How To Create Jobs: A Note To Obama

Includes: SPY
by: James A. Kostohryz
One of the most important insights that one must grasp if one is to be able to think correctly on how to address the jobs deficit in the U.S. is that the U.S. labor market is extremely fast-moving and dynamic. Consider:
  • The U.S. economy is currently creating jobs at a pace of around 2.3 million per month. So, you may ask: Why did non-farm payrolls grow by zero jobs last month. Because zero is a net number, and 2.3 million is the amount of new jobs created; zero is the net jobs created because that same month, 2.3 million jobs were lost.
  • Many people lose and gain a job more than once in a month. Thus, there are 50 million job separations each year. Total non-farm payrolls in the U.S. economy number about 130 million. That means that on average, jobs last only about 30 months.
Nobody knows exactly what will be contained in Obama’s job proposal. However, it will presumably be a $300 billion package. Probably at least $100 billion of that will be to extend the payroll tax holiday and other things that will not represent a single dollar of marginal economic stimulus or create a single marginal job. So let us assume that $200 billion will be earmarked for direct job creation. How much good can that do?
Let us assume that it takes $300,000 of total expenditure for one job to be created. That implies 666,667 jobs. That is a drop in the bucket in terms of overall labor dynamics. Again, 2.3 million jobs are gained and lost each month. And there are more than 4 million job separations in a month.
Now, if 666,667 represented net new jobs, it would be nice. It could reduce the unemployment rate by 0.5%. But there is no guarantee that this will create that many net new jobs. It is quite likely that the net number could be less, depending on what sort of economic activity is being stimulated. Some portion of the jobs “created” could just be a shuffling of the deck where workers – particularly higher skilled workers – move from one job to another, creating no net new jobs. This is indeed quite likely when it comes to hiring certain types of highly skilled workers since there is actually a shortage of them in the economy.
For the reasons cited above, it is my belief that policies directly aimed at creating jobs are likely to fail. Jobs are created by economic activity. If you want to stimulate jobs, you need to stimulate economic activity -- by whatever means. That is what the focus should be, not job counting. Jobs will come with economic activity. And in particular, it needs to be the sort of private sector-driven economic activity whereby entrepreneurs create business plans that specifically targets the available labor pool.
That is not to say that the government should fold its arms and do nothing. It simply means that it should not be creating jobs just for the sake of creating jobs. If there are projects that are worthy of investment from a long-term economic point of view – e.g. natural gas infrastructure, alternative energy, transportation infrastructure -- then, by all means, go ahead. But these and all other projects need to be evaluated on their economic merits, not on how many direct jobs they will produce this year or next. Ultimately economic activity is driven by the profit motive. If money is invested in areas that can assist the private sector in generating profits in a sustainable fashion, jobs will be created.
That was one of the biggest problems with the 2009 stimulus package. It was haphazardly put together and money was spent on a bunch of wasteful projects that could not sustain any sort of longer-term economic activity. By contrast, when you invest in things such as listed above, this has the potential not only to create jobs on a sustained basis but to spur the creation of even more jobs by the private sector.
For example, if the private sector sees that the government is investing in natural gas infrastructure to exploit the U.S.’s massive reserves, that will be an unmistakably bullish signal for private companies to invest money (and create sustainable jobs) in this sector. Some companies are unsure about the U.S. government’s commitment in this area and have been hesitant to commit to major investments. Ditto for alternative energy projects.
If Obama’s jobs bill is directed at various and sundry projects that are not economically sustainable in the long term, it is unlikely that it will have any serious net impact on employment. On the other hand, if the jobs bill is focused on long-term job creation through public-private partnerships in areas with high rate of return and growth potential, then that could be something to get bullish about. The S&P 500 (^SPX, SPY) could rally significantly to news of that nature.
Do I expect something to get excited about from Obama's speech? Not really.
A final note. Investors interested in understanding more about how the job market works would do well to consult the work of Jeff Miller. I got the data cited above on job separations from him.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

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