Bruce Yandle has a very interesting paper titled Jobs, Jobs, Jobs: Where Do Jobs Come From?. Here is a bit from the abstract:

Can political leaders create and build jobs . . . out of thin air? Sustainable jobs that will continue on their own once the government’s job-building efforts have ended? Is it direct hiring by government, such as funding construction projects that will lift the level of permanent employment? And if so, what is the opportunity cost, which is to say, where does the real purchasing power come from to fund the government jobs? Will other jobs be lost when taxpayers reduce their private spending to fund the public works? Or is it, as President Obama and Governor Fallin suggest, forming market friendly government policies that will inspire economic growth, bringing with it more jobs? And what about people who hire themselves? Start their own businesses? Are there enough of them to matter?

So where do jobs come from? Real jobs that can be sustained by normal economic activity? Is there a role for government in the process? How do government policies enhance or reduce the long-run pace of job creation?

This paper addresses these questions. The next section focuses on the where and how of job creation by exploring the decision making process made by employers engaged in adding workers to their payrolls. Incentives faced by employers and employees enter the process in important ways; these are discussed in the section. Attention is also devoted to the huge number of one-person firms in the America, those people who create their own jobs. In every case, large and small, in a free society, jobs are ultimately created by consumers and citizens who are willing to pay for goods and services that they value.

Section two concludes with a summary of policy actions governments can take to improve the job creation climate. Section three closely examines the dynamics of the U.S. labor market where the economy is described as a massive churn that produces goods, services, and along with this, jobs. As the churn turns, jobs are destroyed in some sectors and locations and expanded in others. The net result can be job growth. The section also discusses the rise of the knowledge economy and describes major forces that explain migration to jobs across America, which is another way of identifying where jobs come from. Finally, the paper’s last section offers final thoughts on the changing world of work.

Who creates jobs? Who is John Galt? Two questions. One answer.

And from the paper:

As a child, I did not understand that all public works jobs had to be paid for with tax money, eventually. This meant that job growth in the private sector that could have been is forfeited when job-creating public works are expanded.

My lack of understanding had to do with what is seen and not seen. I could see the Wilmington workers turning over bricks. I could not see the results of jobs that never emerged because of the tax increases that paid for the street work. The seen and unseen problem always plagues us when we think about actions that can be taken by government to improve welfare.

But we can be certain that jobs that provide real purchasing power, which is to say wages in dollars that are not depreciated by printing press money, are never created out of thin air.

I once had this exact conversation with my 92-year-old grandfather, who recalled fondly the public work projects during the new deal.

I began by asking what would you say if I told you that the New Deal prolonged, and not shortened the Depression. He was incredulous. I asked, who pays those construction workers? He answered, the government. I asked, where does the government get the money from? He paused, and simply said that the government has the money. I suggested that the government can only get money from taxes, or by printing the money. If they get it from taxes, they are taking it from people who had enough to pay taxes, and giving it to those who do not have jobs, such as the construction workers. Alternatively, they can print money, which leads to inflation, which raises the prices of goods (price controls notwithstanding), and prevents people from buying things.

He thought about this for a moment, and replied that I may be right about the economics, but I did not live through the Great Depression, and cannot understand how dire things were. He intimated that Roosevelt was very popular, and that at the time, people were so happy to have jobs. Frankly, he did not care where the jobs came from, and he was happy that the road to the mountains (perhaps more useful than digging a hole and filling it up again) was constructed. He just wanted to see people working. It was more important to do something, anything really, than just stand by. He wasn’t really worried about the long-term consequences of such policies.

This notion that the government can create “jobs” at no cost out of thin air is so pervasive in popular accounts, yet so wrong. Yandle’s work here is quite important.

So what are the thee ways (two desirable, one undesirable) government can create jobs?

Governments can create jobs in at least three ways.

First, they can build obsolete factories that employ lots of workers, as was done in Bangladesh. Those jobs are not sustainable in open competition.

Then, governments can use tax money or deficits to put more people on government payrolls. Doing so may yield more jobs on balance if the government produces real benefits that taxpayers value. Those jobs may be sustainable in the sense that taxpayers agree to continue to transfer money from their own accounts to the government to pay for them. If the deficits get out of hand, taxpayers will be less willing to do so. Governments can also employ people to perform marginal tasks that are not valued by taxpayers. Workers can be hired to turn over paving bricks. When taxes to fund public works projects are paid, creating those marginal jobs can destroy more employment than is added.1 Again, it is the problem of the seen and unseen.

Finally, governments can take actions that improve the economic climate for private sector firms so that more people will seek work and firms will hire more workers. These policies include:

• Reducing taxes that individuals and employers pay when filling a job.
• Eliminating obsolete state licensing requirements. Reducing mandated costs associated with employment
• Eliminating burdensome regulations that affect the use of labor.
• Reducing capital gains taxes so that firms will accelerate the use of the latest technology, which will increase labor productivity.
• Allowing exceptions to government stipulated pay rates so that employers and employees can contract on the basis of a voluntary meeting of the minds.
• Maintaining the competitiveness of the economy by avoiding the formation of monopolies and encouraging expansion of international trade.