Tuesday, March 15, 2011

Would There Be Unemployment in a Free Market?

The unemployment rate has been high for the last couple of years.  The Austrian Business Cycle Theory helps explain why the rate has been so high and has remained high.  The Federal Reserve, under Greenspan, artificially lowered interest rates and created new money out of thin air.  This sent false signals to the market and injected money into places where it most likely wouldn't have otherwise gone.  For example, money flowed into stocks and real estate.  When Bernanke became Fed chairman, he actually stopped the loose monetary policy for a while.  This revealed that much of the previous investment could not be sustained.  It revealed a misallocation of resources.

The reason for the high unemployment is that these resources are trying to realign with consumer demand.  Some of the people that became real estate agents and construction workers due to the housing boom should not have gone to those jobs in the first place.  This error, caused by the Fed's monetary policy, has to be corrected (without government interference).  To make matters worse, the Fed has been printing money like crazy since 2008 with very low interest rates.  In addition, the government is bailing out certain businesses as well as running huge deficits.  With all of these things and all of the uncertainties, it has prevented the unemployment problem from correcting itself.

Now let's forget about the Federal Reserve and monetary policy for the sake of discussion.  If the Fed kept a neutral stance and did not change the money supply (I know this is virtually impossible over the long-run), what would unemployment look like?  Now we have to consider all of the other interference by government.

In a completely free market, there would be virtually no unemployment for anyone wanting a job.  I wouldn't say it would be zero, because there would be temporary unemployment for those in between jobs.  It is also the case that there may be a very tiny percentage who are too sick or disabled to work at all.  But in a truly free market system, unemployment would be close to zero.

The government causes unemployment in a number of ways.  Regulations on businesses cause unemployment.  Taxes cause unemployment.  Labor laws cause unemployment.

If you are willing to wash my car for $10 and I am willing to pay you $10 for my car being washed, then I can employ you to wash my car.  Let's say that the government imposes an income tax of 20%.  Now you will only make $8 to wash my car, but that may be too low for it to be worth your time.  I could pay you more so that your take home pay is $10, but I may not be willing to pay over $12 to get my car washed.  My time is not worth that much, so I would rather do it myself than pay that much.  So, because the government instituted the income tax, it broke our deal.  It caused unemployment.

Of course, minimum wage laws are the biggest job killer.  If there were no minimum wage, just about anyone could find a job at any time.  I would be willing to pay someone $1 a day to be my personal assistant.  Sure, the wage is extremely low and most people would be foolish to do it, but it is a job offer.  But I can't make that job offer because of the job destroying minimum wage.  With no minimum wage, I'm sure someone else would be willing to pay someone at least $20 per day to be their assistant.  If you were unemployed, you could at least do this until you found something better.

To top it all off, not only does government do things to destroy jobs, it actually subsidizes not working.  Unemployment "benefits" encourage people not to work.  I have personally heard stories of people intentionally collecting unemployment benefits with no intention of getting a job.  I heard of one person who got displaced and was about to retire anyway, but collected unemployment because it was there.

There are people that have been on unemployment for over 2 years now.  While we can certainly sympathize with people who lose their jobs, it is hard to sympathize with someone who has been out of work for over 2 years.  You can work in a fast food restaurant if you have to.  If it is beneath someone to do that, then it should also be beneath them to collect unemployment.  I don't blame people who collect unemployment as many of them are just getting some of their money back from the government.  But the system is horrible and it just encourages people to stay unemployed.

To summarize, there are a lot of reasons for unemployment and they all go back to government.  In a truly free market environment, there would be work for anyone who wanted a job and was willing to work.


Stewart said...

Ugh, that was a waste of my time. Much regulation stems from abuses by employers to their employees. Also, I have to laugh whenever anyone blames walmart cashiers high pay rate and ignore the millions executives are handed out.

Sparky11 said...

"I would be willing to pay someone $1 a day to be my personal assistant."

I would find this funny if you weren't being so serious.

Abolishing the minimum wage and other "restrictions" might create a few more jobs- but the jobs created will be paying very low wages and likely offer a lack of job security.
Unemployment benefits also would be abolished in a true Libertarian economy.
So what you would get is a situation where a bunch of people are forced to work hard for low wages. They would have to work their butts off because they could be easily replaced and yet their wages may be so low they could be in poverty.

I also use the word "might" create jobs- because you do not consider that existing jobs might simply lower wages instead, in order to increase the wages of employers.

Yeah.... that sounds like a GREAT system you've thought up there.


This is what we are dealing with people. These are the thoughts of a couple of statists. It doesn't occur to them that real wages went up in the 19th century when there was a mostly free market. It doesn't occur to them that most people today are making more than the minimum wage. Why are these greedy employers paying anyone more than minimum wage?

Anonymous said...

The less government you have, the less unemployment you have.

The less government you have the more SELF-EMPLOYMENT you have.

Governments are parasites who steal the fruit of peoples' labour. When the people refuse to give away their fruit, then the governments start to impose restrictions on peoples' business. That's when unemployment starts..............

Sparky11 said...

Your claim is "in a truly free market system, unemployment would be close to zero".

Please point to a single real world example where this has been the case, to prove that your claims are backed by solid real world evidence.

Can you please explain how "Labor laws cause unemployment".

Certainly in the UK, there has been no proven connection between the minimum wage and unemployment. In fact, unemployment was much higher in the 1980's under the "free market" policies of Margaret Thatcher and went DOWN after the minimum wage was introduced.

Ernest Martinson said...

I have a personal real world example where lack of a free market caused me to be unemployed. I have no doubt my example can be multiplied many times in other ways. The catch is that you must want to be employed in a creative way and not just an obedient drone in a welfare/warfare state.

I attempted to build an affordable and alternative home without a mortgage in a rural area in northern Wisconsin. I could not make an end run around the state Uniform Dwelling Code, though many people told me to pay off the inspector or build in the woods where I might not be detected.
I would have been able to grow and raise food in a healthy way and cut firewood to burn in a extremely efficient masonry heater as well as use passive thermal principles in an earth sheltered home. This would have been on old farmily farm land. In other words, I grew up on the land and was not a nature-alienated city dude who farms the government and subsidizes industrial farming that tilts the farming field from the small efficient sustainble farm.


For anyone observant enough, you could think up hundreds of examples of where the welfare/warfare state causes unemployment. Just like in your example, being employed doesn't necessarily mean having to work for someone else who pays you. However, the government makes it very difficult to do things on your own and to be an entrepreneur.