HP, Microsoft prove it again: Big Business doesn't create jobs

SMEs get lip service - what they need is dinner at the Club

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Worstall on Wednesday The recent news of layoffs from computing giants provides proof, once again, of an old economic saw. It is not actually big businesses that create jobs, it's the small and new ones.

Our problem is that we've a political class (yes, all of it) that doesn't really quite get this. They would like there to be lots of jobs, of course, but they think that the way to get them is to suck up to - to give privileges to - large extant employers instead of the people who actually do create jobs.

Microsoft is laying off 18,000 because they're not sure what they should be doing (other than indulging in corporate doubletalk that is). HP is going to lay off even more people because, err, they don't know what they should be doing either. And all of this really shouldn't be a surprise to observers of the scene economic. We expect big business to continually be shrinking its workforce. Perhaps not with quite this sort of vehemence but over time it's the standard assumption.

As background consider employment in the UK in a way that you've probably not done before now (even many economists fail to wrap their heads around this). There're some 30 million people employed at any one time (as ever, numbers are not accurate, only indicative of the order of magnitude with perhaps the first digit also correct). We can also see that unemployment moves around a bit. Couple of million, four million, a shifting number over time and decades. We generally also think that unemployment rises when more firms go bust, when more people get fired. But this isn't really true, that's not what actually happens.

Each year the UK economy destroys some 3 million jobs. Yes, really, 10% of all jobs disappear each year. Some of this is bankruptcy of firms, some of it is technological advance (to the extent that the first isn't caused by the second). Each year the UK economy also creates some 3 million jobs. The change in unemployment is the balance between those destroyed and created numbers and what happens in recessions isn't that, particularly, more people get fired or more companies go bankrupt. It's that many fewer new firms start up, many fewer small ones expand. And it's that which produces the imbalance that leads to higher unemployment rolls. Not a greater destruction of extant jobs, but an absence of job creation.

It's also a standard empirical result that it is large companies that do most of that job destruction and small and news ones that do most of that creation. To think in the abstract for a moment, take mature companies in a mature industry like, say, cars in Western Europe and the US. Sure, we can see a bit of jostling between the various competitors, but the market is pretty much constrained by growth in GDP. We're unlikely to spend a greater portion of our existing incomes on cars but we might spend some amount of an increase in income on vrooms vrooms.

But productivity rises faster than GDP (especially in manufacturing, where raising productivity is much easier than doing so in services) meaning that such companies need ever less labour to produce that output. Even if output is rising along with GDP, they still need 1 or 2 per cent less labour each year to produce a consistent level of output. And yes, productivity does generally increase 1 or 2 per cent each year (and more than that in manufacturing as above) over the decades. This is the process by which we all get ever richer, as we have been for a couple of centuries now.

It's worth noting that this is also the refutation of the occasionally offered green argument that we just don't need - indeed, shouldn't have - any more economic growth. For if we don't have growth then we'll end up with 1-2 per cent of the population experiencing technological unemployment each and every year as labour productivity increases.

So it must be those small and new companies that create jobs; this can be derived as the residual of this argument. If big companies are job destroyers but jobs do get created then who else is there?

Which brings us to our political problem. A certain M'sieu Bastiat, the only Frog ever to really grok economics, pointed out that the point of the subject is always to look for the unseen, not to note what is seen. But if you're the CEO of a company employing 100,000 people then you can have dinner with a Cabinet Minister to express concern over laws and regulations that might make it difficult for you to “create jobs”. Even while that's not what you do at all. But the 20,000 entrepreneurs who might create 5 jobs each if they could negotiate the regulatory thicket can't even manage to get the local dog catcher to accept a free pint as they complain about the laws.

So what is seen at the political level is the desires of the extant, job destroying, industries and what is unseen is the needs and wants of the as yet non-existent job-creating ones.

To bring our examples back to the tech industry Microsoft is one of those companies arguing very hard for strong IP protection. Why not, they own a lot of it after all. But strong IP protection for extant large companies restricts the derivative jobs, companies and IP that can be created on top of it, almost certainly to the detriment of jobs and economic growth. Our conundrum here is that we want to have some such IP protection so that people will create the IP in he first place but we probably don't want to have as much protection as Microsoft would like there to be.

As a bonus discussion point, regarding Nadella himself, Laurence Peters wrote one of the three management books you ever need to read (the others being the Parkinson' Law and Up the Organisation), the Peter Principle. Which is that everyone is promoted to their own level of incompetence. You do well as a junior exec, you become a senior one, you're a good senior one you keep climbing the greasy pole until you get to a job you cannot handle and thus you're incompetent at. The corollary is that all useful work is done by people who have not yet reached their level of incompetence.

So, is Nadella below, at or above his Peter Level? And how can we get politicians to listen to the CEOs of tomorrow, rather than those of today and yesterday? ®

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