In my last post, I explained how productivity kills jobs, I introduced the very simple formula C / W = P, where C is consumption, W are workers, and P is productivity per worker. When P increases, one of three things has to happen. Fewer workers. More consumption. Or some combination of those two. So all else being equal, increased productivity kills jobs.
Demand creates jobs, that’s why they call it “stimulus spending”.
Today, we’ll be working with Joe the Woodchopper and his cordwood business, his village, and the village in the next valley (maybe) to explain how demand creates jobs. As you’ll recall, the villagers where Joe’s business is located demand 100 chords of wood in a normal year. Joe’s woodchoppers, using single bitted axes, could produce 33.333 chords of wood each per year. So:
100 / W = 33.333 and solving for ‘W’ (workers) we see that Joe needed 3 woodchoppers. And sure enough, Joe had three woodchoppers: Larry, Moe, and Curly.
The blacksmith in Joe’s village was fooling around one day and tried making an axe head with a blade (bitt) on both sides, instead of just one. He knew it wouldn’t be any good for most axe work, but figured that woodchoppers mainly use their axes one way, and with two bitts they’d only have to stop half as often to sharpen their axes. He tried it out, the idea worked, and he sold his new double bitted axes to Joe the Woodchopper.
When Joe tried them out with Larry, Moe, and Curly, he found out that the boys could produce half again as much wood thanks to half as many stops to sharpen their axes. So worker productivity went from 33.333 chords of wood per woodchopper per year up to 50 chords of wood per woodchopper per year.
Now Joe had a dilemma. He has money sunk into the new double bitted axes. His boys were producing 150 chords of wood but he could only sell 100 chords, and it wasn’t likely the villagers would buy more. And he was paying three woodchoppers, to boot. He sat down with his stubby little pencil and rumpled piece of paper and plugged in the numbers:
100 / W = 50 (chords of wood per year) and when he solved for W (workers) the answer was clear. He only needed 2 woodchoppers, he’d have to let Curly go. Now he had two woodchoppers, Curly was unemployed, and Joe had to refigure out the whole woodchopper pay thing. He knew he had to recoup his investment in new axes, and that knowing the score on technology now, he should be investing something in the next generation of woodchopping equipment. He would probably have to advertise more to make sure his customers stayed his customers, because his investment was bigger now. So in the end, he gave Larry and Moe a 25% pay raise to keep his now highest skilled woodchoppers on his payroll.
So now, we can start looking at how demand creates job, how increasing ‘C’ can offset the negative effect on ‘W’ of increased ‘P’.
Larry and Moe didn’t tell their wives about the pay raise, but they did start meeting at the pub every evening after work. They spent most of their new income on beer. Pub rules in their village required a new glass for each new beer (no ‘refills’). Larry and Moe, having two of the best jobs in the village now, drank so much more beer that the dirty glasses were backing up, and the barkeep often had to stop serving beer (decreasing his productivity) to wait for the beer glass washer to deliver more clean glasses.
The situation was getting so bad that the pub owner realized it was curtailing his business. He knew from talking to the barkeep that most of the time the one beer glass washer could keep up with demand. He only had this, if you’ll pardon the expression, logjam when Moe and Larry came in after work. He got out his stubby pencil and rumpled piece of paper and figured he needed a second beer glass washer for 3 hours a night.
So he hired the only unemployed villager he could find, Curly, to wash beer glasses from 5-8 every evening. And he paid Curly a crappy wage that was a fraction of what Curly had made as a woodchopper. But he told Curly that he was in management and made him wear a tie, so Curly was happy.
So that is how demand creates jobs. When the population consumes more of something, and that demand exceeds any increased productivity, a job is created. Now, to a happier and more uplifting conclusion.
Things were going along OK in the village, except of course Curly’s family was living on scraps and beer spillings, when the very next year the weather turned brutally cold. It was colder than anyone alive could ever remember it being. It was so cold, it never warmed up. People had to start the fire earlier and keep it burning longer. They were going through cordwood like crazy, and despite their best efforts to conserve, they simply had to use more cordwood.
Joe could scarcely keep track of the orders, much less dispatch his boys, arrange deliveries, and comply with the new government regulations on reporting production of cordwood. His stock of cordwood was dwindling at an alarming rate, so out came the stubby pencil and rumpled paper again. He figured his orders for cordwood were running at the rate of 150 chords per year. His boys were still producing cordwood at the rate of 50 chords per worker per year. So, once again:
150 / W = 50 then solving for ‘W’ (workers) he realized that he now needed 3 woodchoppers. He’s have to hire Curly back on. So he headed for the pub.
Once he started talking to Curly, it didn’t take long for the ex-woodchopper to realize something. The shoe was on the other foot, now! He told Joe that he’d be willing to leave his nice, comfortable management job washing beer glasses and come back to cutting cordwood, but he’d need to make more money than before to a) give up his management position, b) do the hard, uncomfortable, dangerous work of chopping cordwood, and c) take the risk of taking back a job that had disappeared once before.
Joe wasn’t happy, but his choices weren’t happy either. Curly was the only underemployed villager who knew how to chop wood with a double bitted axe. Joe knew that if he ran out of cordwood, some of the villagers might go to the woodchopper in the next village, and if they did they might not come back to him. In the end, Joe hired Curly back at the new higher pay rate, so now his workforce was back to 3 woodchoppers, where it had started.
So what just happened here? Due to cold weather, demand for cordwood increased from 100 chords per year to 150 chords per year. Productivity could not easily be increased to fill the demand. So the excess demand created a job. But wait! There’s more.
Now the pub owner had a problem, because Larry, Moe, and Curly were drinking beer in prodigious quantities at the pub from 5-8, and the beer glasses were backing up faster than ever. The pub owner needed a part time dishwasher, so he put up a ‘Help Wanted’ sign. And as insurance he went and talked to the village blacksmith about building some sort of contraption that could wash beer glasses, maybe powered by the village water wheel….
Increased productivity kills jobs. Increased demand creates jobs. The former without the latter leads to unemployed or underemployed woodchoppers and other citizens.
G’day all, and may God continue to bless America!