In discussions about the Fed actions, it occurred to me that many of the explanations that link the Fed’s moves to stronger job growth leave out a number of steps in the middle. It’s of course not the case that the Fed buys MBS or announces they’ll keep rates low and jobs that weren’t there before suddenly appear. There’s a chain of events that needs to occur and there’s plenty of slip twixt the cup and the lip.
So let’s talk about the process of job creation, both in normal times and in times like these.
Demand for labor is so-called “derived demand,” derived from the demand for goods and services that firms sell to consumers and investors. That can be anything from a Snickers bar (consumer good) to a steel bar (intermediate good) to barroom (investment good). As I explained in greater detail here, in normal times, job creation is a function of a virtuous cycle where growth generates income which drives consumption, signaling investors to new opportunities, generating more growth, etc.
But, of course, stuff happens and the cycle breaks down. There are big market failures, like the Great Recession. There are high levels of inequality that divert growth from reaching enough consumers to generate robust demand throughout the economy. There are inflationary supply shocks (e.g., an oil disruption) that sharply reduce real incomes…
Daddy, Where Do Jobs Come From?