Understanding unemployment: in a free market, unemployment is an unnatural phenomenon. That this condition continues to afflict millions is a consequence of harmful legislation and regulation.
To be unemployed in this world of scarcity is unnatural and senseless. Yet millions of workers in the industrial countries are unemployed. Some seven to eight million Americans always are unemployed, many more during periods of stagnation and decline. Some walk the city streets in despair and anger.
If unemployment is unnatural and senseless, it must be an affliction that is institutional--that is, something instituted by law and regulation. It must be a consequence of the machinations of legislators and regulators who shape, guide and direct working conditions and labor markets. It must be the outcome of policies that render certain labor prohibitively expensive for useful employment. In a free economy, a job comes into existence whenever an individual offers a service that is worth at least as much as it costs. A job is lost whenever the costs exceed the value of an individual's productive contribution--that is, he or she is found to inflict losses on the employer. This rudimentary principle of employment applies to unskilled labor as well as to triple-Ph.D.s and corporate managers. Any individual who expects to be subsidized by other workers or business owners is bound to be disappointed.
In 2001, even before the terrorist attack on September 11, unemployment was rising as economic activity was slowing down. From being the dynamo of the world economy, the American generator suddenly lost some power. The information and communication industry which led the "new economy" began to contract, leading to an 80 percent fall in high-tech company share prices. The boom of the 1990s, which led to many ill-advised business ventures, was drawing to a close. The Federal Reserve System, however, sought to stem the readjustment with ever larger doses of its credits and lower interest rates. These efforts led to feverish real estate investment and refinancing of housing as mortgage rates declined, but manufacturing activity continued to contract, leading to shorter working time and rising unemployment. The longest boom in American history drew to an end as a dreaded recession came into view.
Fed monetary policy not only precipitated the cycle and its inevitable aftereffects, but also caused a monstrous international maladjustment that is inflicting much pain on American industry. The dollar's position as the world's primary reserve currency allows the Fed to engage in currency expansion to a greater degree than any other central bank. Some of the money it creates may be spent abroad and become a reserve in the possession of foreign financial institutions. If the U.S. dollar were just like other currencies, rapid credit expansion would cause it to fall in foreign exchange markets. But its stellar position allows the Fed to inflate without suffering immediately the dire consequences of inflation. Moreover, several foreign central banks, especially the Bank of Japan and the Bank of China, deliberately support the U.S. dollar, selling their own currencies and buying dollars, in order to sustain the dollar's purchasing power and facilitate continuous American purchases of Japanese and Chinese goods. In short, Fed credit expansion in conjunction with foreign central-bank support of the dollar allows the American people to import more goods and services than they export. But this obvious benefit to consumers becomes a competitive disadvantage to many American manufacturers who, unable to compete with importers, must curtail production and release labor.
The Cost of Labor
In a free and sound labor market unemployed workers could soon find work at market rates. As mentioned above, there always is a job for an individual who offers services that are worth their costs. In fact, if the services portend to be profitable to employers, many are likely to bid for them. A few mathematical economists even developed a simple formula of labor cost and labor demand according to which the demand for labor varies inversely to its cost at a two-to-one ratio. A one-percent reduction in cost is likely to increase the demand for labor by two percent; a five percent cost reduction may boost the demand by 10 percent, etc. We may argue about the usefulness of such mathematical ratios since human action and reaction are never automatic and robot-like. Moreover, the relative importance of labor differs from industry to industry, affecting the ratio. Still, mathematical economists do confirm the basic principle that the cost of labor and the productivity of labor are the determining factors in its employment.
This basic principle points to myriad factors that act upon the productivity and cost of labor. But the most important by far are government, which legislates and regulates nearly all aspects of employment, and labor unions, whose very raison d'etre is to boost the costs of their members.
Minimum wage legislation is supposed to benefit all workers with minimum usefulness and productivity. Unfortunately, it condemns millions to chronic unemployment because it raises their employment costs above the levels of their productivity. At the present, the federal minimum stands at $5.15 an hour to which all mandated fringe costs must be added, raising the total minimum to some $8 to $9 an hour. There is workman's compensation, which "alone may amount to $2 to $3 an hour. There are two unemployment compensation levies--one federal, one state--and there is the employer Social Security contribution.
The evil consequences of minimum wage legislation are felt throughout American society. More than one-half of our minority youths are condemned to chronic unemployment, which leaves them frustrated, bitter and angry. Worse yet, political demagogues manage to turn their anger from legislators who are causing their plight to businessmen who are barred from employing them economically. Politicians manage to turn their wrath from government to business, reducing their productivity even further.
Minimum wage legislation and other types of legislative and regulatory intervention deprive labor markets of their ability to adjust promptly and smoothly. There is legislation and regulation pertaining to nearly all conditions of employment, to wage and hours provisions, unemployment compensation, old-age and retirement benefits, medical care, and other comforts. They obviously increase the cost of labor and thus reduce the demand for labor. Such regulation may amount to relatively little in the case of high-income earners, such as corporate executives and professionals, but may be significant for unskilled and semi-skilled labor, raising labor costs by one-half or more. This explains why the rate of unemployment of such labor, despite its multifarious usefulness, always is significantly greater than that of highly productive individuals.
Similarly, the strongholds of labor unions are centers of unemployment. During President Roosevelt's New Deal of the 1930s, industrial labor was unionized and made to operate under a system of collective bargaining. The necessary result of collective bargaining is conflict about the size of the "economic package" which typically consists of wage increases, expensive benefits and eased work rules--all of which boost labor costs. It covers compensation for time worked and not worked, including vacations, holidays, sick leave and other paid leave, and it may stipulate employer contributions to public and private unemployment compensations, pensions, healthcare and employee welfare funds.
Collective bargaining arrangements cover roughly three-fourths of employees engaged in transportation and more than one-half of those in mining, construction, manufacturing, communication, and electric and gas utilities. This readily explains why these industries always are the centers of unemployment in boom times as well as in recessions. When economic activity declines or merely stagnates these industries tend to suffer grievous losses, which makes them rush to government pleading for favors. In the halls of Congress the voices of management and labor usually sound alike.
A free and unhampered labor market knows no mass unemployment. It offers a job to every person seeking one and allocates the full, undiminished fruits of his or her labor to everyone. Surely, a free economy undergoes many changes and adjustments which force businessmen as well as workers to readjust. It may compel them to learn and seek, but it does not deny them the opportunity to be useful and productive.
Hans F. Sennholz was professor of economics and chair of the department at Grove City College from 1956 to 1992. He is the author of numerous books and articles on economics and politics.
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|Author:||Sennholz, Hans F.|
|Publication:||The New American|
|Date:||Nov 17, 2003|
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