Not All Job Destruction Is Creative
Inflationary booms bring busts.
In last week’s column I argued that we should not worry about saving jobs, but rather should celebrate the job destruction that comes with technological and economic progress. Finding ways to accomplish our goals with less labor almost defines “economic growth.” When digital switches and cellphones destroy the jobs of telephone operators, and ATMs replace bank tellers, we should see this as part of the process that enriches us all.
That column caught the notice of some folks at FoxBusiness.com, who invited me on one of their shows. To my surprise the questions quickly turned to the current unemployment rate and what we should be doing to bring it down. Toward the end of the interview I began to realize the source of the confusion: The host was thinking that the “creative destruction” of jobs I had described is the same thing as “unemployment.” This week, I’d like to try to untangle those ideas.
Economists recognize that there are multiple reasons for unemployment. We normally divide them into frictional, cyclical, and structural. Frictional unemployment refers to people between jobs for the short term. Think of the waiter whose restaurant closes and is now looking for a new job at a different eatery. Cyclical unemployment refers to changes in the macroeconomy, such as the boom and bust we’ve experienced in the last decade. Structural unemployment involves a longer-term mismatch between the skills of workers and the kinds of jobs that are in demand.
It’s often difficult to determine how much of the unemployment rate is represented by each type, but certainly we can make some broad observations, including that the current 9.5 percent rate includes a significant degree of cyclical unemployment.
Frictional unemployment is, of course, unavoidable in a dynamic, growing economy. People want new jobs, businesses fail (except for banks and auto companies, apparently), and some folks just get fired. Structural unemployment is also, to some degree, unavoidable. Most of us are trained for a range of future jobs early in life, and if our skills are overly specific and become outdated, we will need time to retrain for the new jobs in demand. Such retraining happens continuously, but people often will be unemployed, or underemployed, in the transition. Both forms of unemployment are likely unavoidable in a free market, which means we should never expect the unemployment rate to be near zero in a healthy economy. However, both are usually signs of economic progress: Bad businesses should fail, unproductive employees should be fired, and people should be free to find new jobs. As last week’s column pointed out, even though technological change has short-run costs, over time it improves life for everyone, including those who lost jobs.
Avoidable Unemployment
By contrast, cyclical unemployment, is largely avoidable. The boom and bust of the business cycle are products of misguided government monetary and fiscal policies. The recession we are now experiencing could have been avoided had the Fed not driven interest rates down too low after 9/11 and had other government policy not channeled the new money into the housing market, which then became the basis for a host of problematic investment vehicles. Suffice it to say that a 9.5 percent unemployment rate is no cause for celebration.
Undoubtedly the recession destroyed a lot of jobs created during the boom. But those are jobs that never should have been created in the first place! So given the boom, it’s a good thing the bust destroyed those jobs: They represented misallocated resources. However, from a broader perspective, we should not be cheering this destruction, as the whole boom-and-bust process that it represents involves a great deal of wasted resources, not even counting the trillions spent on the bailouts and “stimulus” plans.
In an economy suffering from an inflation-induced boom, too many of the wrong kinds of jobs get created, then the bust comes and destroys them, leaving us with high unemployment. In a healthy economy, growth and technological progress destroy jobs first, then create new kinds of demands that lead to new, sustainable jobs — more than were destroyed. A healthy economy creates more and better jobs by destroying ones we don’t need. A sick economy create jobs only to destroy them.
Thus not all job destruction represents economic health. When government policy generates booms and busts, it creates unsustainable jobs that eventually will be destroyed, harming millions in the process. That’s not the “creative destruction” of the market. That’s just destruction, pure and simple.
Comment by Joe Schmoe on 26 August 2010:
To clarify, when you say government policy creates cyclical unemployment you mean the Austrian interpretation of the business cycle, where inflation of the money supply leads to both increased consumption and increased (mal)investment?
Comment by Capt. A. on 26 August 2010:
Mr. Horwitz,
Thanks for your cogent, well written article.
I might offer an additional thought to a sentence (of yours) comfortably nestled in this article, specifically: “Both forms of unemployment are likely unavoidable in a free market, which means we should never expect the unemployment rate to be near zero in a healthy economy.”
Really? And the reason…?
The late libertarian, Harry Browne once quipped: “People are really never out of work, they are simply looking for SOMETHING ELSE TO DO.” (Cap. emphasis mine) “They are and can remain unemployed because they choose to set or NARROW their conditions of employment in a free market.” Example: “I will only work for a given wage, specific conditions such as in an air-conditioned building, during the hours of 9 am – 5 pm, weekends off, etc.” They remain “unemployed!”
Mr. Browne aptly pointed out that during his entire life he never picked up a newspaper from a town of consequence and always found jobs available in the “Help Wanted” section of the newspaper! If fact, I too have never picked up a newspaper of consequence (both here in Europe and the U.S.) and failed to find at least “something” available in the “help wanted” section, to be done.
When people “choose” to define and limit what they are willing to do in a “free market,” and there is nothing that fits their wants and desires—they will remain unemployed! Period. This reminds me long ago: the U.S. Sugar industry ran full-time “help wanted” ads for “years” to hire people to cut sugar cane in Florida, in fields around Lake Okeechobee. The ONLY individuals that answered the ads were Haitian immigrants, and a few others, to work in what some might call “hell!” Temperatures in the mid-nineties, stifling humidity, ankle-deep in water and just to make life “enjoyable,” lots of snakes (moccasins, coral and Eastern Diamondback rattlers!) At the time, the 1970s, the wage might have been $2.50-3.00/hour. Yet during the early to mid-seventies, during the deep recession, the ONLY people to show up for the sugar cane harvest were Haitians and those few others! The “just looking for something else to do” crowd was NOT present to be employed in the fields! The “unemployed” simply stood inline to collect government pelf. The “help wanted” ads were always in the newspaper … and NEVER filled! I remember and will never forget this. So, MY wage, 9-5, air-conditioned… There IS always “something to do!” You eat, or you die … or you redistribute the wealth via a badge and barrel of a gun. C’est la guerre.
Regards,
Capt. A.
Principaute de Monaco
GMT +2:00 CET
Comment by Steve Horwitz on 26 August 2010:
Joe: The Austrian theory is one possible explanation and it’s the one I prefer. But one could have alternative theories of the business cycle that explain cyclical unemployment as a resulting from bad policies or institutions. I was trying to make a broad point about bad policies there and not specifically trying to tell an Austrian story, even though that’s my preferred explanation.
Capt. A.: I’m not sure how this contradicts my claim. It’s true that some people will choose to not take a job if the ones available don’t fit their preferences. But that is still unemployment, as economists define it. You’re looking for a job but having found one yet.
You might wish to distinguish between voluntary and involuntary unemployment, and label this sort as “voluntary.” That’s a different discussion however. I stand by my claim that even in a totally freed marketplace, the unemployment rate would not be close to zero.
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Comment by Dennis on 26 August 2010:
One of your better editorials. Thank you.
Comment by Jimmi on 27 August 2010:
Great follow up from your first article. Good work!
Comment by Troy Camplin on 27 August 2010:
Steve,
You say:
“In a healthy economy, growth and technological progress destroy jobs first, then create new kinds of demands that lead to new, sustainable jobs — more than were destroyed. A healthy economy creates more and better jobs by destroying ones we don’t need. A sick economy create jobs only to destroy them.”
I would have to disagree with the first sentence. The new things have to be created first so that the alternative is actually available to replace a given good or way of doing things that is then destroyed. Creation necessarily precedes destruction.
A better way of putting this is that a sick economy is one with cancer. The boom is the cancerous growth — too much growth too quickly — that then has to be removed in order for the patient to survive. Sometimes healthy tissue ends up being destroyed as one destroys the cancer — but this too is necessary to get all the cancer. All of the government’s attempts to “help” have been wrongheaded precisely because they allow the cancer to remain — on the theory that it’s important that no healthy tissue be sacrificed, even if it means the cancer remains. The opposite is, of course, true.
What we need is healthy growth, not just any kind of growth, or growth at any cost. Cancer is growth, after all — but it’s a very unhealthy growth.
Comment by D. Saul Weiner on 29 August 2010:
I am not surprised that Fox latched onto the topic of unemployment, in light of the current climate.
It seems to me that one could characterize some of the current unemployment as cyclical or structural, i.e. related to malinvestment, such as the elimination of the real estate and building jobs.
Comment by e on 6 September 2010:
You forgot to mention the MILLIONS OF LEGAL AND ILLEGAL IMMIGRANTS THAT HAVE BEEN ALLOWED INTO AMERICA, artifically increasing the american workforce, creating more supply of workers, lessening demand.
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