Debunking the Myth of Job Creation

An enduring myth of both economics and politics states that businesses, regardless of size, create jobs.  It is most often claimed that small businesses create the majority of jobs in our nation; it may be true that small businesses hire more workers than any other sector of the economy but it is easily demonstrated those businesses do not create any of those jobs.  If they did the solution to our current economic woes would be for more businesses to simply hire more workers, but that is an obviously unworkable idea.  If GM hired more workers to build more cars they could not hire enough workers for those employees to be able to afford to buy all the new cars the company would be producing and they would likely wind up having to lay off more workers than they had originally hired.

Businesses only provide jobs by hiring workers in response to consumer demand for goods and services.  Businesses do not create demand, they respond to it.  It is consumer demand that drives job creation, the more demand created for goods and services the more jobs will be created.  A business only hires a worker when it feels there is sufficient demand for the product that they will profit by hiring someone to do that job.

How do we increase consumer demand?  We find ways of putting more money in the hands of consumers, the majority of whom are wage-earning workers.  It should be obvious by now that continuing to give tax breaks or subsidies to businesses, while not entirely inappropriate in certain instances, will do nothing to spur job creation; and since wealthy persons on average spend a far smaller amount of their incomes on consumer purchases lowering their taxes will fail to provide any stimulus that would cause a sizeable increase in hiring.

The most direct way to increase consumer demand and create jobs is to increase wages.  The most famous example of the efficacy of this tactic is when Henry Ford instituted a five dollar per day minimum wage for his factory workers in the correct assumption that if they could afford to purchase the product they manufactured most of them would.  But his action went beyond that because the increase in their pay made it possible for them to buy other consumer goods, creating demand for other products, the producers of which had to hire more workers, again increasing consumer demand.  It is this cycle of increased wages creating greater hiring that is illustrated by the fact that at no time has there been a decrease in hiring concurrent with increases in the national minimum wage.  Whereas it would be preferable for employers to act in their own best interest and raise wages voluntarily, the fact that worker productivity and corporate profits have risen steadily over the last thirty years while wages have remained stagnant indicates this change may only be practically effected by federal legislation to increase wages.

Increasing wages is the primary means by which the private sector can increase consumer demand and it is by far the most effective, but there are other actions available to the government alone.  The first of these would be to lower taxes charged to low-and middle-income workers; this would have a similar effect on their disposable income as a wage increase, with the drawback that any resulting decrease in revenue would have to be offset by a similar cut in government spending or otherwise increasing revenue.

The most counterintuitive and therefore least popular means of increasing demand is to increase social spending on programs like food stamps and TANF.  This does create jobs because the persons to whom it is disbursed have little choice but to turn around and spend the money for food and other items that contribute to the creation of jobs for those who make the products and provide the services these individuals need.  An increase in social spending results in increased purchases, fueling creation of jobs; some of these jobs may be taken by benefit recipients, resulting in a simultaneous provision of useful employment and reduction in the nation’s social burden

The “businesses create jobs” idea is often used as a justification for either decreasing or refusing to increase taxes on higher income individuals who are assumed to be mostly business people and therefore “job creators”.  Now it has been demonstrated that it is the employees themselves who are the true job creators, and the most effective means businesses have to avoid tax increases is to pay workers more, every cent of which would be tax deductible for the employer; doing this would also increase the amount of revenue collected on the incomes of those workers, reducing any potential need to increase taxes on higher incomes.  By this process business owners do take an active part in the creating jobs and contributing to greater tax equality for all.