Preserving jobs at all costs leads to economic stagnation

May 24th, 2009

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In Australia, one of the common political slogans we hear is “Jobs! Jobs! Jobs!” The objective of any politician to win votes is to find ways to create and preserve jobs, either through direct government stimulus spending or subsidies. In this respect, politicians here will have much to admire Japan. It is a country where the culture of lifetime employment is alive and well, with the government playing a major role in preserving it.

But, government interventions to preserve jobs as a sole end have a price to pay. To understand why, let’s revisit Are governments mad with ?stimulating??,

As long as the structural problems are not dealt with, the economic slump will not end. As we quoted Wilhelm R?pk?s 1936 economic classic at Overproduction or mis-configuration of production? in January 2008,

It is an indisputable fact that a general slump, which does not permit of the scale of production reached in the boom being maintained, sets in during the crisis, and it is equally indisputable that this general slump is the result of the total demand suddenly falling behind the total supply. But let us make sure what this means and what it does not mean. Under no circumstances can it mean that the cause of the general slump is to be sought in the fact that production has outstripped consumption and that too many of all goods at once are being produced.

The root of the global economic crisis is the structural imbalance between production, consumption, and real capital investment. Government policies to preserve jobs as a sole end without plans to address the structural imbalance will undermine the future competitiveness of the nation.  As this article showed an example from Japan,

When the sheet metal orders coming into his small business, High Metal, fell by half last October, it never occurred to Masaaki Taruki to lay off his workers.

Instead, he set about brainstorming new projects to occupy them. An indoor vegetable garden? A handicrafts workshop?

Because of government subsidies, Mr. Taruki in the last three months installed rows of parsley, watercress and other plants, using factory space that has been empty since the company disposed of unused machinery. High Metal?s staff tend the sprouts religiously, topping up the water supply, adding fertilizer and adjusting the fluorescent lights.

When sales at the machinery maker Shinano Kogyo in central Japan plunged some 70 percent late last year, the company started dispatching its idle workers to sweep the streets and pick up trash in the wider community, while remaining on the payroll.

Such workers’ paradise in Japan must be the dream of politicians. But there’s a nightmare to such a dream,

Companies slash wages, which reduces consumer spending. Businesses become more reluctant to take on new recruits, shutting young people out of the labor force. And productivity plummets, hurting Japan?s competitiveness in an increasingly aggressive international market.

?By helping to maintain excess employment, you face the risk of keeping alive businesses that are no longer competitive, and perhaps whose productive era is over,? said Hisashi Yamada, an economist at the Japan Research Institute, a private research group in Tokyo. ?This could hurt employment in the long run. What you need is more structural change.?

Very unfortunately, in the context of an economic downturn, maintaining employment, and promoting structural change in the economy are opposing goals in the short-term. Structural changes involve creative destruction, which results in loss of jobs and rising unemployment. In countries with excessive private debt levels (e.g. US, UK, Australia, Spain, Ireland, etc), such changes are so painful that any long-term benefits for the economy are currently incomprehensible. But without structural changes, the economy cannot remain competitive and return to a sustainable growth path. If a country loses its competitive edge, the standard of living of its citizens will decline.

In Japan, the result of such lack of courage is economic stagnation for 15-16 years. Today, Japan has fallen into a depression that is the worst since the Great Depression.

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