June 16, 2020
Activities: Employment
Geography:
Demographics:
Annual ROI: 0.0%
Image source: World Bank
Unemployment has hovered around historically low values in the United States, at least up until the pandemic struck. But as jobless claims rise and more people move to the sidelines of the labor market, we need to re-imagine ways to open the economy back up, create jobs, and utilize all this excess capacity not being used now.
So what does that cost? Many government, nonprofit and for-profit firms firms work in job-training, search assistance, and other activities designed to create jobs. Things like subsidies and government contracts also help. And we know that getting someone back into the workforce generally moves them from a net tax-consumer to net tax-producer (but using less safety net programs and instead paying into the tax system).
As a policymaker or public servant trying to create the most bang for the limited buck, the major question (after how much it costs) is how can I most efficiently create the most number of jobs? After all, all jobs aren’t created equal. An article by the World Bank looks at these issues and points out interesting statistics that could help decide the best course of action to creating sustainable jobs.
Creating more and better jobs is central to our work at the World Bank and a shared goal for virtually all countries —developed and developing alike. But oftentimes the policy debate turns to the cost and effectiveness of programs and projects in creating jobs.
As an example, I recently found myself in the middle of a discussion regarding a development project aimed at creating employment: one of the reviewers objected given that the cost per job created was too high. “More than $20,000 per job,” he said, comparing it to much lower numbers (between $500 and $3,000 per job) usually associated with active labor market programs such as training, job search assistance, wage subsidies, or public works.
But what is the rationale behind these numbers?
Contrary to an active labor market program (ALMP), which connects workers to existing jobs, or to public works that create low productivity jobs with earnings below the minimum wage, the project in question was promoting private investments to create new jobs in the formal sector.
Creating new jobs is not cheap
People tend to associate the cost of a job with the salaries and benefits paid to a worker. But for that worker to be able to do something useful, he needs to have the equipment and presumably a place where to operate. The business hiring the worker most likely will have to buy insurance and pay for different types of permits, plus basic services such as water and electricity. At the margin, adding a new job costs probably “only” the salary, a desk, and a computer. But for that job to be created, a new enterprise had to be established in the first place, with associated capital and operational expenditures.
Take the case of a coffee-shop in the United States. According to Crimson Cup Coffee, setting up a coffee shop with seating can cost between $80,000 and $250,000. Costs include rent, reserves for salaries and benefits, fees for architects and lawyers, equipment, raw materials, income taxes, and others. A coffee shop usually employs between three and seven people, meaning each job would cost between $25,000 and $35,000.
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