The U.S. job market is showing signs of improvement if the latest data are accurate. On Friday the U.S. Bureau of Labor Statistics reported that the unemployment rate has fallen to a three-year low of 8.5%. Of particular note is that private sector employment was up more than expected in December. Tall of this could just be a one-month data fluke, but it is also encouraging that the number of new jobless claims has been declining recently as well.
Jobs are important to the economy for a number of reasons. One of the most important reasons is that jobs are by far the primary source of income for U.S. households. The Bureau of Economic Analysis estimates that for the 3rd quarter of 2011 the total of all income earned in the U.S. was 13.4 trillion dollars (seasonally adjusted at annual rates). Of that total, 8.3 trillion dollars or just shy of two-thirds was paid in the form of wages and salaries.
Most of us think of unemployment as a bad thing for exactly this reason; jobless people earn no wages and, as a result, suffer from a whole host of associated problems. The reason we have programs like unemployment insurance and other jobless benefits is to help alleviate these problems to some degree.
But another very important reason that jobs are important is that jobless people who want to work are a valuable resource that goes unused.
Of course not everyone who is without a job represents a wasted resource. Retired people and children are two obvious groups of people who generally do not work for money. For retired people the benefits of working are outweighed by the benefits of leisure time. In addition, retired people generally have a stock of savings to draw upon and are not so heavily dependent on wages for their income. For children, the benefits of working when young are outweighed by the benefits of enjoying a happy childhood and also of increasing their education to be more productive when older.
Many people between these two extremes in age also choose not to work. This is particularly true for married couples with children where often only one person works for wages. In these cases the benefits from working are outweighed by the benefit of having one parent at home.
However, when qualified workers seek jobs and are unable to find them, we can legitimately view this as an aggregate waste.
In this context, however, not all jobs are equal. Some jobs add value in the aggregate, some do not, and some may even lead to a decrease in total economic well-being. For example, if your shiftless brother-in-law who is currently jobless begins working as a jewelry-store thief, the economy as a whole would be worse off due to all the broken windows he creates in the course of doing his job despite the fact that he is now employed and has a source of income.
Politicians and policy makers often talk about the challenge of creating jobs, but there is no challenge at all if the objective is simply turning idle workers into paid employees. All that is required is the ability to tax or create money and one can pay workers to do all sorts of things. Milton Friedman once suggested that two jobs could be created by hiring one person to dig holes and simultaneously hiring a second to fill the hole up again.
What is challenging is to foster the creation of meaningful jobs that add net value to society. Much well-meaning public policy is counterproductive in this regard. For example, income taxes can act as a power disincentive to work. It is often argued that these disincentives are very powerful for the wealthy because they face higher taxes on each additional dollar earned. However, the burden at the other end of the income distribution is often heavier. Going back to that shiftless brother-in-law of yours; suppose he has a knack for fixing cars and wants to work as a mechanic. If values his current leisure time at $14 per hour and an auto shop were willing to shell out $16 per hour for his effort, he would likely turn the job down. Right now the combined burden of Social Security and Medicare taxes alone would amount to $2.13 per hour, meaning if he took the job he would net $13.87 per hour. Loss of jobless benefits and welfare payments when wages are earned can make the effective tax on earned income much higher than this.
This is only one example of the many ways public policy distorts employment. The challenge our policy makers face is not in creating jobs, but rather in fostering an environment where meaningful jobs can be created and sustained for the long-run.
Kerk Phillips is an associate professor of economics at Brigham Young University.