Thursday, 24 September 2009


Language is a powerful influence on the way we think. Take the word "jobs". An innocuous word in itself, used in many and varied context. Most people would be familiar with its use in forms such as:
"protecting jobs"
"creating jobs"
"exporting jobs"
"this will cost jobs"
"this government policy will cost jobs"
or my favourite at the moment:

"turning our back on Europe will cost jobs"
All leave a visual impression of a tangible object, like a book or a cup. Things that can indeed be "protected", "created" or moved from one place to another or even lost forever down the back of the sofa with all that loose change and lolly wrappers. The natural extension of such thinking is to believe implicitly that these things are fixed in number, that if I have it you can't. In economics speak, we would say rival in use, or consumption.

On those general impressions, reinforced by that language, the electorate in every country I can imagine believe they are involved in a global economic tug of war, fighting for these "jobs". This isn't good. For one, it provides the fuel for protectionist behaviour that adversely affects everyone's welfare.

The problem is, like many widely held beliefs about economics, this impression of "jobs" is wrong. It simply is not true that the relocation of output from one country to another (for example Dell moving from Ireland to Poland) will leave a hole created by a theft, or exportation, of "jobs". Nor is it true that some form of government policy (read public spending) is needed to fill such an imaginary hole.
And why is that the case? The reason is because there are no "jobs" per se, but an amount of labour that is needed to produce a given quantity of goods and services for the available technology and capital stock. And the amount of labour you use, relative to the amount of capital used (the level of known technology is simply a given at any point in time) will be determined by how much labour costs compared to capital.

If your production process requires you to open cans and labour is very expensive, you will buy an automated electric can opener and employ one person to operate it. If labour is cheap, you will buy 6 manual can openers and employ 6 people to operate them. The key is in the price of labour, or wages. "Jobs" will be there so long as wages are flexible and an economy is allowed to move from one state to another. They won't be lost, stolen, created, exported or anything else.

You can see the crux of the issue here though. It is all about the flexibility of wages; by which I mean the level of wages relative to everything else, including stuff in other countries. This is the only way that a shock to the economy, or any policy will "cost jobs" - if we refuse to allow wages to adjust.

So the only way that an economy is likely to be left with a shortage of "jobs" (i.e. persistent excessive unemployment) is if the price of labour doesn't adjust, or if some obstacle to movement of labour from one region to another, or from one industry or skill set to another is impeded. Note here that large scale government "training ", like the Irish FAS can in fact be such as impediment - but that is for another post.

What may happen is that wages might need to fall to restore full employment, which could imply a lower level of income on average. But there is no point in fighting that. It is a superior outcome to what would be a lower level of income and a larger number of unemployed people who are without employment for longer periods of time.

Here are the important implications of this that everyone should bear in mind:

A government does not, can not, "create jobs". Reject outright any rhetoric based on such a lie, it is usually a political ploy from the CEOs of the most dominant and powerful industry in the world, the political one.

Buying goods or services from abroad does not "cost jobs". Nor does buying domestic goods "support jobs".

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