Job creation numbers are deceptive

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MUNCIE, Ind. — Business news is filled with new job creation numbers. Every new business with more than a few employees will get coverage in local papers, and larger firms will make statewide news. Typically, reporters will write about the industry growth patterns, why the firm says it chose its new location and often a quote from a local elected leader or economic development official. If it is a really big announcement or an unusual industry, the thoughts of an economist might even make the news.

Michael Hicks

Michael Hicks

These are important and popular news stories. It is natural that we would want to hear about the businesses coming to our state. Some of it is just passing interest; for others these new firms might represent new customers, competitors or potential members of a trade association or Chamber of Commerce.

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Some new firms will have worked with economic development officials. So, a local economic developer or the state’s Indiana Economic Development Corporation might be involved with the new relocation. Sometimes these organizations provide technical services, like finding the right regulatory agencies or helping with a new site. Other times they help usher through state and local tax incentives.

At the end of the year, each of these economic development groups will add up all the companies they’ve worked with, count the jobs these firms say they are creating and tally up the investments in businesses and property these firms have made. They’ll write annual reports of these data and post them on their websites.

Political leaders from governor to town council will use these job numbers to claim success at job creation. All of this presets the question: What do these job creation numbers tell us? The short answer is mostly not a dared thing. A few examples make that clear.

In the last full year for which we have data, 2021, the IEDC claimed a record 31,710 jobs created in the state. That represents a great deal of work from a small number of employees, who deal with more than one new business every day throughout the year. It was also their record year to date, but there’s a catch.

That number represents only about 1.3 percent of the jobs created in Indiana in 2021. As it turns out, the US Department of Labor and the Census do a good job counting job flows. In each year examined, the number of new workers in each quarter alone runs around 600,000 jobs. At the same time, the state lost about 575,000 jobs per quarter.

So, in 2022, the state actually had 101,299 new jobs created. That isn’t the number from IEDC, it is the difference between the jobs created and the jobs destroyed that year. Of course, a good share of those jobs lost were from turnover. Some industries turn over one-third of their workers per quarter.

If we eliminate all the individual turnover, and focus only on business expansions and contractions, along with openings and closings, we get somewhere between 500,000 and 600,000 new jobs created each year. In a good year, we have more jobs created than destroyed. In a bad year, we have more jobs destroyed than created. But, in a great year, state and local economic developers will actually work with 4 percent or 5 percent of all the new jobs created in the state.

One way to dispel any notion about the usefulness of these data is to compare two recent years. Year 2021 was the best year for job creation in Indiana since we’ve been keeping records, with over 100,000 jobs created. That year, IEDC reported that they assisted employers who promised 31,710 of those jobs. In contrast, 2020 was the worst job creation year in Indiana history. We lost more than 130,000 jobs that year, yet the IEDC claimed 31,300 new jobs created that year.

So, the difference in the number of jobs claimed by IEDC in the best year and worst year on file was 410 jobs, or 0.16 percent of the actual difference in job creation between those two years. The one certain lesson for this is that the job creation numbers reported by IEDC tell us absolutely nothing about the state’s economy.

In fact, the job creation numbers from economic development groups are worse than no information at all. One could’ve learned more about the difference in economic conditions between 2020 and 2021 from a random hermit or second grader than you could derive from the economic development data.

One way to think about this is that the Indiana economy is a huge bathtub, with thousands of spigots and thousands of drains. The job creation data from economic developers is simply one of the spigots spilling jobs into the state. The real measure of the growth of the economy is if the water level in the bathtub is rising or falling.

To be clear, the misunderstanding about these numbers is not the fault of the IEDC. They are ruthlessly honest about these numbers, which are promised jobs at some future date. Their annual reports are very clear about what these data are and are not. Moreover, in recent years, they have begun to focus on reporting investment dollars rather than job creation. This has its own limitations, but is at least different than counting promised jobs.

The problem with these data is not that they are nuanced or that they require a deeper understanding of the data. That is true with all data. We would be better off if reporting about end of year job creation numbers included more insight and explanation, but local media are increasingly scarce. Moreover, readers seem more interested in sensational stories, not workmanlike efforts to explain complex ideas.

As a consequence of little scrutiny, elected leaders use these numbers to explain economic conditions. Whether it is a ‘state of the city’ or a ‘state of the state’ address, these job creation numbers are rolled out by elected leaders of both parties. Perhaps this is an intent to deceive voters. It is surely misleading. A more likely explanation is that they and their staffs don’t understand the data either.

Still, I don’t hold political leaders responsible for this misuse of data. Sure, better, more transparent leadership would help keep this problem in check. In writing this column, I reread many of Governor Daniels’ speeches and found no examples of him using these data. I suspect he did at some point, but it was fruitless to criticize an elected official telling voters what they wanted to hear.

The conclusion here is that the real problem is not IEDC or elected officials. The problem is us, the voters. We seem to have lost the power of simple discernment on matters relating to the economy. We hear elected officials spouting meaningless data about the economy, and we ask no questions. So, no matter how good or bad the economy is, there’s no pressure to alter state or local policies. If we are going to have real change, we are going to have to be better citizens.

Michael J. Hicks, PhD, is the director of the Center for Business and Economic Research and the George and Frances Ball distinguished professor of economics in the Miller College of Business at Ball State University.

This article originally appeared on Muncie Star Press: Hicks: Job creation numbers are deceptive

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