Judd W. Patton, Ph.D. (Biography) Bellevue University Online
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The Plain Truth About Unemployment
by
Dr. 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 evident.

Economic Principles

     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 result.

     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.

Market-Generated Unemployment

The 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 unemployed.

Government-Generated Unemployment

     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.

(1) 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.

(2) Redistribution Unemployment

     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 political income.

(3) 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 industries.

     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.

(4) Cyclical Unemployment

     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 unemployment.

(5) 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 productivity.

(6) 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.

Economic Cure Summarized

     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.

If these 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.

Ethical Cure

     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 yourself.”

     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 end.

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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