Job Creation Is Impossible

Nobody needs job creation more than the Iberian Peninsula. The pain in Spain falls mainly on the working class, as 20 percent unemployment -- the second highest in the EU -- looms behind the continent's third largest deficit. How do you create jobs while cutting spending? That's the Spanish conundrum. And for now, the answer appears to be: make it easier for employers to fire their workers. (Wait, what?)

Yes, Spain's labor market overhaul almost sounds counter-intuitive. If a fifth of the economy is out of work, why make it easier to put the other 80 percent out? AFP explains the logic:

Many economists blame the high jobless rate on the high cost of firing workers in Spain, which makes employers reluctant to hire staff and encourages the use of temporary contracts that have few benefits and rights.

Workers on full contracts are entitled to severance pay of as much as 45 days per year worked, one of the highest levels in Europe. Under the government reform this would be reduced to 33 days for some contracts.

In other words, if the Spanish government makes it cheaper to fire workers, employers will realize that it's cheaper to hire workers, since a worker's cost include the price of his dismissal. It's sort of like saying: if you make it less cumbersome to get divorced, more people will choose to get married.

If that sounds like a pretty darn indirect way to encourage hiring, it's only because it's pretty darn indirect way to encourage hiring. The dirty secret of "job creating" is that there is no magic wand that will make employers hire again. All you can do is lower the cost of hiring and holding workers. Spain is doing this implicitly by lowering the cost of firing. The United States is trying to do this explicitly by cutting payroll taxes for new hires in 2010 and extending a host of small business tax cuts to free up capital that employers can put toward new workers. But contrary to the loud debate about how the government should create jobs, the government can't actually create jobs in the private sector. That's why it's called the private sector, after all.

Ten percent unemployment in the United States is a huge problem, economically, politically, psychologically. Like the oil spill, it demands swift action. But like an underwater leak we can't plug, employment is an open wound we can't quickly salve. The only thing we can do is change the cost of hiring and firing and hope employers respond with job offers.