Flashback – Job Creation Basics

[Every two or four years we hear tales from federal and state candidates about who has or who is going to create the most jobs. In reality the only jobs governments create are government jobs. The best any government can do is to minimize regulations that stifle job creation and not try to micromanage the job market. 

I wrote a reminder of this in August 2011 when the job market was just recovering.]

There has been a lot of talk about jobs in the past two or three years, but I think it requires strong economic understanding and critical thinking to draw accurate conclusions.

Jobs are not created; they are purchased. You don’t work for the boss; you work for the customer. Conversely, jobs don’t go away, customers go away. My experience is that many bosses don’t understand this important concept and fail to pass it along to their workers. When a company is growing or downsizing, it is usually based on matching the number of jobs to the needs of their customers.  (Sometimes, though, they economize by passing along their work to their customers, think self-service check-outs and those irritating phone menus).

When we work at jobs, making goods or delivering services, there must be a market for those goods and services. People should say to themselves, ”Wow, this is better and cheaper than the other comparable alternatives. I’m glad I made that particular purchase.” Everyone in the organization, whether it be a single proprietor or a global corporation, is working together to make that sale successful. Then customers continue to buy and more customers arrive. By buying more products or services, they essentially create more jobs. This is the motivation for a company to focus on customer satisfaction.

When a governor decides to “create green jobs” by mandating that a portion of electricity be generated by renewable sources (wind, solar), who purchases these jobs? Since they are created, they must be additional to jobs that already existed and the additional wages for these additional jobs must come from somewhere. Because there is no magic money tree, utility customers pay more. These jobs are created not because there are voluntary customers; instead the customers are forced to buy these new jobs with money they would have spent on other things (i.e., other jobs). Then we are paying more to support a wind farm that no one asked for, with a much bigger ecological footprint than conventional generation, that requires a back-up system anyway because it is only 35% efficient as the wind blows only part of the time and more at night, when less electricity is consumed. It doesn’t improve customer satisfaction or attract new customers. It merely creates jobs by displacing other jobs.

When we hear of jobs being created, we must be very wary. GM, GE, General Mills, and Geico don’t create jobs. When they have something we want, we, as customers, create those jobs voluntarily by our buying decisions, not because of new laws or regulations, but because we believe the output of those jobs makes our lives better.

Economic Understanding

Everyday we see on the news some reference to economic results or statistics. These should be of interest to everyone, not just those Wall Street tycoons and rich investors. Whether shopping at the grocery store, filling the car with gas or looking for a new job, economics affects our lives in so many ways.

One basic tenet of economics is the law of supply and demand. 

In a free market, the relationship between supply and demand determines the price of goods and services. Things that are scarce cost more because people who own them can wait to get the best offer from the highest bidder. Things that are common cost less because people who need them have a choice of sources; they can take their time to shop around for the best deal. As the supply of a product increases, the price goes down, simply because there is more of it. The opposite is also true.

This idea of supply and demand is behind many price changes, but it hits close to home when it affects jobs and wages. 

A couple of weeks ago the Business Insider ran a headline that made the point clearly: “The US unemployment rate fell to 3.7%, a 48-year low, in September.  What should be good news is bad news for the fast food and retail industry.” Why would it be bad news for the likes of McDonalds and Wal-Mart? The answer is supply and demand.

When the unemployment rate drops to today’s historic lows, the supply of available workers has decreased. That pushes up the cost of hiring people, that is, buying their services. Many of those jobs typically do not require a high level of education. Needed skills can be learned on the job. But with openings at many potential employers, workers would wisely look to where they could get the best deal – selling their skills to the highest bidder as fast-food locations and retail outlets compete for their time and loyalty.

But there is a downside to this as well. As I have written often before, there is no magic money tree.

The Business Insider continues: “Companies are giving workers higher pay and better benefits to compete – and trying to figure out how to cut labor hours by replacing employees with robots.” The higher wages and benefits must be paid for somehow. Do they pass along the added costs to their customers by raising prices? Do they try to absorb the added costs by making their operation more efficient? In the first case, it would be illegal to collude with their competition to get everyone to raise prices. They must continue to compete honestly. In the second case, using robots is one answer. Fast-food restaurants, grocery stores, banks and others have already increased the amount of self-service they expect from their customers.

Neither of these options is evil. People have raised prices and used automation for years. They are just trying to stay in business. Long distance phone calls used to be very expensive until they replaced operators with computers. Now distance is not even a consideration.

But what happens when the controlling factor is not supply and demand, when instead the government forces or coerces companies to pay more? For example when Senator Bernie Sanders wants McDonald's to raise its minimum wage to $15 an hour, they have the same options, raise prices or find ways to reduce overall labor costs. 

Notice that when Amazon came under the same pressure, they did promise all workers a $15 minimum wage. But according to CNBC, “the company is getting rid of incentive pay and stock option awards.” Although Amazon denies it, many workers complained that they will make less with the pay raise than they did before with the other benefits.

With a little economic understanding, none of this comes as a surprise, but people continue to act like there really is some magic money tree and that any well intentioned changes just make the world a better place with no ramifications whatsoever. Then, when the robots fire up and companies are only willing to hire people with $15-an-hour skills to fill the few jobs that are left, where do young people go for a first job experience? Where do today's fast-food workers find other employment?

Where Are the Jobs Going?

“Daddy, I want to be an elevator operator when I grow up.”  “Daddy, I want to be a gas station attendant when I grow up.”  What is wrong with this picture?  We understand it now, but 50 years ago, though it might not have been an ambitious career choice, it was a possibility.

Today kids might grow up wanting to be an autoworker making $60 an hour including benefits.  Those jobs are disappearing as the older workers retire to be replaced by workers making more modest wages.  Today it takes an extreme combination of patience and luck to actually be able to speak to a human when trying to resolve a billing problem or check on an order.  (“Your business is very important to us, so please stay on the line and your call will be answered in the order in which it was received, or go to our website.”)  A good question to ask is, where are all the jobs going?  Some politicians say they are going overseas and south of the border, but when they come back, if they come back, will people do them?

These thoughts come as I look through a few recent articles.  “Walmart (WMT) has patented a robotic device that would create self-driving shopping carts, giving customers free hands while they shop. While that might benefit shoppers, the robot could lead to cutbacks in staff if it lives up to the potential highlighted in the patent, ranging from retrieving containers and abandoned items to helping with stocking and checking inventory.”  According to CBS News:  “A wave of automation is predicted to take 5.1 million jobs away from humans over the next five years, with low-paying, low-skill jobs considered those most at risk.”

In another instance, Zume Pizza, a Silicon Valley company, is using robots to prepare and cook their pizzas. This article calls it “the latest in a new trend within the food industry…to increasingly depend upon machines rather than human labor.”  The management says they are doing it for the employees, as they “eliminate boring, repetitive, dangerous jobs.”  Workers are still needed to prep the dough and measure out the cheese and other ingredients but the robots will soon be taking over those tasks too.  Robots will eventually remove pizzas from the oven, slice them, and box them for delivery – in self-driving cars perhaps.

In other related news, Foxconn, an electronics maker, recently cut around “60,000 factory jobs and replaced them with machines. And Wendy’s cited the rising cost of labor and competition among fast food chains as motivation for its own decision to replace some cashiers with kiosks.”

Meanwhile back at Walmart, they are also “eliminating about 7,000 store accounting and invoicing positions over the next several months.”  Mostly long-term employees held these highly sought-after and well paid jobs among Walmart’s hourly workforce.  There is also talk of a trend to cut back on middle management and support jobs in other industries.

Note how many of these changes can be made under the heading of improving customer service or giving the workers more challenging and rewarding jobs.

The question looms:  Will many of those jobs that may come back from Mexico, China and Vietnam only to be taken by robots, machines that can work 24/7 without vacations, require no government mandated health insurance and don’t give a hoot about the minimum wage?  It is something to thing about today instead of waiting 25 years to wonder what happened – both to the jobs themselves and to all those political promises about creating them.

More Economic Reality

Last time I told of how some fast food workers were demonstrating for a $15 wage, while in parts of North Dakota where the economy was strong and unemployment very low, one Wal-Mart was offering over $17 per hour starting pay to attract workers.  It’s purely a matter of the supply of willing and able workers falling short of the demand.  Many of the able-bodied in that part of the state can work in jobs related to oil production for far more money.  Accordingly, the best way to get a good-paying job is to have skills or talents either superior to many others or rare in society.  Examples include top salespeople making the best commissions and star athletes winning tournaments or big contracts, but the principle generally extends to the rest of us who expect to get rewarded for a good education and hard work.  (Of course some get rewarded for being favored by the boss or being related to the owner, but much of that is out of our control.)

That supply and demand dynamic works well if the jobs exist, but where do jobs come from?  Politicians would like us to believe that if elected, they will create jobs.  Later, if the job situation improves, they take credit; if jobs disappear, they blame evil corporations, the general economy or other politicians – or sometimes they make up numbers and take credit anyway!  The truth is that government does not create jobs (except more government jobs).  Politicians can only make it easier, less burdensome, for businesses, especially small businesses to operate and grow.

Do businesses create jobs?  I’ve often heard people, especially during the recession, complain that if Apple or another big company has so much cash on hand, why don’t they use some of it to hire more people.  These complainers don’t take it to the next step by asking what the new employees would do.  Would they help to make more products, products that would just accumulate in a warehouse somewhere?  That might work in the short term, but then those people, plus others, would be laid off until the products sold.  With no one to buy the products or no one interested in the extra service the companies have no reason to hire anyone.  They will continue to accumulate cash while they advertise in an attempt to grow; but they need more sales to hire more workers.

The ultimate conclusion then is that customers create jobs!  Companies must have someone interested in buying a product or service to justify hiring someone to produce that product or provide that service.  The lemonade stand at the bottom of a dead end street is pretty much doomed to failure.  Apple without people lining up to buy the latest phone has no reason to maintain their level of stores, distribution, research and advertising staff.  A large majority of new start-up businesses fail in the first 2-3 years not primarily because they are poorly run, but because they are unable to attract enough customers to cover their costs.  Many entrepreneurs will live on a minimal salary or no pay at all in an attempt to get their business off the ground, and that means building a customer base.

No matter what we hear from politicians over the next 14 months and beyond, government does not create jobs.  Customers are responsible for private sector jobs and our jobs depend on those customers being happy and coming back.  Unfortunately too few executives grasp this concept well enough to value the workers who make their products or otherwise have face-to-face contact with their customers and to treat those workers with the respect and honesty necessary to motivate continuous caring and high performance.

Why You Should Know the Meaning of “Fungible”

Here is a word that is fairly rare, heard mostly about economic issues.  Fungible means “being of such nature or kind as to be freely exchangeable or replaceable, in whole or in part, for another of like nature or kind.”  A close synonym is interchangeable.

This word came to my mind when I heard a radio ad for a company called Outsource.com.  They were advertising that you could use their services to hire temporary, project-oriented help for your business, especially for such things as computer programming and web design.  They gave sample hourly prices to show how competitive they are.  Whether these services would originate in the US or somewhere else was not clear.  What I do know is that they could be easily delivered from almost anywhere and apparently low bidders have been signed up.

I am not in the market for such services, so there was no reason for me to pay attention to the details, but it struck me that this word, fungible, which usually refers to commodities – this ounce of gold being just as valuable and interchangeable as another ounce of gold somewhere else – can also apply to skills.  When you think about it that way, some major economic issues become clearer.

It has become clear both from the news and from the accents we encounter when calling for a customer helpline that skills like programming and telephone customer service are fungible skills.  A few websites offer basic legal services, because the filling out of the proper forms can be automated to a large extent – lawyers become valuable for their knowledge and negotiating skills rather than for their ability to follow the steps to draw up a simple will.  Some unions’ workers too have found their skills to be fungible.  Jobs move to Mexico or to new hires at a lower pay scale and with fewer benefits as the seasoned workers retire.  In fact worldwide, not just in America, the wages of the working class have been increasing only modestly due to this concept, the fungible nature of those skills and the ability of companies to find and quickly train a competent workforce elsewhere.  Unions who defend their members against management abuse are doing their job; those who try to protect their members against the reality that their skills are interchangeable in many parts of the globe are fighting a losing battle and, in the long term, harming their members and the companies that pay them.

This should be a warning to every high school student and to all parents who want to see their children succeed.  Common skills are no longer good enough, and as we move into a future with ever-increasing speed and bandwidth of communications, the need to develop more specialized and less easily duplicated skills is essential.  It’s no longer realistic to leave high school and go to work for 30 years in the same factory or mine that daddy and grandpa did.

We can’t let our children grow up with only “commodity” skills.  It should be an obvious conclusion by anyone familiar with the ideas behind supply and demand that the more successful students can be at differentiating themselves from the rest of the population, the greater their earning power will be.  Not everyone can be a star athlete or rap artist.  Education is essential.  Otherwise they will be left with fungible skills, skills that can be duplicated many other places with little effort by people willing to work for less.  The only other option would be total economic isolationism, which every economist knows is a terrible idea.

No One Really Creates Jobs

There has been a lot of talk about jobs in the past two or three years, but I think it requires strong economic understanding and critical thinking to draw accurate conclusions.

Jobs are not created; they are purchased.  You don’t work for the boss; you work for the customer.  Conversely, jobs don’t go away, customers go away.  My experience is that many bosses don’t understand this important concept and fail to pass it along to the workers.  When a company is growing or downsizing, it is usually based on matching the number of jobs to the requests from the customers.  (Sometimes, though, they are just passing along their work to their customers, think self-service check-outs and those irritating phone menus).

When we work at jobs, making goods or deliver services, there must be a market for those goods and services.  People should say to themselves, ”Wow, this is better and cheaper than I could have done it for myself.  I’m glad I made that particular purchase.”  Everyone in the organization, whether it be a single proprietor or a global corporation, is working together to make the sale successful.  Then customers continue to buy and more customers arrive.  By buying more product or service, they essentially buy more jobs.  This is motivation for a company to improve customer satisfaction.

When a governor decides to “create green jobs” by mandating that a portion of electricity be generated by renewable sources (wind, solar), who purchases these jobs?  Since they are created, they must be additional to jobs that already exist and the additional wages for these additional jobs must come from somewhere.  Because there is no magic money tree, utility customers pay more.  These jobs are created not because there are voluntary customers; instead the customers are forced to buy these new jobs with money they would have spent on other things (i.e., other jobs).  Then we are paying more to support a wind farm that no one asked for, with a much bigger ecological footprint than conventional generation, that requires a back-up system anyway because it is only 35% efficient because the wind blows only part of the time and more at night, when less electricity is consumed.  It doesn’t improve customer satisfaction or attract new customers.  It merely creates jobs by displacing other jobs.

When we hear of jobs being created, we must be very wary.  GM, GE, General Mills, and Geico don’t create jobs.  When they have something we want, we, as customers, purchase those jobs voluntarily, not because of new laws or regulations, but because we believe the output of those jobs makes our lives better.