This article first appeared in the Fayetteville Observer on June 21.
It’s easy to understand why Jane would be so excited about the new economic development project in her town.
She is unemployed. Luckily, Jane’s husband still has his job, but his income is not enough to support them and their two young children. Jane has desperately been looking for work for five months, and is wondering whether she will ever again be gainfully employed.
Then one morning while helping her children prepare for school, Jane hears some encouraging news on the radio. A large business is going to be moving its headquarters to Jane’s town, and according to the radio report will be hiring hundreds of people. “This great opportunity was made possible in part due to a Job Development Investment Grant,” says the voice on the radio.
Job grants
The Job Development Investment Grant program is one of many “economic incentive” programs offered by the state. These programs typically provide taxpayer subsidies or special tax credits to specific companies in exchange for a certain amount of investment and/or job creation by the company.
As Jane rejoices over the potential to return to work, she quietly says, “Thank goodness for that economic incentives program. Finally, some real opportunities for a job!”
A month later, there is a big ribbon-cutting ceremony at the new headquarters. Company executives, local politicians and the governor are all in attendance. The gathered crowd – including a lot of media – are treated to big smiles and self-congratulatory speeches about how the new headquarters has “created hundreds of new jobs” for the struggling town.
As Jane approaches the shiny office building, she can hear the cheers of excitement from the crowd. But the cheers then fade away as Jane drives past the joyful ceremony to … the unemployment office once again.
Indeed, the line there seems as long as it’s ever been. How can this be? What about those hundreds of jobs “created”?
There’s a catch
For the answer, we need to look beyond the hoopla, and instead think about the individuals who would actually be hired at the new headquarters.
The new company will not just go to the local “unemployed worker” store and order 300 employees. The labor force is not a homogenous blob. It consists of unique, flesh-and-blood humans with very specific skills and experiences. Chances are that the majority of people in Jane’s town who possess the specific skills and experience the new company needs are already working elsewhere.
Thus, rather than noticeably reducing the number of unemployed people in Jane’s town, the new headquarters will mostly just be hiring a lot of people away from other companies. Few new jobs will actually be “created,” and the hiring will largely just shuffle workers around from one employer to another.
So it is quite disingenuous when the governor and media parrot the line that hundreds of “new jobs” are being “created.” In reality, the number of people employed in Jane’s town may remain virtually unchanged.
Sadly, however, North Carolina’s numerous “economic incentives” programs fail to take this reality into account. Many of these programs feature generous tax credits or direct taxpayer subsidies awarded to companies that hire a pre-determined number of additional workers. But the incentivized company merely reports the number of people they hire, and they all count the same whether they are given to a jobless applicant or hired away from another company. The public is sold these programs as creating jobs, when the reality is no net new jobs may be created at all.
This need not be the case. Hardworking North Carolina taxpayers deserve greater accountability from these economic incentive programs.
Change the game
The state’s Department of Commerce should alter the methodology of crediting incentivized companies with job creation. If an incentivized company hires someone currently employed elsewhere, that should not count toward the company’s job creation goal. After all, these programs are supposed to “create jobs,” not just move workers from one office to another.
There are far too many stories like Jane’s across North Carolina. The state owes it to people like her to at least be honest when reporting “job creation” numbers resulting from government-run economic incentive schemes. That would be a first step toward accurately assessing economic development.
The ultimate goal, however, remains ending the practice of politicians and bureaucrats dispensing political privileges to their cronies, and instead allow for an economic climate in which all businesses play by the same rules. Then Jane will have a much better chance not of hearing about “jobs created,” but rather in seeing a “Help Wanted” sign that will be for a genuinely new job that she can fill.
Brian Balfour is director of policy for the Civitas Institute in Raleigh (nccivitas.org).
Mr. Balour: This op-ed apppeared in the F/O in January
The BusinessBusiness is not Creating Jobs
Former House Speaker Gingrich was wrong when he recently stated that the intent and function of entrepreneurship is to create jobs. Ask entrepreneurs and they will tell you that their only objective is to make a profit and hopefully grow their businesses and certainly it is not to just hire employees. A workforce in any business is always seen as a cost which needs to be reduced or made more productive. People are replaced with machines or more efficient business procedures such that a higher level of productivity can be achieved. Productivity can be defined as the ratio of outputs to inputs. Inputs include material and labor. The lowest hanging fruit is in almost all cases is the workforce. So a smaller workforce reduces the denominator or input element in the ratio and thus increases the productivity quotient. More productivity produces more profits and that is the fundamental objective of business. It is not to create jobs.
Since the beginning of the industrial revolution business has engaged in workforce reduction by exchanging manual labor for machines. Machines are more efficient than people and therefore produce a product or service at lower cost. This is essential in a free market society and the result is lower cost to the consumer as businesses compete to become the lowest cost producer and therefore gain market share. Were it not for substitution of machines for people in business operations we all would lead miserable lives, struggling daily for food and life’s essentials.
Two hundred years ago most Americans survived primarily by working in some aspect of agriculture. Today a very small fraction of our nation’s workforce is engaged in farming yet farmers produce enough food and related products to feed three hundred million Americans and still export much to other countries. . Machines make products with less cost, of best quality and in great abundance. But always the focus in all business cost reduction effort is to produce more with the same or less numbers of employees per dollar of revenue.
When a manufacturer announces that it plans to build a factory in a new location and hire 1000 employees they are not creating 1000 new jobs. With rare exceptions, the manufacturer is simply shifting jobs from one location to another. Thus, one community’s gain is another’s lose. Shifts in business locations are prompted by what is perceived to be a more favorable business climate. That climate could include lower taxes or right to work laws but always a labor force available to work for lower wages and fewer benefits.
The shift in manufacturing jobs from the US to China did create employment for Chinese workers and most obviously reduced employment in American factories. The benefit to Americans is that Chinese made goods are less expensive at the retail level. That this is a net benefit is the argument of the day. An excellent example of machines being substituted for manual labor is the textile business, once North Carolina’s manufacturing cornerstone. Mechanization in the production of yarn and fabric was pursued relentlessly to reduce a largely union organized workforce. When improvements in processes by mechanization reached diminishing returns the textile companies looked to off shore locations where labor was cheaper and more manageable. Today, the textile industry no longer exists in North Carolina, nor do the related jobs. They now exist in Asia
Our economy thrives on labor reduction, not labor creation. If the American automobile industry manufactured cars today as they did fifty years ago there would be no American automobile industry and therefore no auto industry jobs. Manufacturing of cars and trucks has become incredibly sophisticated. Robots which need no health care, pensions and do not belong to unions have largely replaced workers. Today’s vehicles are of the highest quality ever. They are available to buyers at affordable prices because international competition for market share has forced the labor content of the manufactured cost continually down. Four years ago American car builders were faced with a “last man standing” situation and it appeared that GM and Chrysler were not going to make the life boat list. They have survived with government intervention. Had they not and had the government not intervened no jobs would have been lost. American auto industry jobs would have simply been shifted to Germany, Japan and Korea.
When politicians speak of the government creating jobs they are exactly correct. Governments at all levels do create jobs but those jobs are not helpful to the economy. Government jobs, whether absolutely essential or frivolous are drags on the economy because they must be supported with tax revenue and taxes are a drag on business. The government can cause jobs to be created by creating a business atmosphere conducive to business. This is where banks lend money for well considered business plans, business regulations are rational and taxation is predictable and competitive with those of foreign governments. That all goes to the success of entrepreneurship where most American jobs are created.
David G. Wilson
January 10. 2012