Where do jobs come from? Employment vs self-employment

Everyone strives to make the most effective use of their resources to meet their needs as best as they can. When you enter the labor market, you already have some resources. You have knowledge, skills, and abilities and you have some time you can spend on work. Thus you need to decide on the way most beneficial for you to employ these resources. There are two options here: working for a company or starting one. Your potential earnings should help you decide on that. Will you earn more by working on your own than by getting a job?

Let us take an example. Jack is a physical worker. He can either operate a construction machine, or use his own physical strength to get the job done. Jack knows that the best career path for him is doing physical work. Now assume that the current market pay for digging a one meter deep ditch is 10 dollars. Jack is faced with a decision. He can try to secure some orders for ditch digging by himself, or he can get a steady job at a construction company. With his trusty shovel by his side, he can dig 5 ditches a day, so he would earn 1000 dollars a month working Monday to Friday. The construction company has an excavator which Jack can use to dig 30 ditches per day, but the company is prepared to pay only 5 dollars per ditch to a worker, while keeping the rest. On the company’s payroll Jack would earn 3000 dollars. Moreover, unlike Jack, the construction company already has a nice market position and a customer base, so it would take a lot of his work only to catch up with that. And remember that he is less effective at digging than the excavator.

Can we assume that the construction company is exploiting Jack by taking away 50% of his work’s worth? But if not for the company, Jack would earn even less. He lacks the capital needed to increase his efficiency, and his low potential earnings make it harder for him to save up and invest in buying his own excavator. Working for a company already endowed with capital improving his productivity gives Jack a chance for a better life. No rational man like Jack would take such a job knowing that he can earn more on his own.

Thus, unless an employer finds a way to multiply the value of his employee’s work beyond that of his potential earnings while self-employed, the employer cannot possibly hire anyone. And the value of work is always multiplied when used with a helping hand of capital. The capital can be such things as tools, know-how, or business contacts. It is obvious, however, that the employer will not employ Jack out of the goodness of his heart alone. The boss’ aim is to put all of this work to good use, thus turning it into profit.

Martin had a steady job for many years. Month by month he saved some of his wages, sacrificing a potential of a slightly more luxurious life. When he collected 40 000 dollars he took a grave risk. He left his job and founded a construction company. He invested his money in tools, a car for his working team, and in steady salaries for the men he hired. First he took small orders, and his savings dwindled while his men were getting paid. Initially, he earned less than in his regular job, but with every satisfied client he got more orders, and after some time he even started seeing some profits. He continued to consume less than he earned, and was thus able to reinvest his money into his business by training his employees and buying better tools for them. After a few years he had a good market position and decided that it was time to expand. He took another risk loaning money to buy heavy construction equipment, including the very excavator which later got Jack a job.

Notice how Martin did not get it all for free. At first, for many years he had to abstain from consumption and thus save money. Then he took a great risk and left his comfortable and steady job to start a business. Were he to fail, he would not only lose his entire savings, but his job as well. He was willing to do all of these things just because he hoped for a future profit. It was this very hope that kept him going. Without this chance for higher future earnings he would probably never left his previous job.

It is so easy to create jobs for their own sake. You just need to prohibit the use of all construction machinery. Then you will have to replace one excavator operator with ten people working shovels. You can also spend millions of taxpayers’ dollars on workers who will dig trenches, and then more millions on other people filling those trenches up. But it is evident that this is a pure waste of resources that could otherwise be put to a good use. All work is futile unless it adds value.

We have already discussed in our video “That Which is Seen, and That Which is Not Seen” how the government is incapable of creating new jobs. It can only shuffle them around. Roughly speaking, for every job created by the government we lose a potential job in the private sector. And those jobs supposedly created by the government often add no value whatsoever to society. One convincing example is excessive bureaucracy. So what can government do to actually create more jobs?

If what creates jobs is a hope for higher future profits, then the government needs only to abstain from interfering with employment of accumulated capital, and with profit realization. The government should refrain from taxing high profits not to discourage profitable activities of entrepreneurs. And also it should stop pulling away accumulated capital from its most productive uses. The government should also stop making it more expensive for entrepreneurs to hire people. If a workplace costs more money than it brings, then it will not be created. It is also important for the government not to cause inflation by interfering with interest rates, as it discourages savings.

All in all, the best thing the government can do for the labor market is to step aside and allow the entrepreneurs to act.