Where Do All the Jobs Come From?

You can be forgiven if you think that the government creates jobs. Politicians try to justify almost any policy as creating or protecting jobs. This is usually not true. Also, at what cost? If we bail out a failing company or keep open a government facility or military base that’s no longer needed, we are subsidizing the jobs that are retained by taxing others to cover the cost. How much per job? No one likes to discuss this as part of the approval process. Doesn’t raising taxes directly or indirectly discourage investments that create private sector jobs? Couldn’t the people whose jobs were “saved” find other employment?

If the government “creates” a new job or program, it has to raise taxes or fees on the private sector economy to pay for this new job or program. Yes, the government can increase its debt to pay for the job, however that just shifts the cost of the new position to future taxpayers.

The government can help or retard job creation. But, jobs are created by private sector individuals and businesses taking risks with their money and starting a business or expanding an existing business. Yes they benefit a great deal from government expenditures such as for education, R&D, and infrastructure. However, it still takes an individual or company to make a private sector investment to create a new job.

Without private sector investment and risk taking:

1. There wouldn’t be any new jobs.

2. There wouldn’t be any growth in the private sector economy, the source of all federal, state, and local government revenue via taxes and fees.

3. And, there wouldn’t be any productivity improvements. Increases in productivity are the source of our higher living standards. Without productivity improvements, we’d be no wealthier than or grandparents.

The U.S. has the world’s most productive work force according the OECD (Organization for Economic Co-operation and Development). This is due to three major factors: the skills and education of the workforce, the technology applied in a business or industry, and the investment per worker.

So, where do jobs come from?

Let’s focus on investment to start. Every job requires some investment from a building, to tools and machinery, to computer systems, investments in product development, marketing, and R&D. Without these investments even the smartest and most skilled employees wouldn’t have jobs.

In our capitalist system, these investments are largely made from the incomes and savings of private individuals and businesses. They may be the owners of a small business even a sole proprietorship, or someone who invests in startups such as through a venture capital fund, or one who invests in established businesses by buying a company’s stock or lending the company money thought a bank loan or by buying a bond issued by the company. All these investments are made by individuals and businesses from money they earned and saved. Some of these investments are through intermediaries such as pension funds, mutual funds, or via larger companies they have invested in.

Over time, savings equals investment. Government policies from taxation to rules and regulations can encourage or discourage saving and investment. Without investment, there are no new businesses, existing businesses don’t grow, and there are fewer jobs. Also, there is less tax revenues to fund essential government services, and unemployment increases if population growth exceeds the growth of the economy.

Even the lowly “hamburger flipper” needs business investment. To open a fast food restaurant that employees 25 or so people requires a substantial private investment. Just to qualify for a fast food franchise requires that a person have the financial resources to support the investment required. To be even considered for a McDonald’s franchise, you need a financial net worth of $750,000 or more. This means that you have savings excluding your home that’s at least $750,000. Otherwise you won’t qualify for the bank loans etc. needed to start a McDonald’s restaurant.

If you qualify, you need to take some substantial risks and put in a lot of effort. You may have to get some specific training at your expense. You have to find a location that’s approved by the franchise company and sign a lease to rent the property, usually for eight years or so. Then there’s the expense of outfitting the restaurant that could be $200,000 to $1.0 million or more. You may not have all this money so part of this cost would be from a bank loan that you are responsible for. After the restaurant is ready to open, you need to pay for the food and supplies, hire and train workers, and spend long hours managing a business that’s open seven days a week. If you hire others to do this for you, you’d have to pay them for their work.

All this is required to employ 25 or so low skilled workers who need jobs. The total investment could easily be $20,000 to $40,000 or more per job. Think of what it would cost for other more capital-intensive businesses such as a car dealership, a manufacturing company, a software company, a hospital, or other businesses that require more complex facilities, more expensive high-tech equipment, and other large investments.

Let’s not forget that every new job starts with a private sector investment. Discouraging savings and investment is a jobs killer and also reduces future tax revenues.

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About the Author:

William Fletcher is a business executive with interests in public finance and national security. He retired as Senior Vice President at Rockwell International where most of his career was spent on international operations and business development for Rockwell Automation. Before joining Rockwell, he worked for Bechtel Corporation, McKinsey and Company, Inc., and Combustion Engineering’s Nuclear Power Division, and was an officer and engineer in the U.S. Navy’s nuclear program. His international experience includes expatriate assignments in Hong Kong, Europe, the Middle East, Africa and Canada. In addition to his interest in California’s finances, he is involved in organizations dealing with national security and international relations. Fletcher is a graduate of Tufts University with a BS degree in Engineering and a BA degree in Government. He also graduated from the U.S. Navy’s Bettis Reactor Engineering School.