Beware the unemployment monster...government!

The way politicians and economists carry on you’d think unemployment was the greatest and most devastating scourge of our time.  Don’t get me wrong, it is terrible for individuals to experience unemployment for a prolonged period of time, and the toll it can take on primary bread-winners within the family setting is often tremendous. One would not want to wish prolonged unemployment upon anyone.

But, like all aspects of economics, unemployment has to be placed in the broader context in which it occurs.  Not all unemployment is created equal.

While unemployment has a clear manifestation in joblessness, joblessness is not the evil we should be concerned about.  Instead we need to see unemployment’s hidden causes as the real evil.

We have to ask ourselves, why is there unemployment when there is still scarcity and need?  Surely in a world of scarce resources, and widespread and complex wants and needs, there should be no involuntary unemployment?

But there is, so we need to briefly examine why.

Unemployment, at its root, occurs when the employers cannot hire all the job seekers at the prevailing market prices of labour.  Minimum wage laws create unemployment by placing a floor under wages.  Some companies can still afford to hire as many workers as they want despite this wage floor, while others may only be able to hire some of the workers they desire.  The most marginal businesses will not be able to hire any workers and will go out of business as they are only profitable if they pay wages under the wage floor.

Think how perverse this: A company is willing and able to provide a product to the market that meets people’s needs.  The company is willing and able to pay a wage below the wage floor.  The prospective employees are willing and able to accept such a wage.  Everyone wants this to go ahead – the customers, the entrepreneur, and the prospective employees.  Yet, government says this enterprise is illegal and may not operate.  If it operates, government will come a knockin’ with a warrant to force up the wages to the minimum wage – in effect, the government issues a legal death sentence on productive endeavour.

Folks, this is how government creates unemployment.

When we see mass unemployment, one of the big questions we should be asking ourselves is, why does government insist on sticking to its minimum wage laws and perpetuating poverty?  We should be angry alright, but not angry at ‘unemployment’, angry at the state for insisting it controls our rights to commercial freedom, freedom of association, and freedom of contract.

Another way government creates unemployment is by creating false employment.  Central banks and governments, through fraudulent monetary policy and fiat based debt, create boom-bust cycles.  In a cyclical boom there is a proliferation of malinvestment into the bubble sectors.  This ‘creates’ jobs in the bubble sectors.  When the bust part of the cycle eventually arrives, entrepreneurs are seen to have made a collective blunder by investing so heavily in the boom sectors.  These investments prove to be worth far less than originally planned, asset prices start deflating, profits and revenues decline, and companies can no longer afford to keep as many employees on their books.

Mass job losses start to occur.  The media gets itself into a frenzy about how bad unemployment is becoming, and politicians heed the call of the bleeding masses for “MORE JOBS!”  The monetary authorities step in, pump up the money supply, re-create the unsustainable boom conditions, and re-invigorate the unsustainable boom sectors, and re-create jobs.

Oh happy day!  Thank you ever so much Mr. Government for saving our jobs that the free market so ruthlessly tried to steal from us.  Hooray for government!  Boo for the free market!

Right?  Wrong.  The government created boom was the problem in the first place, diverting precious resources away from some sustainable endeavours toward unsustainable boom endeavours.  The surge in employment was fake.  It was borrowed from the future.

The drop in employment is reality trying to restore economic order.  We borrowed growth and employment from the future, now we got to pay it back.  In this instance it is clear to see that job losses are a good thing, not bad.

The people laid off from the boom sectors have been tricked by the monetary authorities into thinking that society needed their employment in these sectors.  In reality there were far too many people employed in those sectors and the economy was really asking for workers to be deployed in other sectors where under-production was taking place.

This process is painful, but it is a healing process, not an economically damaging one.  It should be clear that this period of rising unemployment, if left alone by the government, will be transitory.  People need a reorientation of their skills toward other sectors, professions, and products.

Some classic real world examples of this type of structural dislocation and re-orientation include the tech bubble and its aftermath, and now the housing bubble and its aftermath.

Remember back during the tech bubble?  Everyone worked in IT! 

“Hey, so what do you do for a living?”

“Well, I studied civil engineering, but as soon as I graduated from varsity I got a job in IT because it just pays so much better than civils”.

Remember back during the property bubble?  Everyone was in property!

“Hey, so what do you do for a living?”

“Well, I just quit my regular job about 6 months ago to manage my property portfolio.  Man it’s booming!”

You get the picture.

The final main type of unemployment I want to touch on is technologically driven unemployment.  At face value this looks similar the boom-bust type unemployment, but it is driven by technological progress, not by fraudulent government monetary systems, which makes us all better off.

Technological unemployment happens all the time, and has been happening for as long as man has been progressing technologically.  Before the washing machine was invented for example, many people were employed in the clothes washing industry.  When it got invented, tens of thousands of people lost their jobs.

Does this mean the washing machine was bad for society?  Of course not, it enabled us to get something done using far fewer people, meaning those people could be freed up to produce something else of value to society.  Technology allows us to economize better.

The people whose lives depended on the hand washing industry are clearly worse off immediately after losing their livelihood.  They will suffer until they are absorbed back into the workforce in another profession.  The history of technological progress is that displaced workers do find something else to do.  Why else did unemployment rates in the industrial nations remain so low and falling throughout the 19th and 20th centuries during an era of exponential technological progress.

While the new technology displaces some unfortunate people from their livelihoods, those people must have the best chance of finding a decent livelihood again soon.  This is why governments should abolish minimum wage laws and reduce boom-cycles through monetary fraud, to make finding a job as easy as possible.

As for the rest of us not directly affected by the new technology, we all benefit from the use of this technology, which makes us all more productive and able to produce more things for more people at cheaper prices.  That my friends is the heart of economic progress.

Conclusion

We need to get our heads straight when it comes to unemployment.  When good, honest people are unable to find work, it is indeed a sad thing.  Even sadder though is that it is largely the fault of the state that people are without work.

Abolishing minimum wage laws (in fact, all labour laws) and getting rid of unbacked fiat currency would make a huge dent in the unemployment problem.

But government won’t tell you that.