Whenever there is an economic downturn or political instability, "job creation" often comes up as one of those buzz words that get thrown around in the media; "job creation" is supposed to "steer" our economy back on track. However, the majority don't really understand what happens when “jobs” are created. Contrary to popular belief, government-driven job-creation isn’t such a good thing for the public.
Imagine you are the owner of a little restaurant that serves 100 people each day and you have 10 staff members working for you. During time of economic recession, you notice only half as many people come dine in your restaurant. So what do you do? As a rational manager, you would lay off some of your employees. This makes sense because doing so you recover some of your profit through spending cuts due to a lowered demand.
Your little restaurant functions like our economy. In times of recession, people lack the incentive to dine out the same way market lacks consumer confidence; thus some job positions are eliminated and a percentage of people become unemployed.
If we truly believe in a free market, then the recession isn’t such a big deal because the “invisible hand” shall fix everything and restore the economy back to its potential output. But who gives a damn about a free market when you and I lost our jobs or know a friend or relative who did?
This is when a politician steps in and says “…we’re creating jobs” and suddenly everyone applauses, perhaps even casts a vote for him or her.
The “invisible hand” can be quite uncooperative when anything tries to control it.
Let’s go back to that little restaurant in the midst of a recession. Suppose the government takes over and re-opens the job positions that were lost at the beginning of the recession. It does this for the sake of “creating jobs” to satisfy those who can't find work. When the government does this, these positions fill up very quickly because of the excess supply of labour caused by the recession. While the restaurant maintains its recession-level profit (we’re still in a recession remember?), restoring to previous level of employment means that on average employees would get less than what they got before the addition of jobs. This phenomenon isn’t so new to us; how often do we find too many hands in the kitchen?
The reason why companies aren’t hiring in the first place is because they are at capacity. In reality, hiring more people at a fixed capital decreases their profit. The same principle applies to macroeconomics; to create job positions, the economy must expand by increasing its capital or introduce new ideas/products to the market. Without improving either and creating jobs out of thin-air, the government hurts the economic recovery because it detracts money capital from being invested in the right places. The money should instead be used for skills training, education, entrepreneurship, R&D, innovation, etc. On the contrary, the government-created jobs, such as road-repair, are often temporary and short-sighted. These so called "new jobs" do no more than transfer wealth from one section of the economy to another without creating real growth.
So, ladies and gentlemen, we must think critically next time we see it in the media that the government has created jobs for us।
