Jobs, Jobs, Jobs: Where Do Jobs Come From?

Paper Release Event: The Mercatus Center held an event on February 10, 2011 with Dr. Yandle as part of our Capitol Hill Campus series.

Read the March issue of Dr. Yandle's Economic Situation Report. 

In December 2010, the Bureau of Labor Statistics (BLS) reported there were 131 million Americans employed on business payrolls (Bureau of Labor Statistics, 2011). Some 14.5 million Americans were counted unemployed. Of those unemployed, 6.4 million had been without work for 27 weeks or more. The December unemployment rate had turned down a bit to 9.4 percent. Job prospects were bleak. There was a small silver lining in the dark announcement: the BLS noted that some 1.1 million private-sector jobs were added in 2010.

Celebrating the good news on job growth, President Obama made clear that he was not satisfied. He noted "Our mission has to be to accelerate hiring and to accelerate growth. And that depends on making our economy more competitive so that we’re fostering new jobs in new industries, and training workers to fill them. It depends on keeping up the fight for every job and every business and every opportunity to spur growth" (Office of the Press Secretary, 2011). On an earlier occasion, Mr. Obama had emphasized that government could not on its own create jobs when he said, "Now, government can't create jobs, but it can help create the conditions for small businesses to grow and thrive and hire more workers (Fernholtz).

Job availability, according to the Gallup organization, was the number one worry plaguing the U.S. population in January 2011 (Said, 2011).

Apparently, a number of newly elected governors got the message. On his first day on the job, John Hickenlooper, Colorado's new governor, pledged,"Our first task, our highest priority, is jobs" (Hoover, 2011). On being sworn in as governor of Oklahoma, Mary Fallin said, "Too many Oklahomans are either unemployed or underemployed. That's why my administration along with the legislature will focus on policies that create jobs" (McNutt, 2011). And newly elected Florida Governor Rick Scott promised, "First off, I'm going to build jobs. The only way we're going to turn around the mortgage crisis is we got to get more jobs in the state" (Governor Rick Scott Lays Out His Plan For Florida, 2011).

Can political leaders create and build jobs, as Governor Scott implies? Out of thin air? Sustainable jobs that will continue on their own once the government's job-building efforts have ended? Is it direct hiring by government, such as funding construction projects that will lift the level of permanent employment? And if so, what is the opportunity cost, which is to say, where does the real purchasing power come from to fund the government jobs? Will other jobs be lost when taxpayers reduce their private spending to fund the public works? Or is it, as President Obama and Governor Fallin suggest, forming market friendly government policies that will inspire economic growth, bringing with it more jobs? And what about people who hire themselves? Start their own businesses? Are there enough of them to matter?

So where do jobs come from? Real jobs that can be sustained by normal economic activity? Is there a role for government in the process? How do government policies enhance or reduce the long-run pace of job creation?

This paper addresses these questions. The next section focuses on the where and how of job creation by exploring the decision making process made by employers engaged in adding workers to their payrolls. Incentives faced by employers and employees enter the process in important ways; these are discussed in the section. Attention is also devoted to the huge number of one-person firms in the America, those people who create their own jobs. In every case, large and small, in a free society, jobs are ultimately created by consumers and citizens who are willing to pay for goods and services that they value.

Section two concludes with a summary of policy actions governments can take to improve the job creation climate. Section three closely examines the dynamics of the U.S. labor market where the economy is described as a massive churn that produces goods, services, and along with this, jobs. As the churn turns, jobs are destroyed in some sectors and locations and expanded in others. The net result can be job growth. The section also discusses the rise of the knowledge economy and describes major forces that explain migration to jobs across America, which is another way of identifying where jobs come from. Finally, the paper’s last section offers final thoughts on the changing world of work.