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Why was there unemployment before governmnet regulated wages/hours?

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haghenick posted on Mon, Feb 15 2010 6:30 PM

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Now I'm basing this on standard economic history, and if someone has an alternate empirical study, I'd be interested in reading it.

But theoretically, if there was no government regulation of wages and hours, then there should be no unemployment. Since entrepreneurs would be willing to higher an infinite number of workers for $0 salary. If a worker was willing to work 1 cent per day, it is virtually certain someone would hire him. And that trend continues as wages increase with the law of diminishing returns.

So if I'm an unemployed worker, I just lower the wages I'm willing to work at until I find a buyer.

But during the boom and busts from 1700-1930, there was not minimum wage. And yet during the busts there was a great deal of unemployment.

How does this fit into Austrian theory?

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fakename replied on Mon, Feb 15 2010 6:48 PM

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minimum wage laws were around at the state level before the first national minimum wage law in around 1933. Also, minimum wage laws may not be called minimum wage laws but still have the same effect.

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The Late Andrew Ryan replied on Mon, Feb 15 2010 6:48 PM

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Suggested by Michelangelo

In the not bust period it was probably because the market can't reach equilibrium. As for the bust, would you be willing to work for a penny? I thought not. Wages will fall but not that low and only after a certain period of time, but especially not in a bust period where there is so much uncertianty.

"Lo! I am weary of my wisdom, like the bee that hath gathered too much honey; I need hands outstretched to take it." -Thus Spake Zarathustra

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Michelangelo replied on Mon, Feb 15 2010 6:57 PM

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Suggested by Jon Irenicus

Government intervention creates institutional unemployment, and so removing it will remove the former. In the absence of the state however, there would still be unemployment. Certain uneployment , and this was taught to me by a non-Austrian Economics Professor at that, of those individuals who are switching job positions or moving to another career. This unemployment will however be short and usually end with either the individual returning to his old post, finding a new post, retiring, or going into education (and or otherwise investing into themselves to further their marketable skills). This is opposed to institutional unemployment, which is usually categorized by long periods of unemployment and which is caused by government intervention into the market.

Furthermore, we need not forget that some individuals are simply not desirable by the market. I am speaking about those people who simply have no marketable skills, have a born deficiency to them, or whose personality serves as a disincentive from being hired by workers. Would some employers be willing to forgo the benefit of hiring an additional employee if said employee is annoying to them? Sure, if the would-be employee is that annoying, there is no problem with them electing not to employ them.

And of course, there is a lag that exists due to distance between a would be employee and his would be work place.

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jmorris84 replied on Mon, Feb 15 2010 7:16 PM

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I would argue that 100% employment isn't something that we should strive for. I think it is much more desirable to be able to have less people in a household working, in order to provide the necessities for their family. It seems to me that throughout history, whenever there was healthy competition in the market and little to no government interference, prices of goods and services would fall and although wages fell with them, the real wages, not nominal, were high enough to allow one person to work and another to stay home and potentially take care of the rest of the family (the children for example).

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abskebabs replied on Mon, Feb 15 2010 7:16 PM

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I think unemployment can be expected to, and has occured in relatively free markets. The difference is that the nature of it is transitional and not endemic due to aritficial interventions placed on contracts.

Hence there was unemployment due to the displacement of handmill workers by the industrial mill, etc, labour like all other factors of production needed to be taken out of those lines and be readapted to produce new things. This often takes time and can be painful in the short term, though it is unavoidable, and any argument to protect redundant industries would be a broken window fallacy.

The above problem was more typical during the earlier stage of the industrial revolution in societies that were still largely precapitalistic ideologically and institutionally, like British Empire India, hence adaptation taking longer.

The same goes for changes due to shifts in consumer demand, as well as the mal-investment with both the shift in capital structure and labour force specialisation (or "human capital") brought about by credit expansion and the business cycle. No doubt, without price controls, like the ones Hoover placed in teh Great Depression the market can still adjust and cure this temporary unemployment problem quite fast.

"When the King is far the people are happy." Chinese proverb

For Alexander Zinoviev and the free market there is a shared delight:

"Where there are problems there is life."

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Stranger replied on Mon, Feb 15 2010 8:31 PM

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Labor requires capital to be employed. If you regulate capital, you can cause unemployment.

The fallacies of intellectual communism, a compilation - On the nature of power

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John Jensen replied on Mon, Feb 15 2010 11:52 PM

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Regardless of wage and labor laws, there will always be some level of chronic unemployment due to enablement. I don't mean the welfare state or any government program. Bums can live off friends and family as easily as the tax payer and no one will be willing to pay the rate they desire for their golden sweat. While the deficit they create will still exist as they consume more than they produce, it should be very small and represent the practical minimum value for chronic unemployment.

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Gerald Spencer replied on Tue, Feb 16 2010 10:39 AM

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What if the government pays you not to work - unemployment benefits. This also sets the floor for wage demands.

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