As I\’ve been saying….

The number of workers required to supply a good or service is not a benefit of that good or service; it\’s a cost. Societies become more prosperous only as they succeed in using fewer workers and other inputs to supply any given amount of output. Only then are inputs made available to produce outputs that otherwise could not be produced.

 

This seems to have got people arguing with each other and with me in the comments section.

So, let me try to make this clear.

Jobs are a cost, not a benefit of a particular scheme.

For example, we\’ve had Caroline Lucas recently insisting that renewable technologies are better precisely because they use more labour per x amount of energy produced than non renewable systems.

I argue that they are worse for exactly the same reason.

For, and this is the important part, the cost of something is determined by the opportunity cost: what are we giving up to get this thing or service?

When we have two technologies, one labour intensive, one not so (leave aside all the rest about capital intensive etc) then what is it that we give up if we decide to use the labour intensive one?

That\’s right, all those other things that labour could have done if it was not working on this specific scheme. Wiping babies\’ bottoms, finding the cure for cancer, creating mixed artistic forms celebrating the production from the Stakhanovite Workers\’ Collective.

The price to us of this labour being employed in our pet scheme is all the things the labour could have been doing otherwise: jobs are a cost, not a benefit.

It\’s still entirely possible that jobs are a cost that we\’re happy to pay. We may well have places where people can work and their output is of greater value than the opportunity cost of their employment. We\’ve even got a method we try to use to work out where these jobs might be: it\’s called a market.

Yes, there are even times when there are things not included in the market pricing (externalities) which, when we include them (via taxes perhaps, or regulation) will change which jobs do indeed cover their opportunity costs. Fine, price them into the market.

Some might even say that this might be true but isn\’t if there are unemployed workers. This is again, I\’m afraid, false. For there are always opportunity costs. The unemployed are not doing nothing, they are just not working officially for cash. They are wiping babies\’ bottoms, engaging in home production (an allotment perhaps?) and so on.

Again, it may well be true that these are costs we are delighted to pay, the loss of these things, in order to get the production from our pet scheme that is going to put this labour to an alternative use. And in a lot of cases it will be.

But only if we remember that jobs themselves are a cost, not a benefit.

 

33 comments on “As I\’ve been saying….

  1. Yes yes, so you keep saying.

    But why don’t you say more about jobs being both benefit and cost? Jobs provide income and produce output.

    As things stand, most people rely on wage income, and if they don’t have wage income they have a miserable life, plus some people round here think that even the paltry amount handed out by the state to the jobless has a deleterious effect on incentives.

    So while we want to minimize the number of workers required per unit of output we also want to maximize the number of workers employed. I know your point is that many people think only about the latter and not the former, especially when extolling the ‘benefits’ of some spending plan. But the way you come across is as someone who just does the opposite.

    So long as the economy is below full employment, then job creation is a valid objective, at the same time as raising productivity (reducing labour input) is an objective. If you were to write down a social welfare maximisation problem, it might contain some sort of trade-off between the two.

    F. Scott Fitzgerald’s said something about how the mark of a first-rate intelligence is the ability to hold two contradictory ideas in your head at the same time, which as far as I can tell just gave loads of dim people a licence to hold incoherent views whilst thinking themselves smart. However, there is something to holding two superficially contradictory views at the same time, as in this case. But when you get down to it, there is nothing actually contradictory in regarding jobs creation as both benefit and a cost.

  2. some people round here think that even the paltry amount handed out by the state to the jobless has a deleterious effect on incentives.

    Paltry? Paltry? If that’s paltry, I’d hate to see what you consider to be “real money”.

  3. okay, yes sorry it depends on your benchmark. It’s incredibly generous relative to zero, and paltry relative to the UK median income, and a sum I would not wish to live on.

  4. A job is certainly a benefit to the person who does it…that’s why this continual grating on is irksome.

  5. LE

    I’m sure Tim can defend himself more than adequately but what I think he’s saying is undoubtedly true ie that employing workers is a cost of producing the desired output. In the same way he says elsewhere that it’s wonderful to have exports but, in reality, exports are not a “good” in themselves, they’re the hassle we have to go through to pay for all those things that people here really want to consume.

    The problem is what happens when the marginal cost per worker exceeds the marginal output. In theory, that’s where employing more workers stops. If, however, you include in “output” an impossible-to-value “social welfare” component by which having employment – no matter how useless and unproductive it is (cf diversity outreach workers) – is a good in itself then we’re on the road to Laputa.

    Thus, for instance, throwing extraordinary amounts of money down the energy renewables toilet of wind and biomass might create 160,000 (or is it 1,600,000) jobs but, in the end, will the cost of those jobs (and they are a cost) be covered by the financial output they generate? The short answer is “no” – the long answer is “probably not”. If the short and long answers are correct then it is the productive part of the economy (where revenue exceeds cost) that will be forced to cough up the shortfall.

  6. Umbongo,

    Thanks for your reply.

    This might come across as pedantic, but I think you have my argument the wrong way round.

    Start with the most basic framework in which utility is derived solely from consumption, and social welfare is simply the unweighted sum of individual utilities. It’s not about including an impossible to value “social welfare” in “output”, it’s the other way round – social welfare is based on output (that is consumption). If you assume diminishing marginal utility of consumption, and assume the unemployed have lower consumption than the employed, then maximizing welfare involves some sort of combination of trying to maximize productivity and maximizing employment (whether it is a trade-off or not, will depend on what you assume about how everything interacts). So even before you start thinking about intergenerational externalities, and other costs & benefits from employment in addition to narrow consumption, in the most basic neoclassic neoliberal bastard model, you still get a dual role for jobs. In such a model you would not want to hire thousands of diversity outreach officers, if they provide no benefit (and I like to think real life diversity outreach officers may do something useful), so as you say, embarking on spending because it “creates jobs” but that does not provide benefits, is the road to ruin. However, you might find yourself wanting to create some jobs where the private cost outweighs the private benefits, and the more weight you place on the harmful effects of unemployment, the more you might do that. Of course, when doing that, you still want to make the ratio of cost to benefit as favorable as possible.

  7. Let us reference the real world.

    For months I have been going around clients, demand for whose services has been falling. They are laying off staff and putting the rest on short time.

    This is at the same moment a necessity, and a tragedy both for the staff and the businesses.

    When things pick up, the employers will be eager to rehire the staff to meet increased demand. The wages bills will go up, thus costs, but so will production and profits, and staff and employers will be happy.

    Yeah, wages are a cost, but there are times one is happy to pay that cost, and times one simply cannot.

    The crucial distinction is Demand, and thus the Market.

    The renewable energy market is, I suppose a sorta, kinda real one, but it is created by the government who pass the bills to the customer and taxpayer, without giving them a choice as to whether or not to join in that market. In my opinion, a serious distortion and misdirection of resources to solve a non-existent problem. The jobs created are not a good.

  8. [the above argument is really me thinking aloud – I won’t be too surprised if somebody comes along as explains why I am wrong]

  9. Luis Enrique criticises Tim for failing to record ‘full’ employment as an economic benefit. Although there is some sort of case in that, there is also a great danger: the case is uneconomic, in one sense, and the danger is uneconomic in another.

    The case Luis makes is for the inefficient use of labour as a societal good. To me (and I assume to Tim too), this is clearly not an economic benefit: paying more that the market requires. Thus I refer to it as a societal benefit, and see that something of a case can be made for it on those grounds.

    However, those of us who remember the pre-Thatcherite days (of closed shop trades-unionism and restrictive working practices) see things differently. The maintenance of uneconomic working and business practices is, itself, of societal harm in the longer term. This is because there will be those outside the particular society maintaining those uneconomic working/business practices who will stuff, full and proper, your whole business (and possibly national economy too).

    Every bit of inefficient use of labour has its lost opportunity cost. Lose too much opportunity and your ability to run a long-term profitable business leaks away.

    What is better is for every business, and its workforce, to look for ways in which the problem of short-term liquidity can be overcome. But they must do this without harming long-term profitability. Continuing production with temporary wage cuts are one way of doing this, perhaps with some ‘lost’ wages being delayed rather than cut. In some firms, putting effort into developing new products can work well, and (compared to production) it avoids the cash calls of production materials and of storage of unsold finished goods.

    However, in all cases, a company must start a recession with a sufficient reserve of liquidity, such that it does not run out before business picks up again.

    Purposefully running the company inefficiently subtracts from both profitability and liquidity: that is directly from profitability, and from liquidity by damaging the perceptions of earliest practical recovery of those (shareholders, bankers, credit account suppliers) who provide the liquidity.

    Best regards

  10. Nigel,

    You are quite correct that in practice resisting productivity improvements on the basis of protecting jobs, is a bad idea. Having firms focus on competition and productivity is probably the best way to run things. And so on. None of that changes the fact that jobs must be thought of as both cost and benefit. Imagine a situation where the economy produces £500 billion GDP but only employs 50% of the workforce, and one producing £450bn but employing 95% of the workforce. (holding unemployment benefits constant between the two). Which is better? You can argue for the £500bn if you also argue for redistribution, but I’m not anticipating that’d be your argument.

    Just because I’m saying job creation can thought of as having benefits, doesn’t mean I’m advocating a return to 1970s trade unionism – juggling two objectives does not mean overweighting one at the expense of the other .

    I don’t think Tim would call ‘societal’ benefits ‘uneconomic’ because Tim knows that economics is founded on the bedrock of individual utility, which is what my argument is based on in its simplest form, and he knows that economics encompasses both private and social costs and benefits, and knows that the objective of economic policy is to make people better off, not make the economy better off (although there’s a lot of overlap).

  11. Luis writes: “Imagine a situation where the economy produces £500 billion GDP but only employs 50% of the workforce, and one producing £450bn but employing 95% of the workforce. (holding unemployment benefits constant between the two).”

    Well, I’m in favour of the £500 billion GDP with 50% employment. This is because the 50% unemployed have the time to go work to increase GDP well above the £500 billion. And the £500 billion GDP has £50 billion GDP more to go invest (than the £450 billion GDP economy) in the 50% of available workers, who will need working capital to realise economic benefit from their availability.

    Now, if one creates a scenario where the 50% unemployed are prevented from working, or the 50% employed are prevented from investing, the Luis might have a point. In that case, I’d expect the problem to be caused the government, and a new election or civil war the solution.

    What we actually have currently, in the UK and in many other countries, is a lack of money to invest: this is because there has been a decade or so (perhaps even more) of seriously unwise (ie inefficient) use of the available labour and other economic resources.

    As to causes: too much has been spent on government (never an economically productive organ), and too much on providing too high a standard of living for those not working (at all or hard enough), eg too much of the welfare state concept (rather than a more prudent, and parsimonious, right amount). There are also those (additional to government and welfare recipients) not working in a productive enough manner – on this, the financial sector springs to mind: to much effort passing money round in circles and not enough effort applying it to economically productive activity.

    And for future actions to avoid: further economically unproductive use of labour and working capital, which is very unfortunately pretty much what governments world-wide seem to be doing and planning more of.

    Best regards

  12. Luis:

    Nothing more dramatically illustrates the sloppiness of your thinking on this subject than the illustration you’ve given above–the $5oobn/50% VS $450bn/95% comparison.

    Actually, your twin scenarios very closely resemble actual conditions in different cultures.

    Fiffty to sixty years ago, in the US, it was common for not only children below the age of 18 to be unemployed (in school) but for some older to be also (in college) and for many of the wives not to work outside of home and family duties. This is roughly the equivalent of your $500bn/50% scenario.

    At the same time, there were many places (not in the major industrialized portions of the world) in which it took the labor of virtually everyone: men, women, and children, too–just to eke out the most meagre and precarious of livings (in Japan and China, before WWII, it was common for 5-yr-olds to be “employed” as scarecrows to keep birds away from crops by pulling on bell-rigged strings across fields. And, in current-day Pakistan, 10-yr-olds tend forges to produce surgical tools; whether still or not children tie the knots in rugs in Iran and such places, I dunno). That’s what full employment looks like;
    take your pick.

    What’s additionally obvious is that all those people in the first-mentioned can, if they wish, be employed by doing whatever it is that others want done. To insist that there’s nothing that others want done is to insist that all wants are already satisfied by whatever the working 50% are doing: patent nonsense.

    Unemployment for extended peiods is primarily a voluntary phenomenon unduly encouraged by “compensation” schemes designed primarily to maintain political bloc support for leaders espousing the schemes themselves.

  13. Luis:

    Whatever gives you the idea that “economic policy” is intended to make people better off?

    People produce and trade with each other in order that each makes himself better off. That’s called “the market.” In almost all instances, what is known as “economic policy” is specifically designed to interfere with the market in some way–to make people (in general) worse off than before (especially when the intention is to make some better off).

    What I say is uniformly true in all cases (unless one wants to pretend that ordinary laws against fraud and violence and its threat are included in your defintion of ‘economic” policy.

    Find me even a SINGLE example of economic policy intended to make people better off!

  14. Nigel:

    “Well, I’m in favour of the £500 billion GDP with 50% employment. This is because the 50% unemployed have the time to go work”

    Right, and if they did so, that would increase employment wouldn’t it? I’m trying to get at the idea that holding GDP constant, increasing employment can reasonably regarded as an improvement, and thus we might be making ourselves (that is, the sum of all the individuals) better off by sacrificing some GDP for some more employment.

    Gene,

    That’s a good point. I had neglected to specify I was talking about unemployment as currently defined in most modern economies – that is to say, individuals of working age who are seeking work. People who would consider themselves to be better off if they had a job, and are actively seeking one.

    You may think that actually existing economic policy fails to make people better off, but that’s not what I meant. All you’re saying is that your ideal economic policy is, I don’t know, small government and free-market, because that’s what you think makes people better off. That’s what I meant – the critereon for whether economic policy is good or not, is whether it makes people better off or not.

  15. Tim,

    I don’t think the fact that the unemployed are doing something else* gets you out of the fact that the existence of unemployment introduces a potentially beneficial aspect to job creation.

    Of course I am not advocating harebrained schemes that are chosen on the basis that they are more labour intensive. And I agree that attempts to ‘create jobs’ may end up just reallocating workers to less productive activities without bringing any unproductive resources (unemployed workers) into use.

    If you look at a standard Micro text book, it will tell you that (some of? all? can’t remember) the standard results of welfare economics are only valid if you assume the presence of social welfare maximizing redistribution. I think this is often neglected. I wonder if that lies behind your thinking?

    Are you really telling me that in a world without such redistribution, if you were comparing different outcomes, or if you were social planner, you could place absolutely no importance on the level of involuntary unemployment? That is to say if you were comparing £100m GDP 10% involuntary unemployment with £100m GDP 30% involuntary unemployment (and you don’t cheat by waving a magic wand and … er, creating jobs for those 30% ), you’d see no difference? All I’m saying is that you have to take into account the benefits of reducing involuntary unemployment.

    * I thought the general view around here was that they drank cheap lager and trained pit bulls to attack babies

  16. We can soon check whether jobs are a benefit to a scheme or not. I propose that we employ half the currently unemployed to dig holes, and the other half to fill them in. The sole benefit of this scheme is that it employs a lot of people- there are no other benefits. They will need to pay for transport to work, so will need to be paid more than the unemployment benefits.
    Can anyone tell me how we convert the fact of their employment into money to pay them with, their being no benefit other than that? Or are we just increasing their unemployment pay in return for wasting their whole day?
    Of course if they were providing something saleable, then they could be paid out of the proceeds- that would be gainful employment, and that is the sort that is desired- by as much as the income from sales exceeds the cost of paying people and purchasing supplies.

  17. Reading all the above comments I can now see why one of the definitions of “an Economist” is “Someone who can follow you into a revolving-door and come out in front of you”. 🙂

  18. Tim, spot on.

    Jobs are a cost to firms. Employment has many positive externalities however.

    By thinking like this, we yet again come to the conclusion that taxes on employment must be cut – especially Employers’ National Insurance.

    I wish at least one party other than the Social Liberalist Party would have this as policy as well!

  19. “Jobs are a cost, not a benefit of a particular scheme.”

    I work at a company that is concerned for its finances in 2009. Well, who doesn’t? But let’s go on.

    Grasping the truth of the above quote (not a sarcastic comment- I mean it) I decided to test something.

    I posted a note on our company president’s blog. I stated

    (1) the company is taking exactly the wrong steps to address the financial challenges of 2009.

    (2) We are cutting spending and shedding jobs.

    (3) I suggested we should be stimulating the company, not shrinking it.

    (4) This demands more jobs and more investment.

    (5) In other words, we should be hiring people and we should be spending our way back to prosperity.

    (6) And if we have to borrow to do it, well, c’est la vie. We will save enough to offset the borrowing costs by eliminating some of our products.

    So far, no response.

  20. When thinking about whether jobs are costs or benefits (or, as I argue, both) it’s important to specify what we mean: cost or benefits to whom. The answer is different if we are talking about costs & benefits to a firm, or the consumer, and so on. In everything I am arguing above, the ‘whom’ is everyone – the aggregate economy, the welfare of all its citizens.

    When we are close to full employment, we have already felt the benefit of job creation. At full employment (‘full’ allowing for some frictional unemployment) attempts to “create jobs” do not create jobs, they just reallocate jobs, in which case what matters is whether productivity increases. Job creation is only a benefit to the extent that it reduces involuntary unemployment at a cost below benefit. Most schemes whose proponents tout the benefits of job creation, who Tim objects to, fail this test.

    But you still don’t have to deny the benefits of job creation. It’s easiest to see when thinking about economies far below full employment. Take the growth of the software industry in India … do you think to yourself: “good for them, although terrible shame about all those costly new jobs”? If you were the minister of industry in a poor country, and were considering two investment proposals, both with the same expected gross value add, but one creating more jobs than the other, surely you would not be indifferent – the streets are full of beggars and people eking out a living in the informal sector.

    Tim, imagine you are at the controls of a really good simulation of the economy – fully specified, general equilibrium, all opportunity costs etc. fully taken into account, and with some form of involuntary unemployment. At the top of your screen is a display that shows the discounted sum of expected future utilities for all citizens. Now you can fiddle with the dials, adjust all sorts of parameters and reconfigure the economy as you wish. Consider the set of adjustments were output stays constant but employment changes. What do you think happens to the utility display, holding output constant and increasing employment? How do you explain that without reference to some benefits from job creation?

  21. “For there are always opportunity costs. The unemployed are not doing nothing, they are just not working officially for cash. They are wiping babies’ bottoms, engaging in home production (an allotment perhaps?) and so on.”

    Are you really suggesting that the opportunity costs of unemployment and employment are comparable?

    Tim adds: No, not entirely comparable. Just that it is indeed something that needs to be kept at the back of one’s mind. There really are ALWAYS opportunity costs. For example, a stay at home mother is not in employment as formally described but it would be a harsh system that tried to insist that her activities were of no value.

  22. Luis:

    You’re nothing but a gaseous windbag with no other schtick than to reassemble the words you’ve already used into slightly different versions of ridiculous (or incomprehensible) arguments you’ve already made. You never answer straight-on, leading me to believe that you’re just what they call a “troll,” who finds amusement in occupying the time and serious attention of unwary others.

    That’s why I posed the very simple question to you in the last lines of my previous post. No one serious could have missed that straightforward challenge.

  23. Luis,

    While I appreciate that there is an attractive (albeit specious) logic to your 500/50 versus 450/95 comparision, the contrast is completely fallacious.

    You have created an artificial scenario where there is (for some sort of hideous statist reason) a block on all initiative to try to make your 500/50 scenario less attractive.

    To just ensure we are speaking from the same hymn sheet (you wouldn’t want to hear me sing) – you have 50% of the workforce unemployed and wanting to work (and, although it is largely irrelevant, a $50bn surplus over your comparator.) If they don’t want to (or really do want to but for some personal or social reason are not actively seeking work), you have Gene’s 1950’s USA analogue.

    In a vaguely free society (and the unfree ones tend to, at least try to, maintain the pretence of full employment) that is in your scenario, you will either get a rise (slow or dramatic) in individual entrepreneurs or, if there is some structural reason preventing that, mass emigration. If the emigration is prevented, well, revolution (successful or otherwise.)

    Just look at how the advent of the interwebs and, especially, eBay, has allowed all those stay-at-home mums to start profiting from their collections and hobbies, by reducing the capital and advertising costs required to set up a small business while greatly increasing the scope of their customer base.

    On the other hand, in your 450/95 scenario, to gain any significant improvement in wealth for society, you are talking about fundamental structural changes such as mass shifts from agriculture to industry – Gene’s subsistence farming point. Of course, to free up the people to work in the new businesses, without causing mass starvation, you are going to have some less happy intermediate point – say 445/60 (all those paupers do cost something, even if it is just to bury) – to give the free labour.

  24. Sorry, forgot to say that there is another alternative “solution” to the 500/50 scenario where there are structural reasons preventing higher employment – a large grey economy. Italy in the recent past, for example?

  25. Gene,

    You made two points, one about “what full employment looks like” and the other “Whatever gives you the idea that “economic policy” is intended to make people better off?” and I addressed both of those points directly, in my next comment. I am rather puzzled why you complain about not getting a straight answer. I am sorry you find my arguments ridiculous and incomprehensible. I wonder whether you have really given them any thought.

    Surreptitious Evil,

    Similarly, I am at a loss to understand why you think I have a ‘statist’ agenda. Nothing could be further from the truth. I am quite sure that (appropriately regulated) free markets are the surest route to prosperity, that is to say, the fruits of job creation and productivity improvements – my point only concerns the that job creation can be thought of as a benefit to the extent that is reduces involuntary unemployment. I might see a some role for the state in job creation at the margins, but that’s about all.

    I have clearly failed to get across what I meant by the 500/50 and 495/95 examples. Yes of course if we actually came across a 500/50 economy, if we were able to create a functioning market economy, we would expect unemployment to fall and for that economy to become richer. I was trying to get across the idea that for any given level of output, in the presence of involuntary unemployment then job creation is a benefit.

    This is how we normally think about things – if you want to know whether exercise raises life expectancy, you have to try to look at the effect of exercise holding other thigns constant. If people who exercise more also have better diets, then we don’t know whether the exercise or the diet is delivering the benefits. What we want to know is whether, for any given diet, exercise brings benefit. I am trying to argue that both productivity gains and job creation are beneficial. If job creation is beneficial when below full employment, then you might be willing to accept a reduction in productivity in exchange for an increase in employment, which is what the 500/50 495/95 thing was getting at.

    I tried to improve on that argument (a practice Gene objects to) in comment #22

  26. Gene,

    oh I forgot, you won’t be happy unless I address your `challenge’: Find me even a SINGLE example of economic policy intended to make people better off!

    That is an exceptionally stupid question. Let’s say I answer: the socialist reforms of Julius Nyerere. Now we both know that those reforms spectacularly failed to make people better off .. so what are we going to do now, argue about what Nyerere’s intentions were? You accuse me of not being serious -do you seriously think no economic policy has ever been implemented with good intentions? Did you mean to ask me to give an example of an economic policy that has ever actually made anybody better off? No, you cannot be serious.

    But what’s really stupid about that question, is that you were responding to something I wrote in response to Nigel, who had been making a distinction between economic benefits and societal benefits. I was arguing that distinction doesn’t make sense. You seem to think your idea that `economic policy just interferes with markets’ and your `challenge’ to me, has some sort of relevance to that.

  27. Luis:

    If what you say is true, it should be a matter of utter simplicity to answer the challenge directly. Give me your best jab, not a bunch of jabber.

  28. I’m kinda curious what happens next

    Answer: Julius Nyerere’s economic policies.

    Now, amaze me and explain to my why you know he didn’t intend to make people better off.

    And then you can explain why job creation should not be thought of as a benefit when it reduces involuntary unemployment.

  29. I didn’t, Luis, say that you had a “statist agenda”. Although it wouldn’t surprise me. I said,

    You have created an artificial scenario where there is (for some sort of hideous statist reason) a block on all initiative

    Therefore the statism, the block on individual initiative, is implicit in your scenario not, necessarily, in your personal beliefs and agenda. I was attacking the incoherence of the stated scenario.

    Interestingly, you didn’t mention any “495/95” example – if you look closely, it was “450/95”. Not that it matters that much – the difference in the future expected rise in wealth in the two scenarios is not due to the relative current wealth but the opportunity in the one you deride for a relatively easy near-doubling.

    I was trying to get across the idea that for any given level of output, in the presence of involuntary unemployment then job creation is a benefit.

    I’m sorry, I still don’t believe you. Which has the greater benefit – me being paid x to do nothing or me being paid x to do make-work (the dig and fill holes example)? The benefit to society is nil, the benefit to me is arguable. So, does any increase in the output level fundamentally change that balance? I don’t think so and it is irrelevant to your point because zero is a given level of output.

  30. Dear S.E.

    sorry, I misunderstood ‘statist’. Reading it again, can’t see what it has to do with anything I wrote.

    It’s really simple: Tim is saying job creation is solely a cost, and I’m saying it can also be a benefit, when it reduces involunatary unemployment. That just amounts to saying, all else being equal, lower unemployment is preferable. This doesn’t mean job creation is always a net benefit – the cost may outweigh the benefit – it just means that sometimes we get to write something in the benefit column. That doesn’t mean I think it’s a good idea to pay people x (the same as they being unemployed, in your example) to dig holes. It might mean that when considering an investment in an area with high unemployment, it makes sense to make some allowance for the benefits of unemployment reduction.

    Tim adds: “Tim is saying job creation is solely a cost”

    No, I’m not. I’m saying that job creation must always be treated as a cost…..and that there will also always be benefits that stem from someone being in employment. Savings on the dole, the output they create and so on. But only if we treat the job creation as a cost will we then correctly and successfully balance off the costs and benefits of creating that job.

  31. Tim,

    I don’t think that works – if you admit benefits of reducing unemployment, how can you correctly balance off the costs / benefits if you exclude that benefit from your calculation?

    I think we both agree that a job created where the benefits exceed the costs, in the usual sense of private returns etc. , is to the best. And while I may be more willing to entertain the possibility than you, both of us are sceptical about politicians’ ability to make that calculation and engage in genuinely benefical job creation.

    Let’s think about the marginal job, accounting for costs and benefits as you would account for them, in which the costs equal the benefits of that job and the net benefit is zero – as you’d expect in an efficiently operating, free-entry, market, all positive return opportunities would be exploited until economic returns equals zero.

    Now – and I admit this is where it gets a bit tricky, because you have to explain why involuntary unemployment would exist in such a world – what does the existence of involuntary unemployment add to the picture?

    As you point out, savings on the dole might constitute a benefit of sorts, and if you add that benefit to the balancing of costs and benefits, then you move the marginal job, don’t you? Adding in that benefit would make some jobs worthwhile that weren’t before you took account of that saving. If you add in other negative externalities from unemployment, or positive multiplies from increasing employment, you move the marginal job again. How can you do that, if you treat job creation as a cost? I have never argued for ignoring the cost aspect of job creation, I am only arguing for supplementing it with some benefits in the presence of unemployment.

    If you now put yourself in the shoes of a social planner with the objective of maximising utility, then the utility (whatever it is – presumably non-zero otherwise the person wouldn’t voluntarily take the job) to the unemployed individual who gets a job – moves the marginal job again. This latter adjustment, however, I think might just amount to an act of welfare enhancing redistribution.

    That make sense?

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