As a developer, I do not hire an employee before I have conceived of a construction activity that will earn me a decent return. I hire an employee when I have a productive need for his services. FULL ARTICLE by Fred Buzzeo
Source link: http://archive.mises.org/15126/job-creation-and-other-economic-myths/
Job Creation and Other Economic Myths
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“What is the path to sustained, noninflationary economic growth — and hence to sustained job creation?”
Ensure that the supply & demand process is unimpeded for each factor of production; increase the value of each factor to the end product, by innovation & development. This not only applies to the value of labor to a business, but to all factors, such as the land, machinery, resources, advertising, transportation, communication, etc., etc. Investment is then in accordance with the greatest bang for the buck.
This is exactly correct. Although equilibrium is never really achieved,we seek “an evenly rotating economy.” This does not occur, however, when government intervention distorts market signals. True market signals can only be given by individuals expressing their wants. If the individual were left unhampered, there would be “equilibrium” in all of the markets that you mentioned. This is because the risk takers would get the signals right and act accordingly.Thanks for your comment.
Fred:
In no instance (and I mean NEVER) is there equilibrium. There is never even a single instant in which there is not some new generation of market data with its own driving force toward a new (and different) state of rest; the flux is ceaseless, whether or not formal “markets” are open.
“Paul Krugman, the modern-day reincarnation of Keynes, was even awarded the Noble Prize!”
That would be the “Nobel Prize”.
Nobel Prizes in Economics and Peace sometimes are unfortunately far from Noble. Physics somehow fares better though.
Here’s for giving Paul Krugman the Ig-Nobel Prize. “Comes with little cash, but much cachet, and reward those research projects that ‘first make people laugh, and then make them think’”
John Stuart, not Stewart, Mill.
Remember that the Nobel Prize in Economics is a new prize, not related to the prizes in the scientific fields such as physics and chemistry. It is a prize “in honor” of Alfred Nobel.
And further recall who funds the prize in economics: Not the Nobel estate. A central bank, similar to the FED. So, don’t be surprised when it awards funds (likely printed out of thin air) to one who says their inflationary actions are just and right.
I, myself, do not think the prize is “noble.” Thats rather a pun. However, those that matter do think the prize is important. That is why all of these guys like Krugman get all of the top jobs in the academic world. They the go and ideologically poison the students that pass through their class rooms. Thanks for the comment.
Economic topics explained in a very readable way. Real life examples always make the point clear. All in all a good explanation of why Keynes never seems to go away.
Dear Mr. Buzzeo:
As a real estate developer and considering that half the new housing starts are factory built in one form or another, please explain why no large builder/developer does their constructing off shore? If a factory made house can be built in Oregon and shipped to Alaska at a profit then the same house can be built off shore and shipped to Oregon at a bigger profit.
Why don’t you invoke Libertarian principles and start a trend to put union carpenters, electricians, and plumbers out of work? There are millions to be made. State building codes are available on line.
@billwald
Firstly,since the price to the property buyer would continue to be maximised, land owners would inevitably increase prices and soon capture most if not all of the developer’s savings from off-shoring building costs.
Secondly, perhaps it might make more sense for these productive US craftsmen to apply Libertarian principles by becoming developers, either themselves or more likely as co-developers alongside Mr Buzzeo, perhaps covering their costs and investing their time and skills as ‘sweat equity’.
In fact, Mr Buzzeo could agree with land-owners a proportional share of the developed property, and make them co-developers as well. In this way he would minimise both his capital requirement and his risk.
Hi Chris:
Good points. I do try to include landowners in many of my potential projects, sometimes enticing them with a bigger profit. Most of the times I am not successful. They don’t have the drive of the entrepreneur. The same is true of labor. Unlike you many don’t realize that labor is a favored class; labor gets its money first. I get mine last, that is if I guessed the market correctly. Thanks for the comment.
You’re neglecting the cost of shipping, which is quite high for intercontinental voyages(plus tariffs). Shipping to Alaska is much cheaper since most of the population can be reached by land.
It is true that housing units are becoming more and more pre-fab units. I have done a few myself. But I should like to point out that they are difficult to get approved. Before you can pick a model, you must be certain that it is state approved. If not, it must go through a process to get that approval- a lot of time wasted. In addition, they don’t work in may urban areas like NYC. They simply don’t meet building codes. Also, I’m not certain how they would be transported by ship. They don’t fit into a sea worthy container.
Also, a lot of housing today is built by non-union workers. Unions are mostly involved with the big stuff that has a big pay-off. A couple of single family homes doesn’t interest them. However, they would be all over a high-rise in Manhattan. Thanks for the comment.
This otherwise fine article is badly in need of an editorial clean-up. In addition to the two errors already mentioned, the constant references to the “Phillip’s Curve” are rather cringe-worthy.
I agree that an increase in productive capacity may increase demand for labor. However, it is not necessary to increase demand for labor to “create” jobs. Theoretically speaking, there are an infinite number of jobs in the economy. We live in a world of scarcity and there is no perceptible limit to our demand for labor. An employer’s demand for labor is restrained only by the price of the labor. If I have 10 employees which I pay $50,000 per year to produce widgets, I could hire 20 employees at $25,000 per year for the same cost to produce twice as many widgets (I realize that not all labor is uniform, that markets are dynamic and my original employees may leave when I lower their pay, and that my linear extrapolation of expected widget production is uncertain). My point is that although the price of labor or the hours worked per week may fall with an increase in the supply of labor there should never be a reason why someone should not be able to obtain a job. Therefore the argument over how jobs are “created” is misguided.
If the above is accurate we should ask why the theory is not reflected in today’s reality. The unemployment rate in the US is still around 10%, or 20% depending on the metrics used. Of course the bulk of the blame rests with the Federal Reserve and government interventions which provide false market signals that cause malinvestment the frequency and magnitude of which would otherwise be easily avoidable. But why isn’t the excess supply of labor being quickly absorbed back into economic production? There are some unavoidable reasons: training may be required; some unemployed persons may not be willing to move to a new location, work for less money, or change occupations; and lack of information about job opportunities. None of these reasons strike me as particularly compelling. I am also not swayed by the argument that the high unemployment rate is a result of constantly extended unemployment benefits. Though, this subsidy obviously plays a negative role and we’d be better off without it.
It is my opinion that it is the cost of employment imposed by the government on businesses which inhibits the liquidity of the labor market. There are initial setup costs such as: payroll taxes which the business is responsible for, enrollment in the benefits encouraged through the tax code (medical, dental, 401k, etc), and direct costs imposed by law (unemployment insurance, worker’s compensation insurance). There are the liabilities which increase proportional to the number of employees such as improper tax filing and law suits (equal pay, discrimination, harassment, overtime). Perhaps the most insidious cost imposed by government is the use of a historical index for unemployment taxes. The state may determine the unemployment tax rate for a business according to how many employees they have fired in the past. Therefore, hiring someone that you think you may have to fire in the future is more expensive. If a potential employer observed what appeared to be a temporary glut in the labor market, taking the above list into account, would the benefit of hiring more people be worth the cost? Is it any wonder why we seem to hear more often these days of people being refused a job for being over qualified?
If I, having no experience in the field of construction, were to apply to the author for a job I may offer to work for free for the first few weeks in order to pay for my training and compensate for the government imposed costs. Would a shrewd businessman such as Fred Buzzeo be willing to take me up on my offer? Not if he’s smart, not in the US. If I decided to sue him later for full payment of wages the court would likely side with me, even if we signed a contract (only employers are considered to be competent enough to sign such a contract, not the employee). If he were to perform research and obtain legal counsel to set up a government approved internship program and assume all the liabilities involved he would probably negate any benefit to my offer of free labor.
I agree with Rothbard’s statement that if wages were allowed to drop during the Depression the unemployment rate would not have been as high. The question is why, in today’s economy, wages have not been allowed to fall in accordance with the higher supply of available labor. Just as government intervention in the economy can lead to economic downturns government intervention in the labor market can lead to high unemployment. By reducing the ways in which the government limits the interaction of individuals in the economy and enforcing rule of law, contract rights, and property rights the liquidity of the labor market may be increased.
I apologize for the length of this comment and would appreciate any incite you may have.
Hi Paul:
You have written a very thoughtful comment. I would just like to make a few points. First, of course I agree that if the cost of labor drops, more people will be hired. Rothbard was absolutely correct in his analysis of unemployment in the Great Depression.There is always some business that can absorb labor at a reduced cost. Second, there is a limit to my demand for labor. Right now, I am not hiring at any price. That is because I do not have a productive activity to employ that labor. Why should I build an additional unit of housing when there are thousands that can not be sold? The point is that I must first see the opportunity and then focus my resources in actualizing that opportunity. Labor is only one component. And the job that I create is aimed at making me money. The worker benefits through the profit motive. Third, you are absolutely correct in stating that government imposes a costly burden on hiring. Many small businessmen do not have the ability to hire new employees because of the burden of workmen’s compensation, payroll tax, ect. However, if the profit was there, business would hire. The economic burden that overnment imposes destroys the potential profit. To conclude, the best way to create a job is to have a productive activity that allows a businessman a profit. Without a profit in sight, why should he risk his resources to give someone a job. Thanks for your challenging and well thought-out comment
Paul:
IN addition to all of the usual reasons (for not hiring and, thereby, reducing unemployment) you’ve set forth so excellently, there’s another one operating presently (or you might view it simply as the worst-case scenario of all the rest): very many companies of all sizes are responding to current economic uncertainty by “pulling in their horns” and simply “sitting tight.”
Entrepreneurs can never be certain of the future and what it portends for their ventures. And, when the future is so politically clouded as it is at present, it will simply make good sense to many to sit with what they’ve got at least until some of the “dust has settled” and they can at least see more clearly the risks involved. According to what I’ve heard lately, American business
is sitting on more money “in the bank” than at any previous time in history. Don’t blame ‘em!
Hi Gene,
I have heard of this position before though I neglected to discuss it in my previous comment. I look at it as being one of two things. First, it could be that it is a reflection of the corporate culture which has grown by adapting to the regulatory environment which includes the costs I outlined previously. In this way the knee-jerk entrenching reaction would be less of an inherent factor of human nature and more of a well-established business strategy. The second possibility is that the retrenching reaction is exactly what it looks like, the “wait and see” approach to an uncertain business environment. If this is the case it strikes me as odd that there wouldn’t be some entrepreneurs in some industry using this opportunity to aggressively gain an advantage over their reluctant competition.
Maybe it is possible that this human reaction in combination with the unavoidable employment matching issues I described previously is enough to explain what we’re seeing and the effect of government interference in the labor market is negligible. Though if true it would mean a tremendous opportunity is being ignored by businesses across the board. The only way for the government to help to reduce the rate of unemployment without causing further market dislocations is by reducing the impact of its regulations on the labor market. If the effect of government interference in the labor market is negligible then the effect of its removal will be slight, but it will still be a step in the right direction.
The point you brought up about political uncertainty is also important because it affects all business considerations. Not only is there a lot of legislation out there (insurance mandate, 1099 rule, tax cut extension, etc) but the general trend of government action has been away from free-market principles like property/contract rights. It is unlikely that this trend toward statism will provide a source of optimism for future investment in the US.
Hi Fred,
Thanks for responding to my comment. I agree with all three of your points. Unfortunately it was the construction industry where so much of the malinvestment occurred and where much of the additional labor supply is originating. So I would not expect you to be able to profit from hiring additional labor right now. Only in those industries where the reduction in the price of labor could bring a competitive advantage would hiring be profitable.
Just to clarify my position with regard to your third point. It is true that the burdens imposed by government create an expense which must be taken into account when determining the profitability of a venture, in the same way that corporate taxes and sales taxes must be accounted for. The list that I was considering deals specifically with costs imposed by hiring/firing each employee and makes engaging in a more liquid employment policy increasingly damaging to the profitability of a business.
Let’s not forget the distortion caused by union wages and the minimum wage. There is a minimum wage that must be payed and union wages are often mandated on projects whether union members are used or not. These also keep the cost of labor from falling to market clearing levels.
@Paul Baszner
Paul Baszner wrote:
“[...] I agree with Rothbard’s statement that if wages were allowed to drop during the Depression the unemployment rate would not have been as high.[...]“
Dear Sir, I guess you do not realize that the wages simply cannot be dropped below certain level which corresponds to the minimum cost of living. It is ludicrous to suggest that anyone would agree to work for $500 per month in the present-day United States when a person needs at least $800 per month to survive (i.e. have basic shelter, food and clothes). Why do you think people don’t want to work at McDonald’s or Wal-Mart? Many who do work in the low-wage places, treat it as a supplemental or temporary income, and certainly depend on government subsidies and other financial help to survive…
What classical Free Marketeers refuse to understand is that there is an implicit minimum wage set by the current economic conditions, and for anything below that, very few people would ever consider an employment.
The bottom-line is that the supply/demand curve can be meaningfully affected by the ratio of the employable population and the overall consumer population. When the employability of the local population lowers, for example due to technological advances, or availability of cheaper foreign labor markets, the economy contracts. The same happens if the consumer population grows faster than the employable segment, such as when there is a huge immigration or baby boom, or a natural disaster strikes, which instantaneously increases the consumption in certain areas…
Disagree with the quoted Jean-Baptiste Say’s characterization of economic development, mainly premised on the government interference causing imbalance which is ultimately is responsible for the economic downturn and loss of jobs…
While misguided government intervention can certainly have a negative effect on supply/demand curve, it is not the ONLY factor. In particular, the current downturn of the US economy is NOT caused by lack of demand or lack of laborers willing to work, but rather, is a direct consequence of unrestrained trade with low-wage labor markets…
Who needs a US worker that earns $8-$10/hr minimum wage, when they can hire 10 of them in countries like China and India…
And besides, contrary to the implicit assertion that the Government is responsible for the prices not deflating with the loss of jobs, it is the corporations who do not want to yield not one iota on the prices of their cheaply produced products – NOT the Government!
For example, take Nissan or Toyota car prices… The mid-size or full-size sedans, such as Sentra or Altima costed the same in 2005, in 2007 and today – in 2010 (Altima went for about $19K – $20K for the lowest trim S as it is about now)… The labor situation those years was quite drastically different from today’s, and yet, the prices are same…
Where is Government’s role in keeping the prices high here?! Let author answer me that. Same goes for house prices…
Also, take the gas prices. How come the price of gasoline is about the same or even higher than it was for the last five years?! I don’t think government is keeping the oil prices artificially low. It’s all unregulated Wall-Street speculators who do that…
Show me one proof that it is the Government that is not letting the prices go down together with deflation and reduction of demand, and NOT the multinational corporations, oligopolies and monopolies…
The author cannot simply blame all the troubles on a single entity such as the Government, without properly addressing the role of big business (the oligopolies) in the same!
Look it’s michael/richard, only dumber. Wheeee!!
He’s slightly less wordy
A few points: 1) Say is not only referring to government. He speaks of the “blunders of a nation or its government.” 2)The current economic crisis was caused by easy lending- subprime loans, securitization, credit default swaps, and falling home prices. Because of this inter-relationship,a large segment of the economy was affected. I am not sure how “unrestrained trade” fits into this. 3)Have you noticed the prices of computers and electronics lately. They keep going down. Manufactures are able to sell them cheaper as time goes by-deflationary? 4) An example of the government not allowing prices to drop- minimum wage laws and government support of unions. 5)Have you noticed car prices after “cash for clunkers” program? I was offered a new Nissan versus for 9k; after “cash for clunkers,” the same car was 14K.Just for the record, I am not a supporter of big business. I operate a small business. I have never worked for a large corporation. However, I did work as an administrator and policy analyst for the government.
Great in depth over view. Don’t know your age, however I would like to point out that the US spent itself out of the depression after Germany showed the way.
Peter Zeller
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