Fundamental Questions About Job Creation

House Oversight and Government Reform Committee Chairman Darrell Issa is planning to study the impact of government regulation on job creation in his first hearing.  In a memo outlining his agenda for the first months of the new Congress, Issa said “we need to start by asking a very fundamental question: why hasn’t the economy created the private-sector jobs the president promised?”

That’s an excellent question.  One part of the answer would be the rising cost of labor, including the anticipation of dramatically higher costs due to ObamaCare.  Raising the cost of labor naturally and inevitably increases unemployment, as predicted by the laws of supply and demand.  When a resource is made more expensive, less is purchased.

Suppose the government passed a law mandating a minimum wage of $50,000 per year.  Such a law would not even slightly alter the number of employees who are actually worth fifty grand per year.  Instead, it would create pressure on business to hire fewer people whose true value is less than that.  Since most business expansions involve hiring a lot of entry-level people, one way to reduce demand for overpriced labor is to cancel expansion plans.  There is very little point in opening a pizza restaurant if all the cooks and waiters must be paid fifty thousand dollar salaries.

A given employee tends to earn a higher salary by remaining with a company for a long period of time.  This makes management more eager to retain experienced people when the cost of labor is increased.  Both of these principles are consistent with the current employment picture, in which fewer new unemployment claims have been filed recently, but new jobs are not being created.  In fact, data from the Bureau of Labor Statistics suggest a relatively small pool of recently terminated employees land most of the new jobs, while the long-term unemployed rot on the sidelines.  Workers whose value most clearly approaches the inflated cost of labor, thanks to long and tasty resumes, are most likely to get hired.

The maze of regulations from a massive State automatically produces uncertainty and retards job growth.  The politicians and bureaucrats who write those laws typically have very limited private-sector experience.  Their decisions are shaped by influential special interests and big-money contributors.  Unless you happen to be one of those contributors, you have no reason to expect the regulatory winds to fill your sails, instead of capsizing your boat.  On the contrary, you can expect the State to act against business interests with increasing frequency as it grows in size, because it becomes more concerned with its own growth… which causes the private sector to shrink with increasing speed.

Big Government also becomes more invested in class warfare, which is essential to maintaining political support in the face of its own inevitable failure.  Class warfare is poisonous to business expansion.  Like it or not, investment capital only comes from one source: rich people who want to risk their money in the pursuit of reward.  Why should they take those risks when they might well be stripped of the profits, and cursed as “greedy” if they resist? 

How deep has the unemployment hole been dug?  We would need to create something like 400,000 jobs per month to return to pre-Obama employment levels before he leaves office in 2012.  That’s essentially impossible, and even repairing the damage by the end of his successor’s first term would require over 200,000 new jobs per month.  Nothing short of a fantastic economic boom could produce that kind of job growth.  Such a boom cannot be engineered while simultaneously pleasing the Left and union interests with job-killing regulations.

What do we need for massive job creation?  The principles are simple enough: give the people with capital and knowledge a reason to create and expand businesses, while making labor available at a reasonable price, and they’ll hire people.  They want to hire people.  “Safe” investments don’t produce the same rate of return as entrepreneurial risk.  Nothing is more pernicious than the liberal caricature of The Evil Rich hoarding gold and gems in underground vaults, or blowing every penny on ridiculous luxuries.  Someone who behaves that way is a fool squandering an inheritance, not a successful capitalist.

To put it bluntly, almost every regulation has a cost in jobs.  By definition, regulations restrict the actions available to businesses, and they don’t need to hire people for things they can’t do.  This is not an argument against having any regulations… but we should understand their cost in jobs before we construct a massive, intrusive State, and then wonder why it presides over high unemployment rates.