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How Not to Think About Job Creation

Governments are right to focus on creating more good jobs, because work is the source of most people’s livelihood in every society. But in the majority of cases, the solution lies in policy areas that are not amenable to tools wielded by ministers of labor or education.

CAMBRIDGE – Just because a tire is flat at the bottom does not mean that the hole is there. The same can be said about labor markets. Concern about the scarcity of good jobs is fueling interest in labor-market interventions such as job centers that match workers with vacancies, training services to improve the skills of the unemployed, temporary wage subsidies, and more. Because getting more workers more quickly to good jobs is such an important policy goal, some countries create so-called delivery units in the president or prime minister’s office to focus on how to do it. But, as with a flat tire, a dearth of good jobs does not mean that the labor market is the problem. Here’s why.

Production requires many inputs: labor with different skill sets, raw materials, intermediate inputs, buildings, machines, energy, transportation, finance, rules and their enforcement, security, and so forth. Some of these inputs can be purchased from local suppliers. Others can be imported (assuming that the country has the foreign exchange to pay for them). Governments provide others, such as infrastructure and rules.

All of these inputs complement, rather than substitute for, one another. Coffee and sugar are complements; coffee and tea are substitutes. The more coffee you have, the more sugar you want – but the less tea you want. Likewise, machines work better if they have the needed raw materials, spare parts, electricity, and skilled workers. So, if there is no electricity in the area or if there is a dearth of foreign exchange with which to buy imported inputs, the problem cannot be solved by substituting the missing inputs for more machines or more workers.

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