How were jobs created?

[Dennis Wong]

I am a novice in Economics. In many countries, unemployment is a big issue such that governments need to pay a lot of attention to come up with a lot of solutions to solve it. When I think about this, I am wondering about the process of job creation. From historical points of view, how were jobs created? I am not talking about the job creation in modern cities. Rather, I want to know how was a job created in agricultural era. Do you think this inquiry can help us find out the solutions for unemployment?

[softwareNerd]

You ask how jobs were created in the agricultural era. Well, how does a person create a job for himself in the agricultural era? The answer is: he finds some land and starts to farm it. That is the simplest case, but it means going far back to a time when one could find unclaimed land and appropriate it. (American pioneers were a recent version of this.)

What if all the land is already owned? In that case, the person learns some other trade: basket-weaving, masonry, or even how to hold religious mass. This trade is then his job, and he exchanges with others to get food etc. So, a person might make himself a job as a blacksmith. The assumption here is that there are people who want the stuff that he is going to make (i.e. the village does not already have a whole lot of blacksmiths).

To summarize:

in the first version to "make a job" simply means: go produce the values you want (go farm, domesticate some animals, grow an olive tree)

in the second version, to "make a job" means: go produce values that other people want (make a plough, make horse-shoes, build an olive-press)

Essentially: in these contexts, "making a job" means producing a value. In an exchange economy, this pretty much means you produce something that other people value.

[Dennis Wong]

Oh, I now understand why unemployment happens. According to your explanation, unemployment is a result of "surplus" of labour in some fields or professions. Then, how can a government solve the problem? It seems that there are only two approaches: Give the "surplus" labour retraining so that they can supply other fields with demand or change the people's values towards something so that more people are willing to hire the labour? Is my deduction correct?

[softwareNerd]

My troll-alert is going off here! Still, in case you're genuinely interested... no, I did not claim that unemployment is caused by 'surplus' of labor in some profession, though of course, if there is really a surplus of labor in some profession it could cause unemployment in that profession.

[Dennis Wong]

Haha, I am interested in unemployment mainly because I am amazed by the extremely high unemployment rates in the Europe nowadays. And, in fact, in many decades, politicians and economists have been trying their best to solve this problem but it seems that not many of them succeed. You know, having no jobs is a really a big matter to every family. If we can find out ways to solve this big problem, it would be a great discovery!

[softwareNerd]

Modern day unemployment is caused by a few things.

First, and most importantly, we have factors that keep wage rates higher than they need to be to "clear the market". There are all sorts of government laws that ban workers from working on terms they would freely choose (e.g. minimum wage laws, union rules, government-imposed certifications, and so many more). So, someone who is willing to work for $5 per hour in the U.S. would have been allowed to do so some years ago, but is banned from doing so now. In an exchange economy, one has to produce value and trade that for value. If you want to be "the village blacksmith" people might be willing to trade the equivalent of three bullocks for your services. If the government says they must trade 5 bullocks or go without your services, they might choose to go without. Then, you're unemployed.

government imposed union rules raise the cost of labor, and thus have the same effect as a minimum wage, but it can be even worse because rather than being a really low wage that sometimes has no adverse effect (because sometimes the market might be willing to pay more than that low number) union laws raise wages for slightly more skilled jobs.

Second, the business cycle means booms and busts. In modern times, these are primarily caused by the expansion of credit followed by the liquidation of credit. The liquidation of credit will cause all sorts of restructuring of the economy. As a result, people will lose jobs and it can take a while for them to get back as they often have to wait for the bust to end. These days, this is made particularly bad because governments respond by attempting to make busts more shallow. The problem with doing so is that the busts drag on for longer than they otherwise would. So, the government ends up keeping people out of jobs for longer than they otherwise would be. Some government actions -- like unemployment "compensation" -- also soften the impact of unemployment, reducing the motivation to find work...at the margin.

There really is not much to discover in keeping unemployment low. The answers have been known for at least a few centuries. The classical economists had it right.

Edited April 15, 2012 by softwareNerd

[Dennis Wong]

It seems that you are disfavor any government interventions of the labour market. Well, from the place I live in, Hong Kong, which has been acclaimed as the "freest market" in the world since 1980s, imposed minimal wage laws a year ago. Our people have different opinions about that. But I think the minimal wage laws are a good thing mainly because the money they earn more helps them to better develop/educate themselves and their descendants. In the past, as they want to make a living, they did very low-paid jobs and the money they earned actually could not help them to further develop/educate themselves and their children. Now, they earn more, they can use the money to develop themselves.

[softwareNerd]

But I think the minimal wage laws are a good thing mainly because the money they earn more helps them to better develop/educate themselves and their descendants.

Well, if you think that kids of poor people should be helped to get an education, that's fine: I have no disagreement on that score. I think that is one of the best types of charities: helping kids learn. If you would like to spend 5% of your income on supporting such kids, that's your call.

However, what I object to is if you were to go to your neighbor's house, with a gun in hand, and say that he also must pay 5% of his salary to your favorite charity. In principle, this is what happens when the government takes people's tax money -- which is done by force -- and supports some charitable cause.

[Nicky]

It seems that you are disfavor any government interventions of the labour market. Well, from the place I live in, Hong Kong, which has been acclaimed as the "freest market" in the world since 1980s, imposed minimal wage laws a year ago. Our people have different opinions about that. But I think the minimal wage laws are a good thing mainly because the money they earn more

Let's say someone is getting paid below minimum wage, to do a job. There are two ways in which this minimum wage law could affect such a person:

1. If his employer decides that it makes economic sense to pay him more, he will get a higher wage.

2. If his employer decides that it doesn't make economic sense, he will lose his job and get no wage.

According to the law of supply and demand, in a free market, prices (including the price of labor) tend to be around the level where it makes economic sense. That means that, more often than not, employers will choose option 2, not option 1.

But you are, mistakenly, assuming that employers will choose option 1 every time. That is an unfounded assumption to make. It's wishful thinking.

Minimum wage laws cause poor people to earn less, not more. For every poor person who gets lucky and gets slightly higher wages over a new minimum wage law, many more lose their job.

Edited April 15, 2012 by Nicky

[Nigel]

Read: "How an Economy Grows and why it Crashes" by Peter Schiff

Its a really good book if you are just starting to try to understand economics.

[Dennis Wong]

Let's say someone is getting paid below minimum wage, to do a job. There are two ways in which this minimum wage law could affect such a person:

1. If his employer decides that it makes economic sense to pay him more, he will get a higher wage.

2. If his employer decides that it doesn't make economic sense, he will lose his job and get no wage.

According to the law of supply and demand, in a free market, prices (including the price of labor) tend to be around the level where it makes economic sense. That means that, more often than not, employers will choose option 2, not option 1.

But you are, mistakenly, assuming that employers will choose option 1 every time. That is an unfounded assumption to make. It's wishful thinking.

Minimum wage laws cause poor people to earn less, not more. For every poor person who gets lucky and gets slightly higher wages over a new minimum wage law, many more lose their job.

You have reminded me about the law of demand I learnt in middle school. But I am not sure whether your conclusion can be evidenced in any scientific research, I mean not in pure logic sense but in reality. Can the law of demand be applied in every situation?

[softwareNerd]

But I am not sure whether your conclusion can be evidenced in any scientific research, I mean not in pure logic sense but in reality.

It's a good question. One problem is that increasing the minimum wage could often have no impact on unemployment. At least in the U.S., there have been times when the minimum wage was at a level where even a lot of young teenagers wanted more to induce them to work, and employer were willing to pay. At other times, not so. What this means is that if you look at times when the minimum wage was raised, you would sometimes find that unemployment rose and sometimes it fell. A good study would need to make some assumptions about what wages would have been, if there was no minimum wage, and would then have to look at instances where the de facto legal minimum was significantly above this.

The other way of testing the reality is to understand the decision-making process of employers.

I would guess that -- at least at U.S. levels -- the business-cycle has a far higher impact on unemployment, while the minimum-wage becomes a serious constraint only at certain times and among certain sub-groups (e.g. black teenagers).

[Nicky]

You have reminded me about the law of demand I learnt in middle school. But I am not sure whether your conclusion can be evidenced in any scientific research, I mean not in pure logic sense but in reality. Can the law of demand be applied in every situation?

No, it only applies seamlessly in a free, competitive market. But you can have a logical, scientific approach to all situations. You can evaluate the effects of a government intervention on every market, by relying on economic theory.

The fact is that you didn't. You just went ahead and stated that minimum wage laws would drive prices up, and cause poor people to achieve their goals, without any attempt to validate that claim. I replied with a somewhat simplistic answer, but one based in science nonetheless. Now, all of a sudden, you are looking at things logically.

Which is good, don't get me wrong, but, as far as deciding whether your original claim or my slightly simplistic answer is the right starting point for a more careful study, I think there's no contest.

But supply and demand is not the fundamental issue here. The more fundamental issue is the source of material values. Where do they come from? They come from human creativity and effort. They don't come from bureaucratic interventions. A minimum wage law would not create any values: if a group of people were to receive more values, it would have to come at someone else's expense.

So there is nothing simplistic about my next claim: for every perceived benefit caused by bureaucratic intervention, there has to be an equal or greater (usually greater) hidden cost. That follows directly from the fact that regulation doesn't produce value. Now the simplification comes in: in a completely free, perfectly competitive market, that cost would always come at the expense of other low wage earners. But, to the extent the market is not free or competitive, it might come at the expense of others, as well. But this will just make the market even less free, and less competitive, so the regulation is still not a solution to anything (except to the goals of the politicians, of course, who are getting votes from the visible beneficiaries, while their victims are hidden enough to not affect them - the measure is good for them, because they just need it to be perceived to work, they don't need it to actually work).