Confusion about job creation is obscuring America's productivity crisis

There is perhaps no other topic in economics that is more prone to illogical thinking than job creation. It is a wellspring of hysterical nonsense.

Let’s start with the canard that technology and automation kill jobs. Notwithstanding the fact that US productivity growth rates are at an all-time low, a growing chorus blames technology for killing our jobs. Writing in The New Yorker, NYU professor Gary Marcus alleges that, “as machines continue to get smarter, cheaper, and more effective, our options dwindle.” So don’t bother polishing up that resume; here’s a link to the unemployment office.

Liberal economist Robert Reich argues that robots will “take away good jobs that are already dwindling. They will in short supplant the middle class.” And MIT professors Erik Brynjolfsson and Andrew McAfee write that workers are “losing the race against the machine, a fact reflected in today’s employment statistics.”

Meanwhile, another group of Chicken Littles sound a different alarm – not that technology is creating a job shortage, but instead that, as business writer Aimee Picchi warns, “The US is facing a pending labor shortage in the next two decades.” It is a vision of demography as destiny, best summarized in a recent Conference Board report titled “From Not Enough Jobs to Not Enough Workers: What Retiring Baby Boomers and the Coming Labor Shortage Mean for Your Company.”

So let’s cut through the confusion by getting back to the basics: Economy-wide labor shortages are not possible. End of story. Demand for workers comes from one thing – demand for goods and services. If we buy less, then companies produce less and therefore employ fewer workers. When baby boomers start retiring in droves, final demand will decline as incomes go down in retirement, thereby reducing the need for workers. So no labor shortage.

The Conference Board also argues that slow growth in productivity will mean that companies are going to need relatively more workers. But this argument is as illogical as the retirement argument. To understand why, it’s important to first understand that productivity growth – regardless of whether it is slow or fast – has no effect on overall employment. Yes, if an organization such as an auto manufacturer raises productivity, then it doesn’t need as many workers to produce the same number of cars.

But in a dynamic economy where governments don’t pay people not to work, those workers who lose jobs in auto manufacturing will move as quickly as they can into new jobs producing something else. What else, you ask? Well, the higher productivity also lets companies either cut prices or raise wages — and when that extra money is spent, it creates demand for new workers in other industries.

On the flip side, if overall productivity slows, then companies need not worry about a labor shortage, because with slower productivity there is slower growth in demand (because prices don’t go down as fast, and wages don’t go up as fast), so there is also less demand for more workers. In other words, if the auto industry can’t raise productivity, then the price of cars won’t go down, and car buyers will have relatively less money to spend on other things.

An endless series of reports, op-eds, government white papers, and manuscripts all breathlessly ask, “where will the next jobs come from?” But it’s time to stop the hand wringing, because the answer is simple. They will come from the same sources that have always created them in the past: a combination of innovation on the supply side and changes in consumer demand. That employment in tortilla manufacturing went up 13 percent in the last decade had nothing to do with producers’ ability to make better tortillas through innovation; it had everything to do with the demand side of the equation – the population of Hispanic Americans has grown, as has the number of other people with a taste for Mexican food.

Conversely, that employment has grown more than 160 percent in Internet publishing and web search portals has had nothing to do with demand for content and everything to do with technology-based changes on the supply side (e.g., faster computers and more broadband Internet access). To be sure, we can’t easily predict where the jobs will come from in 10 years. They will depend on things such as whether Americans decide they want to keep buying $3 cups of coffee and whether virtual reality becomes so compelling that we all own VR goggles, which would employ more people at Starbucks and Oculus, respectively. 

But all this confusion around jobs leads to very serious policy mistakes. The most serious one is avoiding the need to focus on boosting productivity. What elected official wants to support policies that are designed to increase productivity if productivity kills jobs? None in their right mind. The result is that, as former TD Bank economist Don Drummond argues, “governments react to the public’s misunderstanding, even fear of productivity, by borrowing a concept from Harry Potter. Just as Lord Voldemort must be referred to as ‘He-Who-Must-Not-Be-Named’ or the ‘Dark Lord’ so must ‘productivity’ be globally replaced by ‘innovation’ or ‘competitiveness.’” And because of this phenomenon, pro-productivity policies such as expanding tax incentives for investing in automation equipment, or increasing funding for robotics research, are ignored.

The second problem is that jobs confusion leads policymakers to take measures that actually lower productivity and output under the false belief that jobs are scarce. Take France, for example. Amid worries of high unemployment, the French government in 2000 mandated a 35-hour work week. What could the politicians possibly have been thinking? They reasoned that if France had 24 million jobs, but 27 million workers, then why not mandate that the 24 million workers work 13 percent less? Surely, the unemployed workers would be hired to fill in the gap – and then voila! Unfortunately, basic economics foiled the plan, because when people work 13 percent less, they produce 13 percent less, and since their wages are related to their output they consume 13 percent less, too. So their reduced consumption leads to fewer jobs in other areas of the economy. This explains why the unemployment rate in France is actually higher in 2016 than it was in 2000. 

Another ill-conceived idea that policymakers around the world have latched onto is that they should give unemployed workers extended periods of income support since there are not enough jobs to go around. But the reason there are not enough jobs is that governments are paying people not to work, and that money by definition comes from higher taxes on people who are already employed. Those people then consume less, thereby completely offsetting the added consumption the government is creating by supporting unemployed workers. And worse, long periods of unemployment insurance payments encourage people not to work. If they instead were retrained so they could rejoin the labor market, their increased consumption from being employed would create additional jobs, leading to a positive cycle of more jobs and less unemployment.

A third nonsensical policy idea is that we should favor small businesses, since according to urban myth they create the lion’s share of new jobs. In truth, they don’t, but even sophisticated business leaders are susceptible to such thinking. Case in point is a recent USA Today op-ed by financial heavyweights Lloyd Blankfein, Michael Bloomberg, Warren Buffett, and Michael Porter, who argue that to speed job creation governments should lower taxes and regulatory burdens for small businesses even further than they already have relative to the obligations of large firms. But such a small business agenda would do nothing to create jobs, since any jobs created would come at the expense of other businesses, large and small. It would however reduce productivity and wages economy-wide, since US small business are less productive, on average, while paying significantly lower wages and providing fewer employee benefits than large firms.

So please, let’s put an end to the nonsense and stop the overwrought handwringing about jobs. Instead, let’s focus on what really matters: spurring technological innovation and putting the pedal to the metal for productivity growth.

Robert D. Atkinson (@RobAtkinsonITIF) is the founder and president of the Information Technology and Innovation Foundation, a think tank focusing on the intersection of technological innovation and public policy.