My son is taking economics in high school, so we have been talking about this kind of thing lately. At one point, I said to him that I always found it dubious when the news reports that someone is opening a new restaurant in town, “creating X jobs”. My feeling is that our town can really only support so many restaurants, so a new one opening will cause a temporary uptick, but after a few months it will either fail or the weakest already extant restaurant will go under.
I noted that a new factory opening in town will almost certainly raise the number of jobs available in our town–and not just the factory jobs but the ones that get created by the multiplier effect (in simple terms, if there are enough new factory jobs, maybe the town can support one more restaurant after all, as well as other businesses where the factory workers spend their money). But if that factory is successful, it is probably driving its weakest competitor somewhere else out of business.
I had a momentary thought that maybe job creation came out of discoveries that made workers more productive and companies more efficient, but that was countered by the realization that those could actually make it easier to downsize and increase profits.
Yet as we all know from jobs reports like the one released today, the economy does add jobs during the majority of the time it’s in an expansion rather than a recession. It’s not a zero-sum game. So where do the new jobs fundamentally come from? (I told my son I’d get back to him.)
This isn’t a question with an unequivocally ‘correct’ answer. Like asking a question on religion, you need to specify in which system you are looking for an answer.
In general, all economic systems pretty much agree that productive economic activity (that is, anything not based on violence or fraud) improves outcomes at the margin (and implicitly, creates jobs), since trade leads to gains. However, they differ on how much individual economic actors can do to affect output. Keynesian economic systems will argue that one business replacing another may not improve outcomes very much in the long run, and may even make things worse in the short run. On the other hand, classical economic systems argue that all business activity creates jobs in the short and long-run.
No economic system is entirely correct; as with most things in life, the truth lies somewhere in the middle. Most economists of either partisan orientation understand the mechanisms of action of the other sides’ theories, and even concede that they may have some minor validity. Debates are usually more a matter of degree rather than disagreement on fundamental issues.
ETA: to elaborate on your specific question, “where do jobs come from?”, Keynesians would argue that new job creation is largely a function of government monetary and fiscal policies reducing the real wage rate as well as workers’ expectations declining to be more in line with reality. They would also probably accept that the classical method of job creation, innovation and arbitrage, can have an effect as well.
Can you elaborate on your “ETA”? And do you agree that it’s nonsense for news outlets to report that a newly opening business “creates X jobs”, with X being the total number of people the business employs?
We add net new jobs most months. A significant number of jobs need to be created every month just to create enough jobs for young people entering the workforce for the first time, since more young people enter the workforce than old people die or retire.
When you hear a nationwide or statewide announcement that “300,000 jobs were added last month”, those jobs aren’t an ‘uptick’, it’s a bona fide increase in jobs. For example, tens to hundreds of thousands of jobs have been created every month since October 2010.
So if there are hundreds of thousands of permanent jobs being added every month nationwide, why take credit away from the little restaurant opening? Surely they must trace back to individual companies creating jobs. Where else would the come from in aggregate?
Sure they do trace back (hence to my question about what *kinds *of enterprises are at the root of the creation you’re talking about); but I don’t believe for a second that a new restaurant with 30 jobs, opening in a town of just a few thousand people, has actually *created *30 stable jobs, just like that. Maybe that restaurant opening is an *effect *of the kind of rippling outward of the net jobs that are created in the economy at large. But even then, I’d be willing to bet that only a fraction of the 30 jobs are actually added to the town’s pile on any lasting basis (in a town like mine, anyway, that hasn’t added population for decades, has no tourism to speak of, no energy to drill for or resources to mine, etc.).
If your town never had a good Italian restaurant before, people who never before went out to dinner might go there. Even people who occasionally go out to dinner might go out to dinner more often. And, of course, the new restaurant might steal customers from old restaurants. Counting the number of employees on opening day and saying that that many stable long term jobs were created is silly. The restaurant could fold or cause other restaurants to fire people. Or it could take off like wildfire and need even more employees.
Remember, not everyone lives paycheck to paycheck. There are people out there who put some of their paycheck into savings accounts. If you can convince them that you have something desirable, they might just spend some of that extra money with you instead of putting it into savings.
In order to really analyze this, we need to examine the causes of unemployment. After all, if everyone was employed, then the economy couldn’t add any jobs at all.
Classical economics gives three causes of unemployment: structural, frictional, and cyclical/seasonal. Structural unemployment is caused by things such as minimum wage laws, unions artificially raising the price of labor via monopoly powers, anti-discrimination legislation making it harder to fire workers (and thus making businesses less willing to hire), and other government/institutional factors. Frictional unemployment is due to information inefficiencies and the fact that it takes time to find a new job. It is also caused by skill mismatches between what workers have and what employers want. Cyclical unemployment is pretty self-explanatory; in certain places, the amount of workers employers are willing to hire changes substantially over time, and this can cause unemployment when the market is flooded with newly unemployed workers.
Keynesian economics accepts that these can be causes of unemployment, but doesn’t believe that these mechanisms can account for persistently high unemployment during an economic recession. They believe that high unemployment is a cause of the nominal wage workers are willing to work for being higher than the wage employers are willing to pay, and consequently employers have to lay off their least productive workers. Keynesians believe that the wage workers demand and the wage employers pay are in equilibrium during good times, but during a recession, the wage employers are willing to pay declines, while the wage workers want stays the same. They provide several reasons why workers refuse to lower the wage they’re willing to work for, a phenomenon known as sticky wages. When the government enacts fiscal or monetary stimulus (that is, defect spending/tax cuts or printing money, respectively), they can decrease the value of money, and consequently the real wage rate. This reduces the gap between employers’ wages and workers’ wages and increases employment.
Now that we’ve looked at the causes of unemployment, we can examine what exactly a classical economist and a Keynesian economist would believe happens when the government announces that x jobs were created. Classical economists believe that new job creation is a result of new businesses reducing one of their three causes of unemployment. For example, a new restaurant may increase the demand for labor, and consequently be willing to hire lower quality workers, reducing unemployment.
Keynesians, on the other hand, attribute much less of the decrease in unemployment to new businesses creating jobs. Although they accept that this mechanism may have some effects, they place most of the kudos on the government for reducing the gap between what workers are willing to work for and what businesses are willing to pay.
In sum, when the government announces that x new jobs were added, that’s definitely true and not in any way BS. That many new jobs, in a very tangible sense, were added. But whether that can be attributed to the government or to private actors is a matter of debate in general, and also differs on a case by case basis. Both Keynesianism and classical economics have some validity, and so one specific business that added a certain amount of jobs may really have added that number to the total economy, while another business may have added some jobs, but crowded out other jobs elsewhere, and the new employment may actually have been a result of government policies. The real world is messy.
Eh, microeconomics is complicated. A town can absolutely be at saturation point for restaurants, beyond which any new restaurants must either be driven out of business or drive the weakest of the extant restaurants out of business. But the reality is usually going to be much more complex. Just to hit you with a list of all the ways this is true:
A new restaurant may represent a new type of niche, that brings consumer dollars into the service sector that simply were not being spent before. For example the small town I grew up in was provincial enough that for many years it had no delivery food restaurants at all. The first pizza place that opened, that delivered, was undoubtedly capturing consumer dollars that largely were not being spent before. From people who were sometimes struck with the urge to not cook dinner, but who didn’t want to go out to a sit down restaurant.
Very few locations have fixed population size. As a town grows so too grows the number of restaurants that town can support.
Unemployed people represent a dead weight on the local economy. A new restaurant that is able to sustain itself also lowers unemployment, which creates more consumers and thus increases cash flow into the local service sector. Further, most unemployed people to some degree take spending money away from someone else, a parent, spouse etc. That person no longer being unemployed releases those dollars to be spent in the service sector.
But your base intuition is correct. For a service business like a restaurant, there needs to be some base of other economic activity to sustain them. In theory you could have a small town in which everyone was a banker, because banking services can be sold nationally and internationally (hell, think of Switzerland for example.) But in contrast not everyone in a locality can work in the “in person” service industries like restaurants and hotels unless the location somehow is able to bring tourists in. For example the small town I grew up in, which to this day attracts virtually no tourism, restaurants only can survive based on local demand of residents. So there must be some other industry to sustain enough people to support a restaurant industry in the town.
First part is true, second part largely isn’t. You’re forgetting that most of the time the economy grows. That is why it’s not zero sum in an absolute sense*. That factory could simply be part of genuine GDP growth, not necessarily something making someone somewhere else poorer.
The simplest way to understand this is to understand that economic activity can create things of value de novo, which can make society wealthier and can be exchanged in a transaction that is mutually beneficial. Economic theory holds that outside of coercion, all economic transactions are non-zero sum, whatever I give you in exchange for what you’re giving me must be a) more valuable to me than what I’m giving you and b) the transaction costs must not make it undesirable, if a and b aren’t true I’d never engage in the transaction (unless coerced.)
Warren Buffett has used a farm analogy to explain this to people skeptical of basic economics. Namely that if you take a bunch of seeds and plant corn, after letting sun, water, and some inputs you may have to pay for do their thing you end up with a harvest that will quite often be far more valuable than all the inputs put into it. (In the real world bad shit can happen and agricultural markets can spike/crash, but let’s not digress.) That amount of corn, quite literally, did not exist before you grew it. You’re creating something, using the sun’s energy, water, and soil. There is no reason that this has to make anyone else poorer.
Very long turn it’s not inconceivable automation could eliminate work as we know it. But in the term of our lives it’s largely lead to wealthier people with high employment rates. We are wealthier now than we were in the 1950s, and unemployment isn’t very high either. And yet we are far more automated.
Producing things that are net gains creates a surplus of capital in the economy, in the form of investment capital and positive household wealth. Both of these create jobs by creating new demand for buying shit and new investment money made available to entrepreneurs to try and figure out what cool shit to make or do for people to capture their new discretionary income. If economic activity makes a people wealthier, it makes them have more expensive tastes. if all humans were happy living in caves then a lot of the economy wouldn’t work the same way, but in reality every generation in American history has largely gotten wealthier, and then wanted to spend money. This created industries like the automobile industry, a luxury item that eventually became a staple. It created industries like the soft drink, candy, fast food, consumer electronics etc. Going further back it created the textile industry, furniture etc–as people got wealthier they quit wearing the cheapest fabrics and garments they could string together on the farm and furniture roughly hewn from trees felled in clearing fields was replaced by stuff made by master craftsmen and later industrial concerns making mass produced clothes and furniture.
That’s not actually true. Keynesians do not believe government is the font of all job creation. They believe government activism in the economy, fundamentally, can act as a form of leverage to increase economic prosperity (and thus jobs), but Keynes certainly didn’t believe all jobs were created, or even that jobs are largely created, by government policies. Keynes himself was often concerned with full employment, and how government could deal with those marginal people (the unemployed) between the “natural” unemployment rate and the current unemployment rate. But Keynes didn’t disbelieve entirety in the classical concepts of job creation. Just he had specific ideas on how to fix where it was lacking, and particularly how the government can use things like counter-cyclical spending to enhance prosperity.
These news reports are correct when they are stating the expected head count of the new business. I don’t believe I’ve ever read a news report that delves into “net jobs”, which is what you’re talking about. In terms of simply reporting how many positions are being created by the restaurant, it seems pretty reasonable to report a known fact–how many people the restaurant plans to hire, versus a speculative conjecture. On a microeconomic scale there is not an economist who lives that believes he/she is so smart as to know for a specific mid-sized town how many net jobs a new restaurant represents. There are far too many factors at play there.
Just to give you an example–I know a wealthy family here in my neck of the woods, the grandmother/matriarch of the family funded her son’s restaurant ambitions some ten years ago. Based on the customer traffic into that place I am quite certain it has never turned a profit (it’s an upscale restaurant but the location is wrong and I think the fare is wrong for their potential customer base), and yet it’s stayed open with full employment that entire time. How? Because grandma is sitting on probably $50m+ in inherited wealth in her own name, not to mention her kids also had generous trust funds and likely grandson’s own parents and grandma are probably funneling what was essentially “dead” money sitting in a trust into the local economy via the son/grandson’s dumb restaurant.
Your model is more of a Neo-Keynesian than actually Keynesian. Regardless, in either model government only gets the kudos for creating the new jobs if the economy was not at full employment and government was directly intervened. Keynes never denied that capitalists create most of the jobs, only that in certain situations the economy could get caught in a feedback loop that depressed employment. In that particular case he thought government should step in and break the cycle and then capitalists would then start creating jobs until full employment was reached.
As for the OP there are several scenarios in which a new restaurant could create permanent jobs. Perhaps the food is so good, people stop cooking at home and new demand for restaurant meals is created. Demand is constantly changing and shifting so if something happened to create new demand for restaurant meals then the restaurant could meet that need without closing any competition. Alternatively, maybe they use more labor than the competition and when the competition closes their business model results in more jobs overall.
It’s based on research by David Birch, who defines some companies as “gazelles” which are fast-growing and essentially produce all of the net new jobs in the economy. And while these are all new/small businesses, they are only a tiny percentage of new/small businesses. Some new businesses create jobs, others only play a role in re-allocating jobs.
The restaurant that you’re talking about, for example, would not be a gazelle. Birch would agree with you that it’s not creating much in the way of new jobs.
Right. The example with the factory applies here because generally factories make products that are sold widely and often internationally. So you can have a town where 80% of the jobs are in manufacturing, because many of those products are being bought by people in other towns that don’t have as much manufacturing. Similarly, you can have places like central California, Kansas, and Idaho where a large percentage of the jobs are agricultural. The people there are growing food that gets sold to people who live in the manufacturing towns, and some of that profit is used to turn around and buy manufactured products. Same thing with mining towns, financial centers, towns that specialize in professional services, etc.
What you can’t really have, however, is a society where 80% of the jobs are in manufacturing. Someone has to grow the food, pack it, ship it, write insurance policies on it, inspect it, create marketing plans for it, arrest those who mislabel it, and heal those who get sick from mislabeled food.
Also Switzerland is not 100% banking - it does have significant manufacturing and agricultural sectors. But it does have a notably large banking presence, one that’s quite bigger than, say, Sweden.
Over a long period of time, that’s not true at all, even if you ignore population increases.
There are way more restaurants per capita now, and a higher percentage of meals are prepared by commercial businesses than, say, 100 years ago.
One way of thinking about that is that the economy is becoming more specialized. And increased specialization means more jobs, because if a task becomes specialized enough, then someone has a job doing it, and they that person has income to pay for the practitioners of other specialized tasks.
Consider restaurants. In the very early days of the restaurant as a concept, there were public houses or taverns which were a combination hotel/bar/restaurant, and they basically catered to travelers, of which there weren’t many. Someone might have argued that most towns could really only support X taverns because there were only so many people traveling through at any one time. But they’re missing out on the fact that there are many other people who might be customers of a dining establishment.
Fast forward a while, and now you get more people starting to go to local restaurants. Not because they’re far from home and can’t cook their own food, but because the guy at the local restaurant is a better cook than they are, and they have a bit more money to spend, so they spend some of it on the restaurant.
Fast forward a bit more, and you get an explosion of fast food restaurants in the 50s and 60s because people are going all over the place in their cars and just want to get something quick.
At every point in time, having more businesses in a given category won’t really make more customers. But if you can position your business to offer something differently than existing ones, maybe you can make a whole bunch of people who weren’t customers before into customers.
This is a good point. But of course, that money being in savings (as long as it’s not just in the mattress) means it is being circulated somewhere, lending to someone to open a restaurant perhaps.
So do you think, then, that this joke is, well, bullshit?
I’m saying that they should report it differently: “The restaurant has hired a staff of X”. This is probably even more important when there is a debate on the City Council to give some kind of tax incentive for a chain restaurant to open at a certain site, because “it will create X jobs”. Which makes me think, hmmm…this will be the first corporate restaurant in town for this market segment (absolutely true: in my town, we have long had corporate fast food and pizza, but only relatively recently did we get our first “TGI Fridays” style restaurant to compete with the several locally owned, mom-and-pop restaurants in that niche). So if anything, it might subtract net jobs from town: the corporation will siphon profits out of town to its shareholders, whereas the mom-and-pop owners of its competitors kept most of their profits in the region.
This is a very interesting point, and something that should be talked about more by economists. I can think of several small businesses (stores that sell books, knicknacks, etc.) in my college town that are owned by college professors, physicians, or their spouses. They are almost certainly subsidized by the professors/physicians. That’s not “dead” money, but it certainly must distort the marketplace, I would think.
We see this kind of ‘fake’ statistic over here too. Usually some supermarket wants planning permission to build a big shed on a greenfield site. As part of their application, and to put pressure on the council, they say that it will ‘create’ 1000 jobs.
What is not mentioned is that most of them are part time minimum wage jobs, or eve zero hours jobs. They also gloss over the job losses that happen when the shops in the High Street close down and that is a progressive thing as footfall reduces - even unrelated businesses go under.
On the other hand, the government will say that each quarter, 30,000 more people are employed. Those are, for the UK at least, real new jobs. Of course they might be at the expense of our neighbours - London is reputed to be France’s sixth biggest city (lower taxes, less stupid labour laws and a fast train help) and lots of people from economically poorer parts of the EU are coming here and starting businesses as well as taking jobs for lower wages than the locals will. If you were a Greek dentist or plumber, you might well be looking here for better prospects.
Of course, in a finite world economy, anyone’s gain is someone else’s loss. This is why moderate inflation is necessary for the system to work. If you want to be successful (and not having wealthy relatives) anywhere in the world - get a good education, work hard, be prepared to go where the work is and be enthusiastic.
The world economy is finite but it is not fixed. There are no more resources than there were one hundred years ago but the world is much richer. Wealth is constantly being created, not just moved from one person to another.
To use the seed corn analogy, the restaurant example would be like trying to plant one too many plants with finite water or fertilizer- that plant may grow, but either at the expense of one or all the other plants. (they could all be equally stunted).
That’s a special case specific to small towns, which are probably more similar to closed systems than not, in that there are literally only so many meals to be eaten in the town on any given day, and one restaurant might conceivably capture a significant portion of the restaurant meals to be served in that town. Contrast this with a big city, where there are still a finite amount of meals to be served, but the number is orders of magnitude higher than what any one restaurant could possibly have any effect on. In other words, in a town with 1000 restaurant meals consumed a day, a new restaurant capturing 200 of them changes things significantly for the other restaurants, but in a city where 750,000 restaurant meals are consumed a day, one restaurant getting 200 doesn’t necessarily affect other restaurants as drastically.
I know we’re just talking analogies, but what if we stick with one corn plant and add an alfalfa plant? Alfalfa is nitrogen-fixing. So it not only provides its own fertilizer, giving us two healthy plants… but maybe it provides enough extra nitrogen to get a second corn plant going. Now we’ve tripled our total capacity.
This isn’t so different from how real economies work. You can’t think of it as zero-sum.