1. Skip to navigation
  2. Skip to content
  3. Skip to sidebar

The Ludwig von Mises Institute

Advancing Austrian Economics, Liberty, and Peace

Advancing the scholarship of liberty in the tradition of the Austrian School

Search Mises.org

What's Wrong with the Job Market?

Mises Daily: Monday, December 06, 2010 by

A
A
Not Hiring

The terrible job market has vexed an entire generation. It shows no hope of improving anytime soon. Young people are shut out. College students are taking refuge in matriculation without end. Thirty-somethings are zoning out in their parents' basements and attics. Despair for the future has become a theme of American public life.

The question we must ask is, why is unemployment stuck at 10 percent in the narrowest measure and as high as 30 percent for some demographics?

The usual answer is that the broad economy is not recovering. That's true but superficial; it explains nothing. We have a problem of a specific kind with the job market. To see it as just a symptom of slow growth is an excuse for politicians and central banks to resort to reckless policies in the name of fixing the big problem without addressing the reality on the ground.

Some new data reported by the Wall Street Journal help us get to the core of the problem in greater detail. In the current environment, which the National Bureau of Economic Research (NBER) laughably calls a recovery, business startups of job-creating companies have not kept up with closings.

As compared with other recession aftermaths, new businesses are not hiring as they once did. The number of companies with at least one employee continues to fall at a rate we've not seen in 18 years. Everyone speaks of this as a recovery, but the numbers don't add up. New jobs in new companies are appearing a rate 15 percent less than the last recovery.

Let's try to understand what is going on here.

In boom times, companies tend to bloat up in every area, especially in their staffing. Unemployment is always a feature of the bust because businesses shed jobs and expect more efficiency and productivity out of the remaining staff. Many businesses close and lose all employees.

Whereas workers once had no problem finding jobs and naming their price, there is now a surplus of workers and a job shortage, at least at the wages that the unemployed are demanding.

What usually fills the gap here are new businesses. In recovery times, entrepreneurs initiate new projects and hire the unemployed workers to staff them. The unemployed are usually willing to work for less and are willing to learn new skills in a new business environment. These new businesses become a major source for economic growth and rising living standards.

Without new businesses, there would be no net job growth at all. In postbust economies, it is these new businesses that are responsible for soaking up the excess labor. That's because the older and larger businesses are not willing to take on the risk of new employees and have already adjusted to doing business with fewer.

Until these businesses come along, unemployment will likely persist. And this is precisely what is happening right now. And so, now that we have a better idea of the mechanics of the high unemployment rate, we have a better idea of what question to ask and how to solve the problem.

"New businesses need to depend on a stable legal environment and a bright outlook for the future. These are both missing."

Where are these new businesses and why are they not starting as we might expect?

Let us count the ways.

New businesses need to depend on a stable legal environment and a bright outlook for the future. These are both missing. The supposed recovery has been phonied up in every conceivable way: nationalizations, bad debt swept under the carpet, money creation by the Fed, make-work jobs paid for by the taxpayer. No one really believes all the hokum. The question is not whether the recovery is phony; it is, what is real and what is not real? No one knows for sure.

Despite every attempt by the Fed to provide oceans of free credit, banks are still extremely reluctant to lend when the payoff is not there and the risks of lending are extremely high. This means that prospective new businesses have to raise their own capital from a massively depleted capital stock.

Looking at the risks, it makes far more sense to hire no employees beyond temporary contract workers. Consider the payroll tax, the largest burden on both employees and employers. It does not benefit either party at all. It is sheer robbery that vastly increases the cost of hiring.

The problem of healthcare mandates is very intense. Employees who expect these benefits are mostly going to choose between obtaining them and getting a job. But for certain firms and under some conditions, they are unavoidable and unpayable.

Business taxes are all too high and probably going higher. Regulations on all businesses in every sector of life have been intensifying for decades. No industry is free of them. Even formerly frontier sectors like software are becoming legal thickets of patents, protections, and scary mandates.

The minimum wage is way too high to encourage new job growth among new businesses. And given all the legal mandates and potential lawsuits, everyone knows that once you hire employees, you are pretty much stuck with them for some period of time. You can test the waters. But you have to be sure. And no one is sure.

Businesses thrive in an environment of freedom. But enterprise is no longer free in any area. In boom times, the consequences are less obvious. In the bust, the regulatory thicket, taxes and mandates, and legislative threats all become decisive in a way they were not before.

None of these problems are intrinsic to the business cycle. They are all imposed by government. The same problem afflicted the economy during the Great Depression, but back then the central planning was newly imposed. Now is different: the old central planning is killing us day by day, even without dramatic new legislation.

It could all be changed. Congress and the president and the courts could reverse it all tomorrow, restoring an environment of freedom and free enterprise. Jobs would recover quickly. Hope would be back in a matter of weeks and months. The economy would genuinely recover.

What is keeping that from happening? The lack of political will and the insatiable desire of the state to keep eating away at our liberty and property.

It isn't complicated. The state is living parasitically off our living standards and hopes for the future. It must die if we are to live well again.