Two weeks ago I wrote (What Happened to the Jobs?) about where the economy lost jobs in the Great Recession showing that most of the jobs lost were in frontline non supervisory manufacturing, construction, or government. In this post I want to look at what doesn’t create jobs. There are lots of ideas floating around Washington about job creation and many of them sound attractive. Unfortunately, many of these ideas while intuitive and reasonable sounding have not actually been proven to create jobs.

For example, though it sounds good, there is no evidence that lower tax rates lead to job growth. A simple comparison of Bill Clinton’s job creation record and George W. Bush’s record shows that our most recent experience is that higher taxes were correlated with greater job growth. This lack of correlation between tax rates and job creation has been apparent in other periods and in other nations. And when you think about it further, it makes perfect sense. Simply put, a hiring manager does not hire new workers based on the level of the marginal tax rate, but on whether the business needs the extra employee to meet production demand. I recognize that it is an article of faith to some on the right, but tax cuts do not create jobs – employers create jobs.

Now to disappoint my progressive friends: tax credits also do not create jobs. The idea of offering employers targeted tax credits to hire the unemployed or the long term unemployed sounds really good, but once again no business person advertises an opening for “unemployed, long term unemployment preferred”. Businesses advertise a job based on the skills and qualifications they need for the employee to have, and then the business hires the person they think can best fill the position and produce an immediate profit.  Businesses hire the employee who looks like they can be fully productive in the shortest period of time – if this person qualifies for the tax credit, great, but a tax credit is not going to cause any business to hire someone. The cost of a bad hire overwhelms any benefit of a tax credit so tax credits for hiring the unemployed will merely be lagniappe to the employer for taking an action that he or she took for a different reason – namely that the business hired who they thought was the best person for the job.

There are lots of factors that go into an appropriate tax policy and some policies are more friendly to business than others, but short of truly confiscatory tax structures (think 70% to 90%) taxes really are irrelevant to job creation.

How about free trade? Once again while there may be arguments that free trade will reduce costs for imports or open markets for exports, the reality is that even in the best of circumstances free trade makes the economy more efficient with a diverse set of potential small scale winners who don’t benefit enough to justify adding employees and a specific set of potential winners and losers who may or may not create jobs depending on how competitive the businesses are in the global market and how free and fair the trade actually is. In reality free trade agreements may (or may not) make the US more prosperous as a whole, but they offer no guarantee of net job creation.

How about increasing business productivity or profitability? Once again, it sounds great. Improve productivity and businesses will be more profitable and will then add workers. But once again this logic is mistaken. Productivity, profitability, and improved competitiveness are ways to build wealth, but they do not add jobs. If a business can cut their labor force 20% and still produce the same output, that business has become more productive, can potentially compete better within their industry, and may be more profitable, but they will have reduced the number of jobs, not increased the number of jobs. Profitable businesses do not hire people just because they have money in the bank. Businesses hire because they believe that by adding one employee, or ten, or a hundred employees that these employees will in turn produce even greater profits. Once again it is supply and demand. If there is no excess demand for the company’s products or services which requires adding more workers to meet the demand, then the company will not hire. Large corporate cash balances are more frequently associated with empire building through dubious mergers and acquisitions, than with increasing employment.

Lastly, offering tax incentives to repatriate funds — if the businesses promise to use that money to create jobs — is foolish for exactly the same reasons: the only jobs that will be created will be those where the market demand exists for the extra service or product produced. If such demand exists, then the business will create the jobs; if the demand does not exist, the jobs won’t be added. The tax incentives and the repatriated funds are irrelevant to the job creation decision. Similar repatriation schemes in the past have not led to job creation for this very reason. There may be good economic reasons to reform the corporate tax code or to encourage repatriation of profits, but the creation of jobs is not one of them.

So to summarize neither tax cuts, nor tax credits, nor free trade agreements, nor productivity improvements, nor business profitability, nor repatriation of offshore cash will necessarily lead to any job creation. Any or all might be nice for other reasons, but there is no evidence that any of these policies will create jobs. Unfortunately, these very policies are what are being touted by the policy makers in Washington as the solution to our jobs crisis.

Arthur Fullerton

Arthur Fullerton