Unemployment

In discussions of the minimum wage, the question always arises: does it lead to unemployment as measured by the data? What follows is a blizzard of studies, some showing that unemployment goes up after the laws are passed, some seeming to show no change, and even some seeming to show that unemployment goes down. What all these amount to is [a] fallacious leap ... to show that because one event followed another, the latter event must have necessarily been caused by the former. Human engagement in a market setting is actually too complicated to be captured by such statistical manipulations.

What causes unemployment is the fact that--contrary to the above-mentioned doctrine of the worker's inability to wait--those eager to earn wages can and do wait. A job-seeker who does not want to wait will always get a job in the unhampered market economy in which there is always unused capacity of natural resources and very often also unused capacity of produced factors of production. It is only necessary for him either to reduce the amount of pay he is asking for or to alter his occupation or his place of work.

... what is the 'appropriate relationship' between wage-rates and prices? ... Allow every person looking for work to accept a job at the highest wage he can get. Let him bid freely. ... The cure for unemployment is free competition for jobs. Only a free market can arrive at 'the appropriate relationship' ...

When we speak of unemployment, we cannot be talking about a shortage of jobs to be done. There is always work to do at some price ... [T]here can be no such thing as involuntary unemployment in a free market. Everyone who wants to work is working and everyone who does not ... is in that position by choice ... There are only two reasons for unemployment: legal restrictions that forbid contracts from forming ... and price restrictions that prevent the market for labor from clearing ... [I]nvoluntary unemployment is always and everywhere brought about by ... government restriction of the market.

Government and big business had learned a lesson. An uncontrolled labor movement was politically and economically dangerous. The situation worsened with the Great Depression in which unemployment rose as high as 25 percent. Hundreds of thousands of people roamed America, looking for work. A massive and migrating army of the unemployed is a formula for political revolt. Thus, Roosevelt offered a New Deal in order to create stability. Big business embraced the deal because it also created predictability. Ambitious labor leaders saw the power being proffered their way; they became big labor.

In a recently televised discussion ..., the children and grandchildren of the welfare state met to discuss unemployment ... The demand of the 'grandchildren' was literally that the 'old people' (born in the late 1940s, 1950s and 1960s) should step aside (i.e., stop working) because their working 'steals' jobs from the young!

Chile has eliminated the payroll tax, which, by making it more expensive for employers to create jobs, put a damper on employment. Chilean unemployment is around 5 percent—and without the disguised unemployment of government make-work jobs. By contrast, in the Western European welfare states, unemployment is generally between 10 percent and 25 percent.

Krugman went on,

Instead, Keynes saw it as his job to explain why the economy sometimes operates far below full employment ... Rather than getting bogged down in ... the business cycle ... Keynes focused on a question that could be answered. And ... the question that most needed an answer: given that overall demand is depressed—never mind why—how can we create more employment?

Indeed, if you're trying to end mass unemployment, why would you want to get bogged down trying to understand what actually caused [it]? It's not as though the cause could be expected to shed light on the remedy.

Most studies of minimum wage laws in countries around the world show that fewer people are employed at artificially higher wage rates. Moreover, unemployment falls disproportionately on lower skilled workers, younger and inexperienced workers, and workers from minority groups. The new Cato Institute study cites data showing job losses in places where living wage laws have been imposed. ... As imposed wage rates rise, so do job qualifications, so that less skilled or less experienced workers become 'unemployable.' Think about it. Every one of us would be 'unemployable' if our pay rates were raised high enough.

[Friedman] said that the amount of unemployment at any time was determined by changing supply-and-demand conditions in the market and people's expectations about the future rate of inflation, which influenced their resource-price and wage demands. The monetary authority could fool people by increasing the inflation rate above people's expectations ... But over time, as people discovered the truth about the rate of inflation, they would demand higher wages and resource prices to compensate ... That would reduce profit margins and return unemployment to its "natural" level.

Bureau of Labor Statistics unemployment data confirms the economic prediction about minimum-wage effects. Currently, the teen unemployment rate is 16% for whites and 32% for blacks. In 1948, the unemployment rate for black teens (16-17) was lower (9.4%) than white teens (10.2%). ... while there was a minimum wage of 40 cents an hour prior to 1948, it had been essentially repealed by the post-World War II inflation; however, with successive increases in the minimum wage, black teen unemployment rose relative to white teens to where it has become permanently double that of white teens.

Assistance granted to the unemployed does not dispose of unemployment. It makes it easier for the unemployed to remain idle. The nearer the allowance comes to the height at which the unhampered market would have fixed the wage rate, the less incentive it offers to the beneficiary to look for a new job. It is a means of making unemployment last rather than of making it disappear.

Free-market economists ... never denied that the market economy could face a situation in which mass unemployment exists and a sizable portion of ... productive capacity is left idle. But if such a situation were to arise, they argued that its cause was to be found in a failure of suppliers to price their goods and ... services to reflect what consumers considered them to be worth, given the demand for various other things, including money. Correct prices always ensure full employment; [they] always ensure that supplies create a demand for them; [they] always ensure the harmony of the market.

In a 1951 essay, "The Effects of a Full-Employment Policy on Economic Stability," Friedman showed that ... Keynesian policies were likely to generate more ... instability ... The Keynesian presumption had been that any observed deviations in macroeconomic employment and output from a targeted level of full employment should immediately bring a response through increases or decreases in taxes and government spending to move the economy back to its appropriate full-employment level ... Friedman pointed out that three time lags were likely to prevent the smooth success of such Keynesian policies.

Friedman argued, monetary policy could not permanently push unemployment below a market-determined "natural rate." Over any period of time, there is always a certain amount of unemployment owing to several factors. For example, normal changes in supply and demand throughout an economy are always resulting in a certain amount of shifting of the labor force among various sectors of the economy ... Also, there are various institutional rigidities that result in a certain amount of unemployment: minimum-wage laws, trade-union restrictions ..., regulatory controls ..., and welfare programs ...

Unfortunately Timberlake's strained and narrow emphasis on Fed deflationism as the cause of all the woes of the 1930s causes him to ignore a plausible "Austrian" explanation of the relapse of 1937. As a result of a spurt of union activity due to the Supreme Court's upholding of the National Labor Relations Act of 1935, money wages jumped 13.7 percent in the first three quarters of 1937. This sudden jump in the price of labor far outstripped the rise in output prices and, with labor productivity substantially unchanged, brought about a sharp decline in employment beginning in late 1937.

Higgs analyzes the various ways in which the economy supposedly improved. In terms of the unemployment rate's plummeting, "... In 1940, before the mobilization [for war], the unemployment rate ... was 9.5 percent. During the war, the government pulled the equivalent of 22 percent of the prewar labor force into the armed forces. Voilà—the unemployment rate dropped to a very low level." And Higgs reminds the reader that "... Of the 16 million persons who served ... 10 million were conscripted ..." For all these people, being employed did not exactly mean an improvement in their standard of living.

In 1932, the English economist Edwin Cannan ... explained that people were wrong when they said that millions were unemployed because there was not enough demand for the services those unemployed could potentially render. ... The view that unemployment is caused by wage demands too high in relation to the wages employers are willing and able to pay has been out of favor for more than fifty years. ... Richard K. Vedder and Lowell E. Gallaway ... defend the pre-Keynesian view of the cause of unemployment and explain government's role in making unemployment a significant problem in modern America.

Unemployment undoubtedly is a great social evil that concerns us all. It is an economic phenomenon of loss and waste that harms not only the jobless but also their fellow workers who are forced to support them. In time it tends to turn into a political issue that breeds confrontation and conflict. To alleviate the evils of unemployment becomes an important political task. But it also raises the basic question of the suitability of the policies that are to create employment ... [C]an tariff barriers and other trade restrictions raise the demand for labor and alleviate the evils of unemployment?

... Keynes said that the classical economists had believed that "supply creates its own demand," and that therefore unemployment was impossible ... Since periods of depression and widespread unemployment had happened ... and one was being experienced ..., clearly the classical economists had been wrong ... Government spending needed to fill the gap left by private-sector demand to ensure full employment for all. Kates refutes Keynes's caricature of the classical economists. He clearly explains what they really understood as "the law of markets," why extensive unemployment sometimes occurred, and what they saw as the solution ...

... the International Ladies Garment Workers Union ... had organized one group of the island's garment workers, the brassiere makers. Their pay then averaged about 80¢ an hour. Mr. Dubinsky feared that the $1.00 minimum wage, if it were enforced, would mean unemployment for many of the members of his union in Puerto Rico. According to newspaper reports ... he charged that Puerto Rican legislators were trying to 'play a trick on us by giving us for political reasons a high minimum in brassieres and later blaming it on Dubinsky and the ILGWU that the workers are starving and have no work.'

The most politically powerful argument against admitting immigrants has been that they take jobs held by natives and thereby increase native unemployment. The logic is simple: If the number of jobs is fixed, and immigrants occupy some jobs, then there are fewer jobs available for natives. Theory says that there must be some short-run unemployment in some sectors as a result of immigration. But theory does not say whether the effect will be huge or trivial. And no empirical study has found such unemployment in noticeable amounts. Even in the few sectors where immigrants concentrate ...

... it is a fallacy of the Keynesian legacy that government can reduce unemployment by priming the pump with spending programs. Government needs to reduce spending and taxes in order to leave income in the hands of individuals who earned it and who can spend it much more efficiently than the government can.

ROCKWELL: ... [T]his illustrates the basic fallacy at the heart of the welfare state ... [I]t subsidizes what it seeks to prevent, or pretends to cure. So, it subsidizes unemployment. I remember when Mr. Bush, Sr. ... was running for re-election, and there was concern about the unemployment rate, and so he passed a vast expansion of unemployment benefits, and gee ... the unemployment rate went way up when people could get more money for a longer period of time staying unemployed. So, if the government is subsidizing unemployment, ... I think it's very socially destructive.