What Explains Job Growth

Few political promises are as common as this one: “My policies will create jobs.” You hear it from candidates for federal, state, and local office, as well as from activists, commentators, and other political actors.

Generally speaking, those on the Right tend to emphasize the government policies they believe inhibit job creation, such as high taxes and heavy regulations. Generally speaking, those on the Left tend to emphasize the government expenditures they believe enhance job creation, on education, infrastructure, and even public assistance programs such as Medicaid and unemployment insurance.

This debate has been going on for a very long time. It won’t be resolved anytime soon. Why? One reason is that employment growth is the product of many factors, some controlled by governments but most determined by forces politicians can’t control no matter how hard they try.

For example, no government policy — or, at least, no policy sustainable in a free society — could possibly have prevented the automobile from displacing the horse and buggy as the primary means of personal mobility. Other inventions and innovations have produced similarly disruptive change since then, across many economic sectors. Because states began with differing concentrations of the displaced industries, they’ve experienced differing rates of net employment growth.

Even when we limit our focus to public policy, both conservatives and liberals have plausible cases to make for their respective priorities for promoting job creation. It makes sense that, all other things being equal, businesses are more likely to be founded, sustained, and expanded in places where the costs of doing business are lower. But it also makes sense, that, all other things being equal, businesses are more likely to be founded, sustained, and expanded in places where traffic moves more freely on good roads and the pool of potential workers, professionals, and entrepreneurs is better educated.

(The idea that job creation is higher in places with more generous public-assistance programs is far less plausible, and indeed clearly contradicted by the vast majority of scholarly studies of the subject. If politicians tell you otherwise, it would be entirely reasonable to conclude they are either woefully uninformed or actively trying to mislead you.)

I constantly scan for new academic research on job creation — because, yes, I’m just that nerdy. The latest study I’ve read will soon be published in Applied Economic Letters, a scholarly journal. Jacksonville University economist Richard Cebula and three of his colleagues explored state-by-state differences in net job creation from the turn of the century to the onset of the Great Recession in 2007. Specifically, they wanted to see which of the following variables showed a statistically significant relationship with state employment growth: 1) the state’s average cost of living for a family of four, 2) the average January temperature, 3) the average effective income tax rate, 4) the share of workers belonging to unions, 5) the share of those aged 25 and older with at least a high school diploma, and 6) the net percentage growth rate in the number of small businesses in the state.

So, which of these factors made a difference? All of them. The study’s findings suggest that people tend to move to warmer places with lower costs of living (including taxes), thus supplying more labor to potential employers. Businesses, in turn, tend to start in or relocate to lower-cost jurisdictions with access to educated workers that can be employed at competitive rates (i.e., at rates not kept artificially high by unionization). The effects are particularly pronounced among the small companies that tend to create a disproportionate number of net new jobs.

These six factors explain about half of all the variation in state job-growth rates. Here in North Carolina, conservatives would say their policies are making the state more attractive in five of them: taxes, cost of living, unionization, education attainment, and entrepreneurship.

Now that I think about it, I suppose liberals would say conservatives are advancing the sixth goal, as well: making our winters warmer through unabated climate change. So be it. Don’t we all believe in sound (social) science?

John Locke Foundation chairman John Hood is the author of Catalyst: Jim Martin and the Rise of North Carolina Republicans.

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