. But resources are never idle. Regardless of whether they are in use they are performing an important economic function, and it is costly to put them to the wrong use. The challenge isn’t to create more jobs, but to create the right type. Policymakers are facing a coordination problem, not an unemployment problem.

Anthony J. Evans is associate professor of economics at ESCP Europe Business School in London, and Fulbright scholar-in-residence at San Jose State University. His website is www.anthonyjevans.com.