Unemployment is the condition of somebody who is capable of working, actively seeking work, but unable to find any work.
Unemployment in the free market
If a job-seeker cannot obtain the position he prefers, he must look for another kind of job. If he cannot find an employer ready to pay him as much as he would like to earn, he must abate his pretensions. If he refuses, he will not get any job. He remains unemployed.
What causes unemployment is the fact that 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.
People choose between employment and unemployment in the same way in which they proceed in all other actions and choices: by weighing the pros and cons. If they choose unemployment, this unemployment is a market phenomenon whose nature is not different from other market phenomena as they appear in a changing market economy. This is catallactic, or market-generated unemployment.
The various considerations which may induce a man to decide for unemployment can be classified in this way:
- The individual believes that he will find at a later date a remunerative job in his dwelling place and in an occupation which he likes better and for which he has been trained. He seeks to avoid the expenditure and other disadvantages involved in shifting from one occupation to another and from one geographical point to another. There may be special conditions increasing these costs. A worker who owns a home is more firmly linked with the place of his residence than people living in rented apartments. A married woman is less mobile than an unmarried girl. Then there are occupations which impair the worker's ability to resume his previous job at a later date. A watchmaker who works for some time as a lumberman may lose the dexterity required for his previous job. In all these cases the individual chooses temporary unemployment because he believes that this choice pays better in the long run.
- There are occupations the demand for which is subject to considerable seasonal variations. In some months of the year the demand is very intense, in other months it dwindles or disappears altogether. The structure of wage rates discounts these seasonal fluctuations. The branches of industry subject to them can compete on the labor market only if the wages they pay in the good season are high enough to indemnify the wage earners for the disadvantages resulting from the seasonal irregularity in demand. Then many of the workers, having saved a part of their ample earnings in the good season, remain unemployed in the bad season.
- The individual chooses temporary unemployment for considerations which in popular speech are called uneconomic or even irrational. He does not take jobs which are incompatible with his religious, moral, and political convictions. He shuns occupations the exercise of which would impair his social prestige. He lets himself be guided by traditional standards of what is proper for a gentleman and what is unworthy. He does not want to lose face or caste.
Unemployment in the unhampered market is always voluntary. In the eyes of the unemployed man, unemployment is the minor of two evils between which he has to choose. The structure of the market may sometimes cause wage rates to drop. But, on the unhampered market, there is always for each type of labor a rate at which all those eager to work can get a job. The final wage rate is that rate at which all job-seekers get jobs and all employers as many workers as they want to hire. Its height is determined by the marginal productivity of each type of work.
It is true that under the wages system the individual is not free to choose permanent unemployment. But no other imaginable social system could grant him a right to unlimited leisure. That man cannot avoid submitting to the disutility of labor is not an outgrowth of any social institution. It is an inescapable natural condition of human life and conduct.
Catallactic, or market-generated unemployment must not be confused with institutional unemployment. Institutional unemployment is not the outcome of the decisions of the individual job-seekers. It is the effect of interference with the market phenomena intent upon enforcing by coercion and compulsion wage rates higher than those the unhampered market would have determined. The treatment of institutional unemployment belongs to the analysis of the problems of interventionism.
What if people want to work, but can't get a job? In almost every case, government programs are the cause of joblessness:
- Minimum Wage. The minimum wage mandates that wages be set at a government-determined level. (See also below.)
- Comparable Worth. What if government gets the bright idea that nurses and truck drivers ought to be paid the same wage because their occupations are of "intrinsically" equal value? It orders that nurses' wages be raised to the same level, which creates unemployment for women.
- Working Conditions. Laws which force employers to provide certain types of working conditions also create unemployment. For example, migrant fruit and vegetables pickers must have hot and cold running water and modern toilets in the temporary cabins provided for them. This is economically equivalent to wage laws because, from the point of view of the employer, working conditions are almost indistinguishable from money wages. And if the government forces him to pay more, he will have to hire fewer people.
- Unions. When the government forces businesses to hire only union workers, it discriminates against non-union workers, causing them to be at a severe disadvantage or permanently unemployed. Unions exist primarily to keep out competition. They are a state-protected cartel like any other.
- Employment Protection. Employment protection laws, which mandate that no one can be fired without due process, are supposed to protect employees. However, if the government tells the employer that he must keep the employee no matter what, he will tend not to hire him in the first place. This law, which appears to help workers, instead keeps them from employment. And so do employment taxes and payroll taxes, which increase costs to businesses and discourage them from hiring more workers.
- Payroll Taxes. Payroll taxes like Social Security impose heavy monetary and administrative costs on businesses, drastically increasing the marginal cost of hiring new employees.
- Unemployment Insurance. Government unemployment insurance and welfare cause unemployment by subsidizing idleness. When a certain behavior is subsidized—in this case not working—we get more of it.
- Licensing. Regulations and licensing also cause unemployment. When the government passes a law saying certain jobs cannot be undertaken without a license, it erects a legal barrier to entry. Why should it be illegal for anyone to try their hand at haircutting? The market will supply all the information consumers need.
- Peddling. Laws against street peddlers prevent people from selling food and products to people who want them. In cities like New York and Washington, D.C., the most vociferous supporters of anti-peddling laws are established restaurants and department stores.
- Child Labor. There are many jobs that require little training—such as mowing lawns—which are perfect for young people who want to earn some money. In addition to the earnings, working also teaches young people what a job is, how to handle money, and how to save and maybe even invest. But in most places, the government discriminates against teenagers and prevents them from participating in the free enterprise system. Kids can't even have a street-corner lemonade stand.
- The Federal Reserve. By bringing about the business cycle, Federal Reserve money creation causes unemployment. Inflation not only raises prices, it also misallocates labor. During the boom phase of the trade cycle, businesses hire new workers, many of whom are pulled from other lines of work by the higher wages. The Fed subsidy to these capital industries lasts only until the bust. Workers are then laid off and displaced.
The effect of minimum wage
A minimum wage leads to a reduction in the demand for labor and an increase in the supply of labor in the relevant market — usually, the market for low-skill workers. It removes the ability of some workers to compete by accepting lower wages and shuts them out of the labor force. As a result, it reduces job opportunities for these workers.
But there are additional, hidden costs of these interventions, which are more difficult to detect but perhaps more insidious. For example, one effect of a minimum wage is to reduce the availability of on-the-job training, since more resources are required simply to hire and retain a workforce. And further interventions in the labor market (for example, safety regulations and payroll taxes) make it still more costly to employ labor. These burdens together reduce a firm's willingness to hire laborers and — in the long run — must reduce the number of opportunities for those laborers to acquire valuable job skills. Far from increasing opportunities for the working poor, a minimum wage actually restricts their mobility.
Firms faced with minimum wage laws often substitute skilled for unskilled labor. A report from the Show-Me Institute offers an illustrative example: Suppose that a job can be done by either three unskilled workers or two skilled workers. If the unskilled wage is $5 per hour and the skilled wage is $8 per hour, the firm will use unskilled labor and produce the output at a cost of $15. However, if we impose a minimum wage to $6 per hour, the firm will instead use two skilled workers and produce for $16 as opposed to the $18 cost of using unskilled workers. In the "official data" this shows up as a small job loss — in this case, only one job — but we see an increase in average wages to eight dollars per hour in spite of the fact that the least skilled workers are now unemployed.
There is also a hidden social cost in minimum wage policies. Debates over a minimum wage erode social fabric by placing workers and their employers in opposition to one another. While there have been many legitimate reasons for some tension to exist between firms and workers, minimum wage policies set them in unnecessary opposition to one another over employment contracts, which are by nature cooperative and mutually beneficial. Encouraging the view that employment is a raw deal has created needless acrimony. At the margin, this intimidates people and discourages some from becoming employers themselves.
The prohibition of certain kinds of labor contracts also discriminates against — paradoxically — the law-abiding. Just as legal prohibitions on the use and sale of drugs have lured the lawless into the drug trade, prohibitions on certain forms of labor ensure that only those lacking in scruples will be left on the demand side of the market for, say, child labor and the like.
If restrictions, regulations, and price floors create massive deadweight losses, they also create incentives for firms and individuals to evade those restrictions, regulations, and price floors. Those with a comparative advantage in evading (or violating) the law will be most successful; thus, labor market regulation gives implicit encouragement and support to the unscrupulous. Restriction and regulation reduces the relative price of dishonesty, which means we can expect greater levels of it in the marketplace.
- Encyclopædia Britannica. "Unemployment", Encyclopædia Britannica Online, referenced 2010-06-23.
- Ludwig von Mises. 4. Catallactic Unemployment, from the online version of Human Action, Chapter XXI. Referenced 2010-06-24.
- Walter Block. "How the Market Creates Jobs, and the Government Destroys them", The Free Market, May 1988, Volume VI, Number 5. Referenced 2010-06-24.
- Art Carden. "The Hidden Costs of a Minimum Wage", Mises Daily, July 2009, referenced 2010-06-24.
- Unemployment on Wikipedia
- Politics Causes Unemployment by Hans F. Sennholz, April 2005
- Should We Be Upbeat on Unemployment? by Doug French, May 2010
- The "Problem" of Unemployment by Murray N.Rothbard, from Man, Economy and State
- Austrian Business Cycle Theory or The Natural Unemployment Rate Hypothesis: The Role of Monetary Policy Revisited (pdf) by Steven T. Call, John P. Cochran, Fred R. Glahe
- Affording the Unemployed by Jonathan M. Finegold Catalan, August 2010