Does Government Create Jobs?

Release Date
March 29, 2013


Gov't Debt & Spending

Many people have been talking about job creation lately, especially politicians. But is government the best creator of jobs? And is job creation the best thing for the economy? Professor Steve Horwitz explains that there is a difference between creating jobs and creating wealth. It would be easy to create millions of jobs overnight. For example, we could eliminate all of the machinery and innovation used in agriculture. Then many people would be needed to farm in order to produce sufficient food for society. But no one is suggesting that because it is not practical and it would set our economy back 100 years.
Creating jobs is relatively easy. The problem is that the most economic progress is made when jobs are eliminated as they become unnecessary. New innovations happen gradually, though, and technological innovation means people will need to learn new skills, and some are likely to lose their jobs in the meantime. That unemployment is a bad thing, but the alternatives are worse. To prevent such labor transitions would halt innovation, growth, and the reduction of poverty.
Market signals can indicate what kind of skills people should invest in and where the new jobs of the future will be. But the government doesn’t have these signals. Instead, many government job-creation programs are really about meeting the needs of politicians, not the needs of consumers in the marketplace. “The best job-creation program in human history is the free market and the entrepreneurship it generates,” Professor Horwitz says.

Government Spending Doesn’t Create Jobs  (video): This Cato Institute video presents the argument that government spending actually creates a drag on output and employment
Creative Destruction  (video): A short video on the economic phenomenon known as creative destruction, the process of dynamic positive change in an economy that often comes at the cost of labor and employment
Reducing Real Output by Increasing Federal Spending [article]: The myth that government can create jobs is closely tied up with the myth that government spending increases output
The Myth of Job Creation  [article]: A New York Times editorial on the indispensability of federal job creation
Are Government Layoffs the Problem?  [article]: A New York Times “room for debate” piece on the costs and benefits of government layoffs
Why Government Job Programs Destroy Jobs  [article]: FEE takes a look at government job-creation programs and presents a number of reasons why they are counterproductive

Does Government Create Jobs?

Milton Friedman went to China on a tour. The Chinese delegation there showed him a new canal-building project that they were working on. Friedman asked the delegation, “Can I ask you—why do you have men digging this canal using shovels? How come you’re not using earthmovers or bulldozers?” And a member of the Chinese delegation responded, “Oh, well, if we were to use the big machines we wouldn’t be able to create as many jobs.” And Friedman said, “Oh, it’s a jobs-creation program. I thought you wanted to build a canal. If it’s jobs you want, take away their shovels and give them spoons.”
Job creation is on lots of people’s lips, especially politicians’. I would argue that creating jobs is easy; it’s the creation of wealth that’s hard. For example, we could destroy all farm machinery. That would create millions of new farm jobs overnight. But I don’t think anyone would think that’s the real solution to our problem. The point being that economic progress comes not so much when we create jobs—that’s easy—but when we destroy jobs that we no longer need.
A hundred years ago, over 40 percent of the population was involved in agricultural jobs of one sort or another. Today that’s under 2 percent, yet agricultural output has boomed thanks to mechanization and the invention of all kinds of farm machines. What happened to those old agricultural jobs? As mechanization has made farm products cheaper, people have had to spend less of their money on food and are able to spend their money on other kinds of things. The story of human progress has been our ability to eliminate jobs by economizing on the scarcest resource of all, human labor, in order to make the things that we want.
Of course new innovations don’t happen all at once. They happen gradually over time. And all technological innovation means that workers have to learn new skills, and some are likely to be unemployed for some period of time. And while that unemployment is bad, the alternatives are worse. These labor transitions are the price we pay for economic progress. To prevent them would be to halt growth, innovation, and the reduction of poverty.
Job destruction also signals young people about where the new jobs for the future will be. New jobs have come up that have replaced the old jobs that were once in agriculture. Over the course of the 20th century we’ve gone from a nation of farm jobs to industrial jobs to service jobs to knowledge jobs. And market signals can indicate to people what sorts of skills they should be investing in and where the new jobs of the future will be.
Governments do not have these signals. In fact, many government jobs programs are really about meeting the needs of politicians, not the needs of consumers in the marketplace. Governments are good at creating work, but they’re not good at creating value-generating jobs. If it’s valuable jobs you want, you need people like Bill Gates or Steve Jobs, who know how to create value and generate meaningful jobs. The best job-creation program in human history is the free market and the entrepreneurship it generates.