6. The creation of jobs

The full paper has been published in Real-World Economic Review:  http://www.paecon.net/PAEReview/issue83/Joffe83.pdf


This paper investigates the source of jobs in the modern economy, excluding the state, non-profit and financial sectors. The approach is centered on the firm and its profitability, and in particular, proposes a real investment led economy perspective. Rather than assuming that productive systems already exist, as is frequently done, it examines how they are established and renewed, and also how they may cease to exist. Investment is seen as the strategic decision process that establishes the number and type of jobs for the medium term, and their approximate wage level. Thus, at the time of the job creation decision, it is not clear who the potential workers are – and particularly when technological change and off-shoring are involved, even what population they will be drawn from. Investment often involves a business plan: a joint decision about the product, location, technology, scale of production, etc, as well as employment. In addition, tactical decisions are taken during the course of production. Both types of decision take account of the economic environment, and involve Knightian uncertainty. Unemployment exists when fewer jobs are created than there are people who would like to fill them, because there are too few investment opportunities that are perceived as being potentially profitable. In the investment decision, the whole package needs to be coherent, and offering lower wages may not be enough to make an investment idea potentially profitable. This explains why non-frictional unemployment can occur, and persist, especially when perceived investment opportunities are few. It involves asymmetry: a shortage of workers is reflected in an increase in the wage level, whereas a shortage of jobs is manifest in terms of unemployment – quantity not price. The real investment led economy perspective is also able to account for employment changes in six major types of scenario: a new company, major technological change, relocation, plant closure, regional decline and a major depression. Existing theories struggle to explain these phenomena. In addition, this perspective naturally addresses several puzzles in standard labor economics.