July 17, 2014

Focus On Growth, Not Jobs or Wages

By: Hadley Heath Manning

businessman with financial symbols coming from hand

At a time when our national labor force participation rate is at a 37-year low, the temptation in American economic policy is to focus on job creation above all things. Politicians of all stripes promise that they have what it takes to create jobs and boost wages, and anything that potentially “kills jobs” is viewed as a negative.  But a recent report from the Bureau of Economic Analysis highlighted where the true focus of our economic policy should be: growth. GDP growth in the first quarter of 2014 was an abysmal negative 2.9 percent.

The economic indicators of unemployment, wages, and GDP growth can fall prey to a chicken-and-the-egg question (What comes first?). But it’s important to understand that job creation and wage growth are byproducts of growth, not the ingredients.  Unfortunately, focusing our economic policies too much on job creation (or job protection) and regulation-induced wage growth can work counter to economic growth.

For example, news that McDonald’s and other food establishments could begin using kiosks or smartphone applications to place orders troubled some people who feared this would replace cashier jobs. Even the President expressed the same (flawed) line of thinking a few years ago, when he suggested that ATMs were replacing bank teller jobs.

Automation and technology may seem to replace jobs in the short run, and they often do displace some workers from some industries as they make various aspects of business more efficient. This process though (often known as “progress”) makes us all richer, and ultimately frees up resources to allow for investment in other industries and other roles, creating new jobs to replace the old.

Milton Friedman once traveled to China, where he was surprised to see workers digging with shovels rather than automated equipment. When he asked why, the Chinese officials said that shoveling created more jobs. To this, Friedman wittily responded: “Why not use spoons?”

Another example: In Washington, D.C., cab drivers protested the newest innovation in transportation – Uber.  The new smartphone-centric, credit-card-only chauffeur company is out-competing the traditional taxi, possibly putting some drivers out of business. Uber (and the McDonald’s app) is an example of “creative destruction.”  Someone had a good (creative) idea, and this is destroying the pre-existing, less efficient way of doing things.

Government leaders should not listen to the protestations of these cab drivers or others who ask for regulations to protect them from such competition.  We must also consider the consumer experience, which is improved by creative destruction and competition: More and better options become available at lower and lower prices.

Protecting status-quo jobs does not help the economy, but weakens it and denies progress.

Similarly, wage growth is not the starting point for economic growth. Some advocates of higher minimum-wage regulations argue that putting more money into the pockets of low-income workers would result in higher consumer spending and therefore stronger economic growth. This simplistic (demand-driven) view of the economy has it completely backwards, and ignores many variables (on the supply side). After all, money for artificially increased wages must be moved away from another part of business, resulting in decreased profits, increased prices, or fewer jobs.

When minimum wage laws increase the cost of labor, there are fewer jobs available, working contrary to the interests of all workers, who benefit when there are more, not fewer, jobs in the market.

Here’s how people truly become richer: Natural, real wage growth (positive relative to the cost of living) happens when there are more jobs than there are workers. Then employees have the bargaining power to negotiate or change jobs to obtain a better paycheck. There are more jobs available when firms are more innovative and productive, reinvesting healthy profits into the right parts of the economy. When entrepreneurs and investors see an opportunity to turn a profit, that’s when new ventures take off, and new jobs are created in the process.

Productivity – not jobs or wages – is at the heart of an economy. More workers can equal more productivity, but progress means that sometimes firms will be able to be more productive, even with fewer workers. A healthy economy will ultimately produce plentiful job opportunities, wages, and wealth for everyone, but the focus must be on the Goose, not her Golden eggs.

Follow Hadley Heath Manning on Twitter. Image courtesy of Big Stock Photo.