The Facts Economists Ignore

Economists have had difficulty accounting for the sluggish job market, but it might be useful to talk with businessmen about it.

For economists, jobs are commodities, governed by supply and demand. When the supply is up, the lesser demand should drive down prices. That, in turn, should lead to greater demand. Wages are down, indeed, if you consider the growing numbers of those who are overworked and underemployed, working part-time, when they want full-time jobs. Still, employment doesn’t go up significantly.

When reporters speak to small business owners, they get a more realistic appreciation of why the growth in jobs is so glacial.

The Wall Street Journal interviewed Brian Feeney in Arkansas about his small manufacturing business. In 2011 he expanded capacity, automating “work once done manually, reducing by about a quarter the number of employees needed. . . . Now, guardedly optimistic after two years of brisk demand, he is adding a second automated production line to support a fifth weekly shift, creating seven production jobs.”

You can hear the fear in his voice when he explains why he waited too long to expand: “It’s that beaten-dog mentality,” said Mr. Feeney. “We were thinking, ‘this is too good to be true.'”

According to The Journal, he is not alone: “Companies large and small have balked at hiring and expanding since the financial crisis, fearing the halting recovery would falter.” Macy’s Inc. said it will invest in online operations and build new stores, laying off 2,500 workers but keeping overall employment flat in the process.

Xerox decided to expand an existing plant rather than build a new one: “the two other locations it considered, including one in Europe, would have required more hiring and training. “Those sites would have created more jobs,” said its Senior Vice President. But, he added: “That’s more operating expense.” According to The Journal, “Other companies are meeting demand without hiring or building at all.” (See, “Why Hiring Lags Behind Even as U.S. Factories Hum.”)

Looking back on his reluctance to hire, Mr. Feeney said: “If I was really smart, as soon as we got that first line running, I would have put the second one on order, and we would have been six months ahead of where we are.” But, clearly, he did not think it was “smart” to hire.

That fear may have been irrational, and certainly it led to a delay in production and a significant loss of profits for the company. But it is widespread, and it translates into job avoidant behavior.

Businesses today do not want to hire workers if they can possibly avoid it, and for reasons not so hard to grasp. Not only do they have to pay wages, but benefits as well, and prepare to take on the additional costs of insurance, potential liability, lawsuits for discrimination, etc. Off-loading these problems – and costs – to others is preferable.

Steven Rattner, writing in The New York Times on he “myth” of the return on industrial production, notes: “we need to get real about the so-called [manufacturing] renaissance, which has in reality been a trickle of jobs, often dependent on huge public subsidies. Most important, in order to compete with China and other low-wage countries, these new jobs offer less in health care, pension and benefits than industrial workers historically received.” (See, “The Myth of Industrial Rebound.”)

Rattner is able to see and speak more freely about this, perhaps, because he is a businessman himself. We need jobs, to be sure, but businesses lack the motivation to create them. Theories and incentives won’t change that.