In a tweet on November 1st President Trump hailed the projection-beating creation of jobs in the United States’ economy during recent months. Americans have good reason to celebrate; the economy added 128,000 jobs during October, well more than the 75,000 that economists projected.
Job creation is an oft-cited performance metric for government administrations. Just how much responsibility individual politicians can truly claim for a healthy economy can be debated, but the metric at least aligns incentives of officials with the wellbeing of those they serve. Jobs are among the most important indicators of true prosperity. Their effects stretch beyond simply enabling people to earn money; as people become self-reliant and provide for themselves and their families, they gain dignity and greater feelings of self-worth. People with good jobs are also less likely to feel desperate to make ends meet, which in turn makes them less likely to engage in crime.
Even so, not all jobs are created equal. Some provide higher wages than others, and, significantly, some have a stronger tendency to disappear or move to another region in response to macroeconomic forces.
One of the regions where this phenomenon has most clearly demonstrated its effects is in the United States’ Rust Belt. A former manufacturing powerhouse, the Rust Belt was once home to nearly half of all American jobs. After a period of strong growth in the middle of the 20th century, however, the region began a steady economic decline as advances in robotics and global supply chain led many companies to automate jobs or outsource them to cheaper labor markets overseas. The Rust Belt’s golden age sputtered to a halt.
To understand what happened in the Rust Belt and other places like it, it’s helpful to break down jobs into two categories: local jobs and global jobs.
Local jobs are ones that must be created in order to serve a local market, such as those in design, advertising, management, marketing, sales, and after-sale services. By their nature, they are not easily transferable or outsourced to other countries, since these types of jobs require a deep understanding of local contexts and circumstances. In contrast, global jobs, such as the millions of manufacturing jobs that served as the engine for the Rust Belt’s economic boom, are more easily outsourced to other regions to take advantage of lower wages. It’s important to note that global jobs play an important role in any economy. But while they may provide a short-term boost in economic growth, unless those jobs are accompanied by the creation of local jobs, that growth will eventually reverse when opportunities to cut costs by using cheaper labor elsewhere emerge in the future. In contrast, local jobs are the force that ensures sustained prosperity over time.
So how can governments and other policymakers help ensure robust, long-term growth driven by the creation of local jobs?
In our research, we’ve found that one of the best things governments can do is incentivize market-creating innovations. These innovations transform previously complicated, expensive products into ones that are simple, affordable, and accessible to an entirely new segment of the population. Since they create a new market of people who previously have not had access to these products, they necessitate the hiring of many new people to get products into the hands of consumers, including marketers, salespeople, distributors, managers, and more, creating many local jobs. What’s more, these new markets tend to initiate virtuous cycles, strengthening institutions and creating profits that fuel more innovation and local-job creation in the communities and regions where they exist.
To envision what this looks like, consider the example of the Chinese home appliance giant Galanz. In the early 1990s, the average microwave in China sold for around $500, well above what the typical Chinese family could afford. Given the circumstances, some entrepreneurs might have overlooked Chinese customers, and instead built a business that took advantage of China’s low wages to build microwaves there and sell them to wealthier customers abroad. However, Liang Zhaoxian, Galanz’ founder, recognized that if he could make and sell an affordable microwave, he could create an enormous new market for them at home in China.
Finding a way to build cheaper microwaves was an important part of the equation for Zhaoxian, but to successfully build a new market, he needed to do much more. Galanz pursued an aggressive advertising and education campaign in Chinese newspapers to educate potential first-time microwave users about how to use its products. Unlike manufacturing companies focused on existing customers, Galanz developed new distribution channels to serve the new market it had created, hiring marketers and salespeople and building offices, showrooms, and a network of almost five thousand stores. And whereas other manufacturers might create mostly global jobs that would later move to cheaper labor markets, Galanz’ investment in its new market required creating many, many local jobs that are more likely to remain.
Politicians are correct to identify job creation as being among the most important factors in building prosperity, but not every new job produces the same effect on an economy. Local jobs are much more likely to stay put when economic winds begin to blow, making them the true engine of long-term economic growth. The specific process for creating these types of jobs will differ from place to place, but the fundamental strategy is the same. Market-creating innovations that transform previously expensive and complicated products into affordable and accessible ones—like Galanz’ microwave—have a unique ability to create new markets that necessitate the creation of many local jobs. When that happens, prosperity tends to stick around.