My understanding of macroeconomics is that there is two kinds of unemployment: ‘voluntary’ unemployment caused by search frictions, and the degree of such frictions determines the “natural rate”, and ‘involuntary’ unemployment caused by monetary disequilibrium/insufficient aggregate demand. So anything that purports to create jobs that doesn’t affect these two determinants, search frictions or monetary disequilibrium, does no such thing.
This is why I recoil when I hear some politician claim that some programme or some investment will “create X number of jobs”. There are two reasons in my mind why such statistics (even if completely truthful) are irrelevant:
- The long-run level of jobs is determined by the “natural rate”. The analogue is pretty clear when applied to any other resource: if an investment uses Y acres of land, it is clearly absurd to say that this investment “creates Y acres of land”. Everyone intuitively understands that the market for land must clear.
- Similarly, it’s obvious that a private investor or politician would hardly want to advertise their wastefulness. Evidently the sensible aim should be to achieve as much production as possible per unit of land. This is just as true for labour as it is for land. If anything the fewer jobs an investment “creates” the better.
This doesn’t mean investment is has no good effect: the actual effect of increased net capital investment (abstracting from any effects on aggregate demand) is not a reduction in unemployment but an increase in wage rates. Investments such as the Keystone XL pipeline, for instance, makes labour-suppliers better-off not by lowering unemployment but by increasing the overall demand for labour. The reason for this is clear: the only way to attract new factors of production away from other applications is to bid-up their compensation.
If the argument rested on a Keynesian theory that the level of autonomous investment determined the level of employment that would at least be coherent. But given that this claim is made both in booms and busts, both by Keynesians and anti-Keynesians, and aggregate demand is never mentioned in context, I can’t help but think that people imagine if some investment occurs that requires 1000 personnel then it follows that the unemployment rate has fallen by 1000.