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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