Only 23 percent of the 8,381 companies we were able to contact in our sample hired new workers to complete their stimulus project and kept all of them once the project was done. In other words, more than seven out of 10 companies did not hire workers at all or had to lay off the workers they did hire.
Of course, this is only microeconomics. Macroeconomics tells you that the stimulus injected money into the economy, and therefore it increased employment. The employment increase would not necessarily show up at companies that were the initial recipients of the money.
I’m not being entirely sarcastic. There simply is no reliable way to demonstrate how well the stimulus worked. I do not think that this study refudiates the stimulus.
For those of you new to this blog, I do not subscribe to the Keynesian story, in which spending creates jobs and jobs create spending. I think that comparative advantage is what creates jobs. To put it more carefully, comparative advantage creates the opportunity for people to sell labor and buy goods and services in the market. Entrepreneurs who identify these opportunities create jobs.
In today’s economy, I believe that the link between spending and jobs is weak. That is because, as Garett Jones put it, today’s workers do not build widgets. They do something fuzzier, which Jones terms creating organizational capital. Whether you like that term or not, I think it is fair to say that there is a large element of investment in a hiring decision these days. You do not want to hire a worker unless you are confident that the time you spend training and acclimating the worker to your company will be repaid in the form of a more effective enterprise. You do not want to let a worker go unless you are confident that the worker adds so little to the effectiveness of the enterprise that you would be better off not having to compensate that worker.
In 2008, the reluctance to fire surplus workers went away, and the reluctance to hire possibly-useful workers increased a bit. So a lot of the decade’s job destruction got telescoped into a short period of time. Why have new jobs not been created? Some possibilities:
1. Firms in 2008-2009 did a very good job of discriminating between useful and less-useful workers. The ones they let go were less useful. There has been some back-and-forth between Bryan Caplan and Tyler Cowen suggesting that this has turned the long-term unemployed into a “lemons” market.
2. The choice of “going on disability” has become attractive.
3. The “wedge” between wages and compensation has gone up (think of employer-provided health insurance).
4. Firms that have developed popular goods and services no longer expand by rapidly ramping up employment. They can increase production by using overseas suppliers and automated manufacturing. They can increase sales by using online channels rather than hiring sales clerks.
You need to go farther with #4.
There now exist substantial markets in goods&services in which the incremental labor required for production is nearly zero.
I don’t mean overseas suppliers or online sales channels. I mean that adding say 1 million users to facebook likely provides incremental ongoing employment on the order of 0 to 3 full time equivalent people. (In server farm support roles.)
This is really different from out-sourced or off-shored supply chains for physical goods, and really quite different from online sales channels for such goods. A shirt sold on amazon still has to be made somewhere.
It is important to note the role of startups/young firms in job creation (at least in accounting terms). See here: http://updatedpriors.blogspot.com/2013/01/startups-are-really-important.html and here: http://updatedpriors.blogspot.com/2012/12/startups-and-great-recession.html. Note the following:
1. In most years, almost all net job creation is done by startups. Other age classes typically provide zero or negative net job creation (though these net numbers hide A LOT of activity; see http://updatedpriors.blogspot.com/2013/02/two-economies-of-young-firms.html).
2. Several measures of startup/young firm activity show signs of secular decline for at least the last 30 years. It is not clear what has “caused” this trend.
3. Startups/young firms were hit harder than older firms in the Great Recession. The decline in activity from young age classes is striking and dramatic. There are a few theories out there for why this occurred, ranging from common ideas about young vs. old firms over the business cycle to special credit concerns (ie, new firms often rely on home equity borrowing etc).
So, at least from an accounting standpoint, some of the decline in labor demand can be explained by things that happened to the structure of the firm age (size too, incidentally) distribution. I would say this lends support to your views about entrepreneurs’ role in job markets.
#3 is the only one that really shows up on a Profit and Loss Statement as a hard number and is easy to quantify immediately every month as managers consider hiring. Even with record profits which may be tenuous going forward, the non-wage compensation line in a P&L has to stick out like a sore thumb (covered under Obamacare, I believe—therein lies the problem…).
#4 seems unlikely. Last year, Google hired 21K employees last year from a base of 54K. Apple hired 12K from a base of 72K. LinkedIn 3.5K, up 63%. Facebook 1.6K, up 44%.
Only #4 has some truth to it. I’d add the real reason, #5 – the twin forces of globalization and technology have made it much cheaper to provide the same or better services as a decade ago, but with much fewer people. We have largely not created new services, ie new PSST, to take their place, so there’s an employment shortfall. Smartphones are the big exception, Apple rode that wave to become the largest company in the world and the telcos are doing well.
Why is it that we haven’t created all these new services, especially when we have radical new technologies like computing and the internet at everybody’s fingertips these days? We were supposed to have an educated, entrepreneurial workforce that was supposed to innovate more than anyone else, yet we have to face up to the fact that these “innovators” are just plain stupid.
The fact that they can be surrounded by so much low-hanging fruit online and not be able to pick any of it is evidence of sheer idiocy, nothing else. Some bright boy will finally hit his head on the fruit and realize it’s there, then once he’s accumulated a bunch, everybody else will race to copy him, but until then, we get the growth we deserve. The reason the economy is weak is that we are too stupid to do any better.
Ajay,
I’m happy to know that you are making millions picking some of that low lying fruit. Right?
I’m trying to gather as much as I can, 🙂 but no millions yet. I am continually amazed at how much is just left lying around, for example, that we do not have micropayments yet. I can’t get to everything myself, but it seems like I might have to, people are that stupid.