Economic development incentive policies have often centered on job retention and creation. Historically, this was in line with productivity (you need people to do the jobs to be productive) and politics (people vote, so if you protect or create jobs, then they will vote for you). Today, things are not as aligned.

With the growth of automation, the 1099 workforce (contractors, self-employees, outsourcers, etc.) and increased global competition, policymakers have to deal with a tricky question: Should the intent of economic development policy be to incentivize productivity or job creation? Besides, what does job creation look like these days anyway?

To answer the first question, policy makers, in particular, should take an approach to economic incentives that recognize the impact of productivity and competitiveness.

So what about automation?

It is important to understand the impact that automation has on the economy. Automation in its purest form is nothing new. We have the word “sabotage” from the French workers who threw their sabots into the machines that were taking their jobs. However, we still have tons of fashion designers and apparel manufacturers working in the shoe industry. There are other examples of automation disrupting job markets but not destroying them, think about the auto industry circa 1980s.

What’s important is the long-term effect on productivity. Society is always better off with a higher producing, automated workforce. The employees who have worked in those automated industries have not disappeared. They have elevated their level of input. For example, when software reduced the number of accountants companies needed to make calculations, accountants did not disappear. They went from building and calculating spreadsheets to analyzing them. In other words, their level of productivity elevated. This, in turn, took the automating technology (in this case spreadsheet software) and turned it into a tool whose mastery was necessary for success in the profession. As a result, general productivity in the profession and the companies increased.

Source: http://www.journalofaccountancy.com/news/2013/jun/20138181.html 

 

What about 1099ers? 

The 1099ers, also known as contractors, freelancers, temps or other individual contributors (IC) are a large and growing part of today’s economy. If you are not convinced of that, I can explain it further over an Uber ride. They add value to companies and the economy through the temporary nature of their productivity. Since the individual contributors are not employees of the companies, they add to productivity without adding to legacy costs. Thus, old ways of thinking of incentive policies will not work for them. Their temporary work and targeted value depend on continual patronage by companies and consumers who need their goods and services on a repeating basis. The value that they added to society is through the unique and highly specialized nature of their contribution to the economy. They are a part of the economy when they are producing value. When they are not productive, they automatically disconnect. Also, because it is impossible for ICs to benefit as free riders, their input into the economy more accurately mirrors the overall value of the goods and services that they provide. These individual contributors are the embodiment of Adam Smith’s invisible hand.

However, their value to the economy is often overlooked in favor of the traditional models of employment. From a policy perspective, there is a dangerous scenario where low paying, low skilled FTE jobs are valued higher by policy makers than high skilled, higher paying non-FTE positions. In this scenario, productivity is sacrificed for jobs that are less stable, less productive and easily transferrable. Incentivizing this scenario degrades the economy.

So, this brings me to the second question, what does job creation look like. For policy purposes, economic development incentives should take into consideration the following factors at a minimum: wage rate, level of skill needed (low skilled, semi-professional, professional), total number of jobs created, industry of the jobs created and permanency of the position.

From a policy perspective, all jobs should not be viewed the same. Some industries are highly temporary in nature – construction for example. However, the industry itself survives on doing project after project. If they complete a project on time, on budget and at a high quality, they can land another project. What they don’t do, is finish a project and keep constructing the same project. Construction workers are temps, for all intent and purposes. However, the construction industry is a stable industry. That work and those jobs should count for something.

Policies that only look at permanent job creation are out of touch with today’s economy. Policymakers should view jobs by the value that they add. Incentive policies should not weigh low wage retail jobs higher than they weigh high-value engineering service consultants simply because the retail jobs are “permanent”.

Permanent jobs are important but in today’s economy, it is not the only source of productivity for companies. If a company is not productive then it is not competitive, and it will not stay in existence for very long. Smart policy makers should take this into consideration when designing incentives to strengthen and grow their economies.

For more about incentive policies or to learn about Ady Advantage and the services we offer, visit our website at www.adyadvantage.com or give us a call at 608.663.9218. I or a member of my team would be happy to speak with you.

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