ABOUT FRANCE'S RESPONSIBILITY PACT

President François Hollande, seeking to reduce France’s punishingly high unemployment rate, has called for a “responsibility pact” with businesses that would reward companies that hire more people with lower taxes and greater flexibility.

BUT for a job to be created, there has to be a demand for a good or a service. When business people see the demand for their products increasing, they hire more workers to produce and sell the products. They will hire workers as long as the cost of hiring the additional worker is less than the net revenue cost of the worker.  So, to increase employment, you’ve got to increase economic growth and/or reduce the cost of hiring workers.

Businesses do not create jobs. A job is created when demand for goods or services is greater than the existing ability to provide them. When there is a demand, people will see the need and fill it. Either someone will start filling the demand alone, or form a new business to fill it or an existing provider of the good or service will add employees as needed. So it is demand that creates a job.

Many people wrongly think that businesses create jobs. They see that a job is usually at a business, so they think that therefore the business “created” the job. This thinking leads to wrongheaded ideas that reducing the social contributions to businesses (as planned in France) will create jobs, because the businesses will have more money. But an efficiently-run business will already have the right number of employees. When a business sees that more people are coming in the door (demand) than there are employees to serve them, they hire people to serve the customers.

When a business sees that not enough people are coming in the door and employees are sitting around reading the newspaper, they lay people off. Businesses want customers. Hand a businessperson a check and that businessperson will smile and say, “Thank you!” But the businessperson will not hire a single person more than is needed to meet demand. That check is going in the bank. If it is a tax cut, it is going in the bank. If it is a direct payment it is going in the bank.

But a businessperson with customers coming through the door will do whatever it takes to make sure there are enough employees to serve those customers. Businesspeople understand opportunity and they will hire employees to meet demand because customers are coming in the door.

Businesses in the economy exist to create profits, not jobs. This means the incentive is for a business to create as few jobs as possible at the lowest possible cost. They also constantly strive to reduce the number of people they employ by bringing in machines, outsourcing or finding other ways to reduce the payroll. This is called “cutting costs” which leads to higher profits. The same incentive also pushes the business to pay as little as possible when they do hire. .

This obviously works against the interests of the larger society, which wants lots of good jobs with good pay. And businesses, while working to cut jobs and pay less, need other businesses to hire lots of people and pay well, because that is what creates the demand that makes all the businesses work.

When neither jobs nor demand is happening the government needs to step in and create jobs to get things moving, as well as just to keep people employed so they can get by.  What is needed  is  a fiscal stimulus which is government directly stimulating demand, which is what makes businesses hire. The idea behind fiscal stimulus is a rather simple one : The  government takes the place of the private sector by increasing spending, thus putting idle resources back to work. With their newly found income workers are able to spend again, increase consumer demand. As well, workers who already have jobs will have increased confidence in the state of the economy and will increase their spending as well. But for a fiscal stimulus to be permissible there must be what economists call “fiscal space” for it. In other words, the public debt accrued through stimulus spending must be sustainable. The trouble is that France has NO fiscal space.