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Job Churning, Job Creation, and the Reregulation of America’s Realonomy

Research & Commentary
January 03, 2012

by Salvatore Babones

Where do jobs come from?  Pro-business groups regularly repeat the mantra that jobs are created by entrepreneurs, strong-charging world-changers who fight endless government interference to build businesses from scratch.  But entrepreneurs don’t create jobs out of thin air.

Down in the realonomy, where most Americans live and work, entrepreneurs mainly “create” jobs by destroying them somewhere else.  Some people call this “creative destruction.”  I call it “job churning.”

For example, when Wal-Mart outsources its store cleaning to small local firms, poorly-paid jobs with high-pressure working conditions in a large corporation are turned into terribly-paid jobs with horrendous working conditions in small companies.  There’s no net job creation.  There’s just job churning.

Similarly, when people work at a local McDonald’s franchise, they are working for a small firm.  The nameplates on their shirts may portray the golden arches or a waving Ronald McDonald, but their paychecks are signed by local franchisees.  When local diners close and their employees go to work at fast food chains, that’s churning.

[pullquote]Job churning isn’t restricted to the lowest rungs on the job ladder.[/pullquote]

Job churning isn’t restricted to the lowest rungs on the job ladder.  Over the past thirty years major airlines have outsourced thousands of pilot jobs to upstart regional airlines.  The same plane type is flying the same route, but instead of a 30-year veteran a newly-qualified pilot is at the controls.  Is that job creation?

Almost by definition most jobs are created in small firms, since when you start with zero employees there’s nowhere to go but up.  But though our mental image of a small startup is a tech firm in Silicon Valley, statistically it’s much more likely to be a contract cleaning firm outsourcing unionized school janitors’ jobs.  Small firms tend to pay worse and offer fewer benefits than large firms.

In rough numbers, there are about 120 million private sector jobs in America.  Half of them are at firms of fewer than 500 employees and half of them are at firms of 500 or more employees.  The smaller firms pay an average of $39,000 per year while the larger firms pay an average of $49,000 per year.

In addition to the 120 million private sector jobs, there are about 20 million government workers and 20 million unemployed.  The government workers earn an average of $47,000 per year, similar to workers in large firms.  The unemployed, of course, are paid very little.

[pullquote]We have to find jobs for 20 million people.[/pullquote]

In short, America’s labor force breaks down roughly 60-60-20-20 into large firms, small firms, government workers, and the unemployed.  These 160 million people are the backbone of America’s realonomy — the real economy that pays the bills for the vast majority of Americans who are not senior managers or corporate CEOs.  Of course, this is a simplification, but it does put things in perspective.  Some obvious policy implications pop out.

We have to find jobs for 20 million people.  In order to do this, we have to encourage big firms to hire more people.  Small firms will continue to hire in an endless process of job churning.  A few successful small firms will hire until they become big firms.  But most of the good jobs will come in big firms.

How do we get big firms to hire?  We regulate them.  Americans used to take it for granted that big firms should be regulated, just as they now take it for granted that big firms should be left alone.  As surely as deregulation has destroyed jobs, reregulation would restore them.

Large firms should be forced to comply with health and safety regulations.  Truck drivers shouldn’t drive 20 hours in a day.  Pilots should sleep in beds, not on airport benches.  Meat processing plants shouldn’t be run on such tight staffing that workers end up routinely injured.

[pullquote]The “other 99%” of Americans who aren’t senior managers or corporate CEOs would be better off if workplaces were healthier, safer, and lower-pressure.[/pullquote]

Examples like these can be found in every sector of the economy.  Deregulation has made American businesses more profitable, since deregulated businesses can do the same work with fewer employees.  But what good does that do us?

The “other 99%” of Americans who aren’t senior managers or corporate CEOs would be better off if workplaces were healthier, safer, and lower-pressure.  Imagine if all American workers received mandated vacation time like they do in every other developed country.  Imagine if Americans could stay home with pay when they catch cold.  Half of all American workers can’t.

Government employment must also be part of the solution.  Governments at all levels currently employ just 20 million people.  There’s plenty of scope to increase this.  We could immediately put millions of people to work as teachers’ aides, social work assistants, and home healthcare helpers.

Over the longer term there are roads to pave and parks to improve.  Our air traffic control system is dangerously understaffed.  We even need more tax collectors.  Government has been starved for too long.  An expansion of government employment by 5 million over five years is entirely within our reach.

[pullquote]When good jobs with paid vacations are considered outrageous, something is wrong.[/pullquote]

I know that the prescriptions laid out here are considered outrageous in today’s America.  That’s just sad.  It means that something is wrong in today’s America.

When good jobs with paid vacations are considered outrageous, something is wrong.  When hiring more teachers’ aides and air traffic controllers is considered outrageous, something is wrong.  When the idea that the driver behind the controls of a 40 ton 18-wheeler should be well-rested is considered outrageous, something is wrong.

America’s realonomy has taken a beating in the three decades of deregulation that started in 1981.  Like it or not, reregulation is the key.  Americans must see the anti-regulation rhetoric of big business for the self-serving slop that it is.  We’ve tried deregulation.  It’s failed.  Let’s stop failing in 2012.  Let’s reregulate the realonomy.

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