Plain Truth About Unemployment
Judd W. Patton
The pilot announced to his passengers, “I have some good news and I
have some bad news. First, the good news: With no headwind we're making
exceptionally good time. Now the bad news: We're lost!”
Similarly, there is good news and bad news on the unemployment front
today. The good news is that the government is pursuing a full-employment
policy. Indeed, it has been doing so for nearly sixty years. The bad news is that it isn't working, the recent prosperity
notwithstanding. The early 1980s saw the highest unemployment rates since
the Great Depression. Without an understanding of the economic principles of
employment, it is rather easy for policy makers to “be lost” and thus
pursue self-defeating policies, regardless of noble motives and intentions.
The good news, though, is that the knowledge of the true causes for the
current unemployment dilemma is known.
The causes for all economic woes are rooted in a violation of
inexorable moral and economic laws. Unemployment will be overcome only as
individuals learn, accept, and apply the laws of economic science and the
moral principles in their daily lives. It is the express purpose of this
chapter to make plain the numerous economic root causes and types of
unemployment. Only then will the proper solutions and the policies become
No arguments, however brilliant or sophisticated, can alter the
inexorable principle that employment in a market economy is always a matter
of a proper relationship between an individual’s wage (including all
fringe benefits) and the value of the service he or she renders. That is, employment
is always a price-cost phenomenon. It is not a matter of total spending
in the economy, as is widely taught. The employer cannot pay more to the
laborer than the equivalent value that his or her work adds to the
merchandise, according to the judgment of the buying public.
The second principle of employment is that the
number of jobs is unlimited. A job is merely an attempt to satisfy some
previously unsatisfied human want. But humankind always has unsatisfied and
insatiable wants. It follows, therefore, that there is always work to be
done. There must be more jobs than people to fill them. However, in conjunction with the first principle, jobs exist
for all but only at a specific wage rate, the free market wage rate.
Individuals must accept the market wage.
The third employment principle is that a
free labor market (where the laws of supply and demand are unhampered by
governmental restrictions) is the only
institution that can establish continuous harmony between wages and
individual productivity. Indeed, there are no other means to create full
employment than to permit the free market to determine the height of prices,
wages, and the relationships between them. The notion that prices or wage
rates can be fixed by government decree without dire consequences must be
understood for the fallacy that it is.
Unemployment, then, can never flourish in a free economy with
flexible wages and prices that permit wages to conform to a worker’s
contribution to output. However, if wage rates are held above the rates that
the free, unhampered market would establish, whether through labor
attitudes, business practices, or government policies, then unemployment must
With these principles in mind, it seems clear that there are only two
basic economic categories of unemployment: (1) Market-generated and (2)
Government-generated. Let’s consider each of these in turn.
economy is always in a state of ceaseless change and flux. Consumer
preferences, entrepreneurial foresight and error, technological innovation
and numerous other changes necessitate continuous entrepreneurial revisions,
and therefore continual expansions, contractions and changes in production
activities. Thus, there will always exist some “normal” or adjustment
unemployment in a dynamic market economy. It takes time for market
participants to discover changing market demands, develop or acquire the new
skills needed, and match their skills with the new job opportunities.
A second type of market-generated unemployment is preferred unemployment. Such idleness is just that, a preference for
non- work or leisure. However, as will become evident, adjustment and
preferred unemployment account for only a portion of those currently
Government-generated unemployment refers to idleness caused by
interference with the free-market pricing process. Specifically, any
government directive or policy that raises the cost of labor above its
market value, lowers labor productivity, distorts production structure
relationships or consumes private capital, causes unemployment. There are
six types within this category.
Price Control Unemployment
The most obvious type of government-generated unemployment is a
directive that directly controls prices and wages. An excellent example is
minimum wage legislation. By raising the cost of labor above its market
worth, many people, notably the young, poor and unskilled, are legally
priced out of a job. A person who produces $5.00/hour of value for his
employer will soon be disemployed when the law mandates he be paid $5.15/
hour. Such an employee becomes a liability to his employer. His job is
destroyed. Indeed, if it were possible to arbitrarily raise wages by
government decree, why stop at $5.15/ hour?
The most ominous type of price
control unemployment is general wage and price controls across the
economy, such as was experienced under President Nixon in the early 1970s.
Once prices and wages are legally frozen, supply and demand will not be in
balance in either product or labor markets. Shortages and surpluses of goods
and labor are inevitable when the price system is shackled.
It is important to understand that market production is a series of
interconnected, interrelated decisions coordinated by the continuous
movement of flexible prices, costs and wages. Frozen market signals must
necessarily lead to the disintegration of the division of labor, shortages,
surpluses, and therefore unemployment. If rigidly administered, wage and
price controls are the surest, most effective means to create massive
unemployment and bring the economy to its knees.
Another type of unemployment prevalent in 20th and 21st
Century society is due to government welfare, entitlement, and transfer
payment programs. Such welfare or entitlements make it easier for
individuals to remain idle. The nearer the payment comes to the income that
a person could have earned in the market, the less incentive it offers the:
beneficiary to look for a job. Unemployment is stimulated as welfare
measures make it possible to put off looking for a job immediately, or by
making non-work so attractive that individuals spurn work for leisure and
Monopoly Privilege Unemployment
Modern day governments frequently protect producers from potential
competitors by special privilege legislation. These legal monopolies -
through tariffs, quotas, occupational licenses, exclusive government
franchises, regulatory commissions, patents, etc. - can then restrict
production and realize a higher-than-market price, a monopoly price. Such
pricing severely limits job opportunities and employment in these favored
A significant special privilege today is so called “pro labor”
legislation. Such legislation, as sole bargaining agent status, along with
court decisions that have permitted union intimidation, threats, violence
and strikes, has provided unions with the ability to fix wage rates above
what the unhampered market would have set. Other job seekers (so-called
scabs) are kept out. The cruel consequence is that jobs and potential new
jobs are destroyed due to higher labor costs. It
is not an observational accident that the centers of unemployment are
often within unionized industries.
Inflation, which is an increase in the quantity of money issued by
the Federal Reserve and fractional reserve banking, causes the ups and downs
in business activity known as the business cycle. Truly inflation can kindle
a boom period, but the inevitable end result is a readjustment recession,
the consequence of falsifying market interest rates. The recession is
characterized by business losses, bankruptcies, liquidation of
malinvestments, and high unemployment. Any short-run benefit from inflation
is more than wiped out by the malinvestment of resources and unemployment in
the long run. It seems likely that the first decade of the 21st
century may experience considerable cyclical
Mandated Benefits Unemployment
The purpose of government-mandated benefits is generally to benefit
employees. The result, however,
is contrary to purpose. Such mandates as employer and employee Social Security
contributions, unemployment and workmen’s compensation taxes and
disability benefits raise the cost of labor by law.
Some individuals will thereby be priced out of a job, unless they are
willing to take a cut in their nominal salary.
Any government program that seeks to arbitrarily raise the benefits
for labor will necessarily lower the demand for labor and thereby increase
unemployment. There are simply no gratuities in production.
All labor income (costs to the employer) must be earned by labor
Government Spending Unemployment
One other economic principle must be grasped to understand employment
and job creation. The demand for labor arises primarily from business and
individual saving and investment, and only to a very limited extent from
consumer spending. As firms save their sales receipts, profits, or borrow
other savings, and invest them as a part of productive expenditure (the
purpose of which is to earn income), demand for labor is created. The more
saving and investment in the economy, the more demand for labor and new jobs
there will be.
Government spending, for the most
part, is consumptive. It uses up income; bureaucrats have no purpose
to earn income. But all consumptive spending, whether private or
governmental, depends on some income-producing source. Consumption requires
previous production. Therefore, government spending, most notably through
budget deficits, must crowd out or absorb private savings, and consequently
destroy productive jobs, upon which government programs depend. The larger
the deficits the more saving is channeled into consumption. This means less
demand for labor, fewer jobs and more unemployment.
The unemployment problem in the U.S. today can be overcome by
enacting the following policies: (1) Repeal Federal and State minimum wage
laws; (2) Eliminate governmental relief and transfer payment programs; (3)
Repeal all monopoly privileges afforded to business and organizations (this
includes de-regulating many industries and repealing certain “pro-labor”
legislation); (4) Order the Federal Reserve to cease all increases in the
quantity of money, that is, stop inflating the quantity of money; (5) Repeal
government mandated labor benefits; and (6) Eliminate government deficits by
reducing government spending, the more the better.
actions are taken in conjunction with a government that is diligently
committed to keeping its citizens free from force and fraud, then only a
healthy market-generated unemployment will remain.
But some readers may protest, “The above policy is surely an
impractical one today!” This may be true, but political reality does not
change economic analysis. The six actions mentioned above are essential means
to a fully employed free society. Of course, there can always be full
employment at the point of a gun, as in a socialist, command society.
Nevertheless, the current-day unemployment problem simply will not
be resolved until these actions are undertaken.
Economic analysis coupled with reality does indeed bring to light
that a major change in the national character of the American people is
required to solve our unemployment dilemma. How many Americans are willing
to give up their transfer payments, their subsidies, their monopoly
privileges, their demand for government programs that politically
necessitate recourse to the printing presses, or their demand for price
controls? In short, how many Americans are willing to pull their hand out of
the public treasury and obey the Godly precept to “love your neighbor as
Of course most Americans do not like the higher prices, periodic
recessions and unemployment that are consequences of their economic and
moral actions. Only when a majority of Americans have built sufficient
character to abstain from stealing or coveting their neighbor’s wealth
through the aegis of government, will the age of unemployment and inflation
Summary and Conclusion
Unemployment need not be a mysterious phenomenon. Unemployment is
always due to disharmony in price-cost relationships. To avoid unemployment,
each individual must accept the market wage that corresponds to the value of
his or her service as determined by consumer demand and labor supply. There
are jobs for everyone under such conditions.
The causes for unemployment can be classified as either
market-generated or government-generated. Together they account for the
current unemployment rate. Preferred
and adjustment unemployment are due to the normal workings and attitudes
of people within the market economy. However, undoubtedly the lion’s share
of unemployment today is government-generated. This includes price control, redistribution, monopoly privilege, cyclical, mandated
benefits, and government spending unemployment. In each of these types
of unemployment market wage-price relations are either distorted, or labor
costs are artificially raised, or the demand for labor is diminished, or
idleness is made more attractive to gainful employment.
Economic laws of the market cannot be circumvented without producing
undesirable consequences. A price must be paid for every interference that
distorts wage-price relationships. The only possible successful
full-employment policy, as yet untried, is that of permitting the unhampered
market to determine wages and prices along with a government that is
committed to the principle of protecting life and property with special
privileges to none. This cure will begin when individuals with economic
understanding lead the way by example.
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