What creates jobs?

There were a few recent financial crises. The subprime mortgage. Bailouts of large companies by (American) government. The sovereign debt in Europe.

I thought we were past the worst of things. The economy seems to be recovering, if not already recovering (I’m not an economist). Then I saw this wonderful ad.

Ideal job ad

Jobs are in short supply globally. I just thought Singapore would have weathered this gracefully. But then that advertisement came up recently, so perhaps Singapore had a delayed reaction.

Governments don’t create jobs

I respect every civil servant out there. You should also be aware that their salary comes from taxes. Where else would the government get their money from? (There are probably foreign investments and donations and whatnot, but I presume the majority would be from taxes).

By that logic, hiring more government staff generally means higher or more taxes. If I’m wrong, please leave a comment.

For the purposes of discussion, I would include military forces as part of the government. The military is what businesses call a “cost centre”, meaning it doesn’t bring in revenue directly but costs something to maintain. Well, ok, the military can sell weapons and security technology. But mainly, the military just eats up money.

I am probably offending politicians and military officers left and right here… Go read something else then.

IT departments are usually considered cost centres (well, they were in my previous company). Unless your company is a software company, then your software department making your software products becomes your main cash generating department.

Big companies don’t create jobs

The recent waves of financial downturns, together with globalisation, have kept big companies on their toes. Cost cutting can only go so far.

The reason big companies are big is not because they hire a lot of people (that might have been true in the past), but because they can scale up quickly. They have the infrastructure and people in place. However, that scaling ability comes at a cost. Maintaining the status quo requires money too.

To remain competitive in these current times, there have been mergers and acquisitions. If your company buys up an IT company, your company no longer really needs an internal IT department. Staff from the original internal IT department and the recently bought IT company will be combined, and as expected, people will be let go due to job/task redundancy.

So big companies are not going to be creating many jobs because they’re busy trying to get their costs and profit margins in order in this increasingly chaotic (relatively speaking) economic environment.

Small companies don’t create jobs

Small companies have their own problems too. I will include startups in this. The main problem, in direct contrast to big companies, is scale. Although that can be overcome with some creativity and especially with the Internet.

There was once I applied for a job at a small startup here in Singapore. I asked a friend who was already working there. I was willing to be an unpaid intern. I didn’t get a reply. Either my “friend” didn’t put it up to the founder for consideration, or my “friend” was afraid I’d steal jobs. In this case, small companies are small because they have a small number of staff.

So while existing small companies might not create enough jobs to make a difference, new small companies will still create jobs. Which brings us to the next point…

Entrepreneurs (might) not create jobs

Well, entrepreneurs create companies, right? They usually start small, so they create jobs. Right?

I guess.

My definition of “entrepreneur” comes from the dictionary, which is “one who takes on risks of a business or enterprise”. Based on that, I consider myself an entrepreneur. I run a business selling software that I wrote. I assume the risks of a business. By definition, I’m an entrepreneur.

But I don’t hire anybody. I outsource some of my tasks (usually design work), but the only job I’ve created is custom made for me. And I’m filling it right now.

And typically, for those pursuing “lifestyle businesses”, they don’t hire a lot of people too. They usually outsource, and even if they do hire staff, it’s probably 2 to 5 people.

Not quite the 50 to 500 staff for small companies, huh?

So, what does create jobs?

Customers create jobs

I can’t remember who said this. Basically, a job exists when someone is willing to pay for something, and then pays it. When you have customers, you create jobs.

A customer wants a latte. Someone has to grow, harvest, transport, and grind the coffee beans. Someone has to milk a cow. Someone has to brew that coffee. Someone has to take the money from the customer.

Your customer wants a monthly report on how much money he’s making. He doesn’t want to learn how to write SQL statements to grab information from his database. That’s what you’re for.

On the most basic level, it’s about cash flow. A job exists to facilitate the transfer of money from the customer to you. If you’re an employee, then the money goes to your company, who then pays you.

So if you want to find a job, find out how to create customers for the company you’re interested in.

Optimising only for profit is a lousy strategy

I felt sorry for the woman when I heard she was going to be let go by the company. I felt even more sorry when I heard that she would be replaced by 3 graduates in China. Seriously, graduates were that cheap in China?

This reminds me of a Chinese phrase. “In the past, having a degree was a big deal. Now, the whole street’s filled with graduates.” Not all degrees are created equal.

Let’s start off with a few baseline understandings…

Infinity and beyond

John Cook said this about infinity,

Problems are often formulated in terms of infinity to make things easier and to solve realistic problems. Infinity is usually a simplification. Think of infinity as “so big I don’t have to worry about how big it is.”

(Emphasis mine)

Companies like infinity. Particularly when it comes to describing (theoretical) growths and market share. This is false. More on this later.

Basic economics

We will assume this simple generalised equation for the purpose of this article:

Profit (or earnings) = Revenue – Cost

You can think of revenue as the price of an item. Cost covers everything from the cost of manufacturing an item to storing the item, to paying employees, to paying rent (for use of space), to paying utilities.

Just keep in mind that profit is calculated from 2 components.

The gold standard and Bretton Woods

Back in the old days (way way back), the value of money was static. If you held on to a dollar, 10 years later, that dollar was still worth a dollar. That’s because the value of money was tied to gold.

Historically, a bank was legally responsible to give anyone gold in exchange for the money bill given. That means if you handed the bank 100 dollars, the bank had to give you 100 dollars worth of gold. This meant that banks had to keep large reserves of gold, just in case.

The invention of the money bill dollar note thingy just made it easier so you don’t have to carry around nuggets of gold. Gold’s heavy.

In July 1944, the Bretton Woods Agreement was signed. Basically, many countries agreed to tie their currency to the US dollar. The US dollar was tied to the gold standard, so this wasn’t a problem. (This was part of the reason why US rose to be a dominant force in the world in the early days, because practically everyone was using the US dollar as a reserve currency)

In August 1971, the United States stopped the convertibility of the US dollar to gold. It might have something to do with funding the battles of the Vietnam War. The US ran out of funds. To continue funding, the US needed to print money out of thin air. And you couldn’t do that if your currency was pegged to gold. (Note: I’m not bashing on Americans. I read this in an economics book. No I can’t remember which book… you should know me by now…).

This also “freed” the other countries from tying their currencies to the US dollar. Which (probably) gave rise to the idea of foreign currency exchange rates.

The dissolution of the Bretton Woods Agreement also meant the creation of fiat money. Meaning that dollar you have there is worth what the government say it’s worth. Printing money out of thin air also gave rise to the concept of inflation. Meaning that dollar you have there is probably worth less than a dollar a year ago.

Saturation limits

31 October 2011 was designated as the day when the world population became 7 billion. It’s a big number, but it’s not infinity.

Which is where the companies made their mistake.

In the post-World-War-2 era, everyone wanted a better life. We’ve sacrificed enough. We’ve suffered enough. We want a better life! (baby boomers, hello!)

Babies were made. Population grew. Household appliances made their ways into homes. Henry Ford created the automobile. Product categories multiplied. Industries boomed.

Revenue was up. Sales quintupled. Profits were up.

Just when local markets seemed exhausted, globalisation came and opened up the world. International trade continued the seemingly upward trend.

People started expecting growth as a natural consequence. Companies started paying more attention to Wall Street and upholding shareholder value.

“We just need to capture 1 more percent of market share!”

That started to get harder. The customers who wanted to buy your product had already bought your product.

I read that in America, there were more licensed vehicles than licensed drivers. Meaning there were more vehicles than people who could drive them. I understand there’s a surplus of 31 million of such vehicles. Supposedly, every man, woman and child in Canada could have a vehicle from this surplus.

There are probably more cell phones than cell phone users. There’s more food produced than needed to feed every person in the world (yet there are millions starving).

What happens if Microsoft succeeds in placing a computer (with Windows, naturally) on every desktop and in every home? What happens if Apple succeeds in placing an iPhone/iPad in everyone’s hands? What if everyone has already bought Angry Birds on their iPhone/iPad? What happens if McDonald’s succeeds in getting everyone to eat at their restaurants? What if everyone used an Oral B toothbrush? What if everyone used Body Shop products? What if every male used Old Spice?

What if every business person is already flying with your airline? What if every Harry Potter fan already has all 7 books? (that’s probably a rhetorical question…) What if every C# programmer already owns a copy of your C# programming book? What if every tea lover in your area is already frequenting your tea house?

What if every possible customer already has your product? What if every possible customer already maxed out his/her rate of consumption of your product?

The natural limit is population. The next limit is rate of consumption. Every company hits these 2 limits. The limits just weren’t as prominent a couple of decades ago.

Revenue started stalling

When you hit those natural limits, the company growth stalls. To give the illusion of growth, we go back to that equation again.

Profit = Revenue – Cost

The outside world (mainly Wall Street and the stock market) views growth in relation to profit. The assumption is that if a company is making a profit, it’s still healthy. As in it’s still bringing in revenue.

But if you’re not bringing in revenue, it means you’re not making any more sales. Maybe it’s because your customers switched brands. Maybe your customers switched to a cheaper version of your product (which cannibalises on your own sales, but hey at least you didn’t lose that customer).

But in today’s hyperconnected world, the reason is probably that your customer “market share” is already saturated. You might think 7 billion people is still a lot of people, but a large part of those people are in poverty. They simply cannot buy your product. Or those who can buy your product, don’t want your product.

Some new startup shows up and gets millions of users within a month. It continues at a steady pace and then… stops. The natural equilibrium is reached.

The company CEO has to do something to show that the company is still growing (because the people watching Dow Jones is breathing down her neck). So if revenue doesn’t increase as much, what can you do to increase profits? Reduce costs.

Cost reduction policies

I’d say as a broad generalisation, there’s only so much you can do to reduce costs. Rent space? Consolidate people and equipment in fewer locations. Equipment maintenance costs? Have less equipment, or more efficient equipment, or just get rid of the whole thing.

But one of the most costly line items (if not the most costly) is hiring people. (Be honest. Tell me when I said “cost reduction” you didn’t think of “layoffs”)

Let’s see. The world population is growing (albeit more slowly now). Generally speaking, more people are working (I know the current economy sucks with few jobs being created. Stay with me). Less people are dying. More people are having longer lives. Less opportunities to move up the corporate ladder (because the high level managers are still there).

Yet people still expect pay raises every year. I’m not pro-Malthusianism, but the supply of money is kinda limited… Wait, good thing the Bretton Woods Agreement was dissolved.

Since people have feelings (and machines and raw materials don’t), companies hesitate to fire people (in case of major backlashes). So something has to give.

Outsourcing (the bad kind). Mergers and acquisitions (probably where the term “wholly owned subsidiary” came from). Subtle changes in accounting books (which is illegal, don’t do it).

Anything to create the illusion of growth and profits. (And with the fiat currency system, money itself is kind of an illusion. But that’s another topic…)

It’s made people commit suicide to make an iPhone. It’s made people to over-consume (creating obesity as a problem and the dieting industry to exist). It’s made people buy houses they couldn’t really afford. It’s made people to allow those people who couldn’t afford houses to buy houses.

It’s made people look for shallower qualities in marriage partners (diamonds, big car, big house, big breasts [I hesitated on including this one], big paycheck), which caused increasing divorce rates, which increased the number of divorce lawyers needed, which increased the number of real estate agents needed (to split the property).

It’s caused the dot com bust. It’s caused tech startups to look for the fastest exit strategy, because the venture capitalists backing the startup forced the founders to do so (so the VCs could get their return on investment).

Optimising only for profit is a lousy strategy.

American hare, Asian tortoise

I’ve been meaning to get a drink from the cafe within the library for a while. It’s exam period, and all the seats were taken. But I finally got a chance to sit. I got myself a “Peach Dream”, a smoothie with peach flavour I think.

I quickly sat down at one of the tables that a lady graciously shared with me. Her friend soon returned with their drinks. I was just happily sipping my smoothie, watching a man on his laptop, one girl slumped on the table with her books, and listening to a mother reading a book to her daughter.

The two ladies at my table began talking.

“Did you know her son got 58 out of 60?”
“Really?”
“Her son is already so clever. But he’s still getting tuition.”
“But he’s so clever! He might get 50 even without tuition.”
“We don’t know if it’s because he has tuition, that’s why he got 58.”

That was a primary school science test. Hey I’m not eavesdropping. I just happen to overhear their overshared conversation.

Believing you can improve by putting in effort

There’s this study conducted dividing people on their perception on learning and intelligence. One group believed that intelligence is fixed, therefore if they don’t know something, they’re doomed to never learn how to do it properly. The other group believed that intelligence is malleable. If they put effort into learning, eventually they’ll get the hang of it.

The first group didn’t care what the answer was, only whether they’re correct or not. They didn’t care to learn how the answer came about. The second group cared more about why an answer was so.

When the 2 groups were tested again, the researchers found that the second group improved significantly. The first group didn’t do any better or worse.

I’m going to generalise here. Asians typically believe that if you put effort into something, you can improve. Be it maths, science, English, Chinese, whatever. That’s why here in Singapore, parents hire tuition teachers for their children, even if their children have phenomenal grades in school. (Also see PISA).

I didn’t have any tuition teachers after primary four (age 10). Not because I’m smart, but because my dad couldn’t afford it. Good thing I turned out alright…

Another general trait of Asians is that we save. Money that is. We’re brought up with the concept of saving money for a rainy day.

The hare and the tortoise

I read this book by former British Prime Minister Gordon Brown called Beyond the Crash. He brought up some concepts I’ve learnt about the global economy and politics.

America and Europe lead the world in terms of consumption. It’s worked so far because they also produced as much (as in exports). Their production brought in enough money for them to consume. They’ve raced ahead and amassed much wealth.

Like the hare, they’ve grown comfortable and stopped (more or less).

Globalisation allowed the other countries to come to the fore. The BRIC (Brazil, Russia, India, China), Indonesia, Philippines.

American (and European?) jobs flowed to other countries. First the Baby Boomer generation is slowly retiring, leaving a mass number of jobs for the smaller group of Generation X-ers who cannot fill them. Then globalisation killed those jobs, and the current Generation X-ers and Y-ers can’t find jobs.

The subprime housing situation created more turmoil. The recent bank crisis instilled fear and distrust. University tuition fees go up as people sought to get a Master’s degree in the tight job market. (Just for info, I’ve read there’s an “education bubble” going on).

America just averted a $14 trillion debt ceiling problem. Greece has a financial problem. Europe faces a sovereign debt problem. Their aging population doesn’t have enough people to take care of them, financially speaking (where do you think taxes go to?).

And the tortoises started to catch up.

Education

I’ve read an economist praising the education system of Singapore. I must admit, I was surprised. Then he (can’t remember whom or what book I was reading. Sorry…) pointed out that in America, teachers with average graduating scores are dumped to “second-rate” schools without training. In Singapore, the Ministry of Education chooses the best teachers, and provide them with training. I think it was 2 out of 10 applicants who get in. The Singapore government takes education very seriously.

Barack Obama has stated he’s taking America’s education seriously. As far as the future is concerned, I believe maths and science to be crucial. We’re going to need engineers, mathematicians, doctors, physicists, chemists, biologists and more to tackle the health care of our aging population, creating a sustainable Earth, and understand and make use of any future technologies.

Global commerce

Here’s something you should know. To get money, you have to sell something in exchange. I don’t care if it’s an apple, an iPad, television shows, movies, your body, real estate, knowledge (information). Even if it’s just a 250 by 250 pixel ad on your web page. You have to sell something.

America and Europe produced enough for domestic and international consumption. As a result, they grew. Then globalisation came. Their production dropped (because that production went to other countries as jobs). You produce less, but your consumption rate remain. You should see the problem, right? Then their domestic consumption even increased (think rampant credit card use).

Here’s the catch. China (seems to be the biggest blamee, though there are others) is exporting more stuff, and America (and Europe?) is buying. China buys up raw materials from other countries, manufactures products, and sells them.

What you should realise is that China has a small domestic consumption (remember Asians extol saving as a virtue, so we buy and consume less). Contrast that with China’s growing export business, you should see how China is growing in strength. But this depends on other countries buying their stuff *cough America cough*. China’s growth comes mainly from exports and China’s biggest worry is that people stop buying their exports.

The rebalancing

There was a time when the outsourcing/offshoring thing was a craze. Do you know how supply and demand works? As jobs went to India, China and Philippines because it’s cheaper, those jobs started becoming more expensive as the workers wanted better pay. It might still be cheaper to outsource/offshore, but it doesn’t always make a big financial impact to the bottom line.

You know this oil thing we need? It’s getting more expensive as it becomes scarcer. We need to find alternative energy solutions soon. See education above. Where are the people we need to solve this problem? (They aren’t motivated enough to learn, and they’re watching cat videos on YouTube).

You know what more expensive energy means? Transportation is going to get costlier. Getting a product to be manufactured in China, then assembled in Mexico, then shipped to America is going to be financially inadvisable.

You know what that means? Jobs are going to start flowing back (to wherever they came from).

You know what? There are millions of jobless young people who are willing to do those jobs.

But you need to be willing to train them. Specialisation cannot be your focus. Remember, these people just graduated from school. You won’t find a person who fits the job of a managerial post with an emphasis on information technology.

Get that graduate (who has a bundle of joyful energy) with the MBA. Train him/her on your business with information technology.

Get that programmer who did a bunch of software projects. Teach him/her about your special accounting software business.

Export more bits than atoms

I read that a Singapore minister (can’t remember who. You should know by now I have a terrible memory for these things…) who said that Singapore’s economic concern should still be to focus on manufacturing. I believe he’s referring to material goods.

I’m going to ask you a question. With the climate concern now, and that our landfills are starting to fill with our waste at a rate that’s slightly alarming, and that raw materials are getting costlier to shovel around, should you still export physical goods?

That’s still going to be a viable business. I mean, I still see people queuing up to buy the latest iPhone 4S, and texting on their perfectly working iPhone 4 (I still use an iPhone 3G, which Apple doesn’t even support anymore).

Remember the outsourcing/offshoring thing? There were 2 kinds of jobs: the physical creation of a product, and the intangible stuff. China does manufacturing. India does call centres.

As people become more aware of what they buy and consume, I see people having less material goods. The modern cell phone allows you to play games, organise your calendar, keep todo lists, take photos, capture videos, record audios, browse the Internet and make phone calls.

Even if that’s not the case, there’s a physical limit to how much you can export (and thus sell and thus make money). So sell your skills and knowledge. Teach people stuff. Offer something that’s not so easily replaceable by another person in another country.

Africa poised as untapped and trapped consumer base

Africa is like the poster child for a country in poverty. She has a large population but most of her people are struggling with where the next meal is coming from.

As China and India got more of their people out of poverty (due to globalisation in part), their people started buying stuff.

India is an interesting case. As her economy improved, so did her domestic consumption. In a sense, India is more “stable” than China in terms of growth.

The point is that Africa has a large population who most probably cannot and will not buy your products and services. They’re too busy dealing with AIDS, malaria and hunger. Not only that, it represents a huge number of people who cannot contribute to the world.

A human mind is a terrible thing to waste.

Finishing line

That was a lot to write.

So in case you skipped the whole shebang above, here’s the moral: Consume less (with more intelligence), raise education, and help other people.

The Dragon Bubble

I’ve been, uh, flipping through some books lately. As far as I understand it, they were written by economists, financial analysts and political journalists. And there was this general idea of the seemingly unstoppable growth of China crashing down.

Look, I’m just a mathematician and programmer. I don’t know much about statistics, or demographic studies, or sociology, or economics, or global financial analysis. I just pick up a book that looks interesting and start reading, ok?

UPDATE: Here are some of the books I, uh, flipped:

Here’s the gist of what I understood:

  • China’s massive growth hinges a lot on manufacturing and building real estate (commercial buildings, factories).
  • Manufacturing and building new buildings need lots of raw materials.
  • Countries providing steel, copper and other raw materials are riding on China’s growth.
  • China’s manufacturing and building works on the assumption that the infrastructure is needed for future expansion.
  • China doesn’t have a big enough domestic consumption for that infrastructure.
  • The recent global financial crisis has stunted, if not removed, other countries’ enthusiasm for overseas investment (say in China).
  • China is set to become the world’s largest manufacturer of things.
  • A monopoly of China being the largest manufacturer may not be in the interests of everyone. I’ve read of toxic plastic toys, deadly baby milk formula powders, and suicidal iPhone factory workers.
  • We may be following “Be liberal in our input, but be stringent in our output”, but China’s not. See China’s Internet censorship laws.
  • China is set to consume lots of energy, as her people get lifted from poverty. The “getting out of poverty” thing is good. It’s just that the world isn’t ready with more energy. It sounds unfair, as there are arguments that 1st World countries (in particular, America) enjoyed unbridled (and rampant) use of energy (coal, oil), yet other countries can’t (when it’s their “turn”). We need those alternative and affordable sources of energy, like yesterday.
  • China has bought (as well as other countries) lots of America’s debt, mainly in the form of Treasury bonds.

Please note that this isn’t a China bashing. And note that those authors are American (I think). They weren’t “attacking” China, so much as pointing out probable situations.

So as far as I understand it, China’s growth is fueled primarily by outside investors. It’s domestic consumption is marginal. Jobs are outsourced to China because it’s cheaper there. Manufacturing is done in China because it’s cheaper there, what with the infrastructure the Chinese government had encouraged into place, and the influx of raw materials due to other favourable conditions (such as being cheaper there. Have I mentioned that?).

Here’s a possible situation. America is arrested by her (unimaginably high and increasing) debt crisis, and curbs her consumerist behaviour with less imports (not just from China). Europe has her own debt crisis to deal with. Globally, everyone is affected, because (that I’ve read) 25% of the global economy is due to the exchange of US dollar. China starts to see less investments in manufacturing and building. Australia doesn’t have a strong demand from China for copper, and starts looking somewhere else to invest in. Whatever it is, China’s growth slows and eventually bursts.

Thus the Dragon Bubble.

So who rises? Apparently India and Russia. India, because her measures to lift her people out of poverty are somewhat more stable. People get educated, and get jobs (Is your call centre based in India? Is your development work augmented by, if not outsourced entirely to, Indian developers?). But India still has her old caste system firmly in place, and it will take some time for the growth to spread. But India also has a population just as large as China. And she speaks English.

And learn Mandarin (or Chinese)!. Just in case the Dragon manages to burst through its bubble and has claws in every country in the world. If you can’t speak the tongue of the Dragon, you can’t understand and talk with the Dragon. I’m fine, since I’m bilingual in English and Chinese (as well as C# and VB.NET *smile*).

What about Russia? It turns out that the reason is due to Russia’s possession of oil (lands). Western Siberia, I believe. Hey, I just flip through interesting-looking books.

A couple of definitions to continue with a more light-hearted story. Offshoring is when your company has an office in another country, and your company tasks that office with work. That office is still under your company, perhaps as a wholly owned subsidiary. Outsourcing is when your company tasks an outside company with work. The outside company is involved with your company only so far as being paid is concerned.

Let me tell you a short story. In a previous employment, I had to work with an offshore office in China. That offshore office belonged to a wholly owned subsidiary of my employer, and the subsidiary specialised in IT work. The point was that it’s cheaper for the Chinese there to do certain work than hiring, say, me to do it.

In hindsight, my previous employer entered the offshore/outsource game late. The balance sheet looked great in the short term, but as time went by, and difficulties in coordinating development work increased, the cost savings started to be less prominent.

Hey I understand what you may be going through, or seeing around you. Jobs flying out of your country to “cheaper” countries such as China, India and Philippines. So to make the process easier for you, understand this: If a task can be systematised such that anyone can do it, that task will be systematised so that anyone can do it. If your job consists of checklists doable by paying someone else cheaper, you don’t have that job anymore. Worse, if a task can be automated by computer software, consider it gone.

The offshore team assigned to my team was great. The programmers there did well, once you explained the business requirements and the programming requirements enough to them. But I felt my colleagues here (in Singapore) can explain things too far. One of them went so far as to write the actual SQL statement for use in the code. I felt that was unduly unnecessary.

The more interesting part of the story happened to a colleague’s team. There was a Chinese candidate slated for work in a week’s time. The candidate was a fresh graduate and was hired and assigned to my colleague’s team. The offshore office even sent the candidate’s resume to us. We spent about half an hour marvelling and commenting at the resume written in Chinese, because we’ve never seen one not in English.

One day before the candidate was to report for work, my colleague received notice from the offshore office that the candidate had quit. What? The candidate quit before even starting work? Apparently, a particular university had accepted the candidate, and the candidate decided to pursue a Master’s degree. I don’t know whether to laugh or be outraged.

I intended to write this as a pithy Seth Godin-like post, but apparently I failed. Utterly. I decided not to redact what I’ve written.