Why Jobs Are Created

There is, lately, lots of noise from various Republican politicians blaming Obama’s policies for the slow job growth.  They think less government spending, fewer regulations would lead to more jobs.

Imagine you own a business.   Let us imagine that your product is such that one employee can produce 100 units of your product per year.  At the end of the recession, you have 100 employees and turn out 10,000 units of your product a year.   This number was arrived at because it is the number that you are selling.

Now, if the government offers you a tax credit if you hire someone, are you going to hire someone?  No.  You are still only selling the 10,000 units that your existing staff can produce.

If the demand for your product increases and now you can sell 11,000 units a year, then you are going to hire ten more employees to meet that demand.

There are employers who are managing to meet the demand by working their staff overtime (cheaper than the benefit costs of another hire) and in a few instances a tax credit of some kind might tilt the equation towards hiring.  But an increase in demand will also.

Jobs are created by demand.  Demand is the spending of money.   When the government is cutting spending it is cutting demand.  Since the Republicans won the House, federal spending has been cut.  More importantly, there has been no more stimulus to the states, so state and local spending has been cut including the layoff of many employees.  This is what has been hurting job creation.


July 18, 2011 Update:   Here is the Wall Street Journal in apparent agreement with me.  Apparent since one must be a subscriber to read the entire article, but the first paragraph says:

The main reason U.S. companies are reluctant to step up hiring is scant demand.

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