Thursday, November 17, 2011

Job creators

A conversation with a "job creator":

JC: "I took over a failing furniture chain and saved fifty jobs by managing it properly."

ME: "No you didn't. You just kept fifty jobs from moving to other furniture stores."

JC: "No, if that furniture chain had gone under, those jobs were gone!"

ME: "People would stop wanting to buy furniture if that furniture chain went under?"

JC: "Uhm, no."

ME: "There were no other furniture stores that people could go to?"

JC: "Well, there were other furniture stores, true, but..."

ME: "So wouldn't those customers just go to other furniture stores?"

JC: "Uhm, I guess."

ME: "So, wouldn't those other furniture stores need to hire more people to deal with the additional demand?"

JC: "I... guess."

ME: "So aren't the customers the job creators, who create jobs by buying furniture? Money is fungible. If they aren't spending the money in your furniture store and creating jobs in your store, they're spending it in someone else's furniture store and creating jobs there."

JC: "I... I don't want to talk to you anymore." Stomps off to find someone else to impress.

-- Badtux the Practical Economics Penguin


  1. From everything I have read, Henry Ford was kind of a dick. But one thing he did that really contributed to society was that he figured out that if you pay your workers well, they can afford to buy what you are producing which creates more demand and ultimately more jobs. I am not sure if he figured this out on his own or stumbled on it by accident but there is no denying that if the furniture store pays their workers well, they'll buy more furniture. And if every other furniture store raises wages in order to better compete in the labor market, their workers will buy more furniture too along with a lot of other stuff. It is basic Econ 101 that income has a major effect on demand curves, ie the more money a person has, the more things they are likely to buy.

    Our society here in the US was able to keep demand high even while wages fell by extending credit. But that ship has sailed and we are facing a situation where demand is down because people just aren't earning as much money as they once were and can no longer borrow more money. In some ways, I don't think this is the tragedy that some others think it is in the sense that I truly believe that Americans in general might find their lives improved by having less stuff. But when this situation results in millions of people having no jobs at all, because the so called job creaters are off shoring their work or paying people less and thus lowering demand, I can't help but find it a little bit disingenuous when one of those people calls themselves a "job creator"

  2. Well, sure, if you ignore that most other furniture companies can't/won't hire the laid off, as (like you pointed out a couple of months ago) they have to use up their excess capacity before they hire anyone new. And ignore that fact that furniture is not mostly fungible.

    No, your opponent has a point. Not as much as he would like, but a point nonetheless.

  3. Yogi, excess capacity is not sustainable in a free market (that is, over time, the most efficient stores, the ones that run their business with as little excess capacity as possible, will drive out of business the less efficient stores), and I can tell you first-hand that retail business is very labor intensive, most of the workers are part-timers who work 39 hours per week max (can't work 40, that'd trigger various legal things that raise your labor costs as an employer) and if there are not customers, as a part-time employee, you get *sent home*. So the question is, are the wages of those laid off at furniture store A more important than the wages of those now *not* sent home at furniture stores B, C, D, E, and F?

  4. Lynne, I'm not aware that Henry Ford paid his workers more because he figured they'd buy more of his cars. He paid his workers more to get a loyal workforce that'd stick with him rather than go to competitors. The buy more cars thing was something he came up with later to explain to his fellow industrialists why he wasn't cooperating with their conspiracy to drive down wages but was instead (gasp) *competing* for labor in a (gasp) FREE MARKET manner, rather than colluding to subvert markets.

    - Badtux the Economic History Penguin

  5. The buy more cars thing was something he came up with later to explain to his fellow industrialists why he wasn't cooperating with their conspiracy to drive down wages but was instead (gasp) *competing* for labor in a (gasp) FREE MARKET manner, rather than colluding to subvert markets.

    I know that he started out paying the higher wages in order to attract and retain the best workers. But whatever his reasons, paying workers well did increase demand. That and the unions probably also created jobs because of a weird effect price floors have on monopsony labor markets. (Yes I know that Ford Motor Co wasn't a monopsony but I don't know the corresponding word for when a small group are the only buyers in a market with a lot of sellers).

    At any rate, the larger point is that pubic policy that forces employers to pay higher wages can result in more demand and thus more jobs. The problem though is that such policies won't work without severe restrictions on imported goods and doing that negates the very real positive comparative market advantage gains one gets through trade.

  6. ugh. duh. The word I was looking for was "oligopsony" (sorry, I have a bad habit of posting too quickly)

  7. Tux, you argue for long term in one sentence, and short term in the next breath.
    Of course the customer is the ultimate source of all job creation. But where will they buy stuff if there is no store, no person to risk capital, no employees to trade time for dollars? So your analysis leaves a lot to be desired.
    The creation of jobs is the result of the willingness of someone to risk their capital on their understanding of the market's desires. That willingness to risk is why business owners claim themselves to be job creators, using currently unused or underused inputs (I hate that word) to expand the market place.

    Or are you going to try to argue that the demand for all goods is inelastic?

    Come on, this is a straw man argument. You have a bigger point to make, stop dinking around with barroom analysis. If you want to prove your point, you'll have to go bigger.

    Lynne, the demand curve rolls off at the top: it is not close to linear, it almost looks like a bacterial growth curve: a "knee". People only buy more stuff up to a point, then they buy more expensive things, not just more. (at the far right end of the curve, they start spending less, as they move more and more of their money into investments. This causes the knee.)

    Millions of people are out of work, not because of offshoring per se (though that is one of the biggest reasons we don't have a manufacturing base any longer), but because the actions of the banksters caused a shrinking of available capital, which Tux has rightly been saying could be cured by printing more money. But is is not the consumer credit shortage that is affecting most people, but the inability of businesses to offer goods at lower prices because the cost of funds went of dramatically (in the case of a couple of businesses I know personally, the cost of short-term money tripled.) When the cost of money goes up, prices cannot be lowered, nor credit terms extended.

    Tux, I've worked retail management, construction management, owned my own business, etc. I know this stuff. You make great arguments, but I think here you are over-simplifying.


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