Job Creation in the Recession: The Basics

7.2 Million jobs have been lost since the start of the recession in December of 2007.

Last year, as the slide was accelerating, the American Recovery and Reinvestment Act was a big step toward curbing the downward momentum. But few analysts knew that the recession was as bad as it was. The recovery act was called in to douse a six-alarm fire, but what it ran into was a 10-alarm blaze.

Congress is going to need to offer more help to get jobs growing and make sure we keep seeing improvements in the economy.

There are three main ways that we can create jobs:

1. Increase demand in the economy
2. Directly create government or government contract jobs
3. Encourage private sector jobs by offering incentives

Method 1: Increasing demand in the economy

In a recession, businesses lack customers and are forced to lay off workers to reduce costs. This leads to fewer customers because the unemployed cut down on their spending.

And, so a downward cycle feeds on itself and continues to spin...

This is where the government steps in with direct spending to offset the drop in private consumption and help customers and businesses ramp up their spending. When demand for goods and services begins to grow, businesses hire employees and become more confident in investing. The downward cycle from before is reversed.

This works in practice. The stimulus bill increased government spending on roads and bridges, energy efficiency, and health technology. Much of this direct spending--such as road repair and the purchase of cars through the cash-for-clunkers program--would have happened anyway. But it gave the economy a jolt by making consumption happen now.

It forms a new cycle by boosting demand to spur economic growth, which reverses the downward path of the economy, and creates jobs as a by product.

Method 2: Create government jobs

Simply put, if the government hires people, more jobs are created.

But there are advantages beyond that obvious point. Putting people to work in the government helps the entire country. Cleaning up parks, hiring new teachers, or providing home health care to the elderly are all useful and productive services. And these jobs can be done all over the country--the “industry” of government work isn't limited to a particular area and can be targeted to places that are hit the hardest and need jobs the most.

The effect is threefold: Less people are out of work, workers have money in their pocket and become customers for businesses, and public services are improved.

Method 3: Private-sector job creation

There is no doubt that private sector hiring is what will bring back the labor market. The government can spur growth in this market by offering incentives--such as subsidies--to the private employer for employing people.

This may directly create jobs, but it's certainly not an exact science. It's hard during a recession to convince employers that they should hire new workers. Subsidies would have to be quite large to make the offer appealing.

Subsidies may have their place, but spurring demand also gets business's to hire by bringing them customers and direct government job creation is more reliable.

Conclusion

Digging out from under the weight of the recession will not be easy and we're not going to be out of the jobs hole for a number of years. But public job creation is a reliable way to save and create jobs. And there are ways to climb up the slippery slope by supporting a variety of policies, including spending money to spur demand and create private jobs.

And, those are the basics.