Mises Daily Articles
Labor Economics with Walter Block
[Walter Block will be presenting the webinar How to End Unemployment in One Day Friday, January 27, 2012 at 7 p.m. EST.]
How could unemployment be ended in one day? The short answer is, Pass a law making unemployment illegal, punishable by the death penalty; that will reduce unemployment to zero, heck, not in one day, but in one second. Who would be willing to declare himself unemployed under such a legal regime? Not I, not I.
A more politically relevant question is, Why do we have jobs in the first place? This is because we live in a world of scarcity: we want more goods and services than we have available to us. If we lived in the Garden of Eden, where things fell slowly upon us, anything our hearts desired, there would be no need for work or employment. Unhappily, if we want more things than are now available to us, we must labor to create them. (These and other such considerations are based on my book Labor Economics from a Free Market Perspective: Employing the Unemployable.)
But why jobs? Why don't we each work for ourselves? Or in syndicalist communities? That is the goal of our "progressive" friends on the liberal Left. This is because the entrepreneur, the residual-income claimant, brings three things to the table that workers greatly value. First, he bears risk. If the items produced by the workers cooperatives do not sell, they are plumb out of luck; in contrast, if what the worker produces for the capitalist is rejected by the consumer, the capitalist may not come to the workers and demand back the wages already paid. Second, the much reviled businessman offers time, in the form of capital goods. If 100 workers band together in a syndicalist venture, and the product will not come off the assembly line for a year, they must feed and clothe themselves for this entire duration. As well, they must have among them enough savings to purchase the machinery, the raw materials, and the marketing services necessary for a final sale. In contrast, the entrepreneur provides all this to the workers, who, all too often, do not appreciate his efforts on their (and of course his) behalf. Third, the owner of the business firm provides leadership, in setting up the entire enterprise.
What determines the level of remuneration in labor markets? In a word, productivity. If a man can create $15 worth of product in an hour, his wage will tend to equal that level of compensation. If he is initially paid only, say, $8, this means that the employer will earn $7 from the sweat of his brow. But, assuming the worker is equally productive for many firms, some other entrepreneur will come along and offer this laborer $8.01. Another one will raise the bid to $8.02. Where will this process end? At the point where no additional profits can be made by attempting to hire this worker away from his present employer. On the other hand, if the wage for such a person gets pegged at a higher level, say $20 per hour, the firm paying him will tend to go broke. This wage level cannot either long endure.
Why do we have unemployment? One major source is when wages are pegged at higher rates than productivity. Minimum-wage laws and union legislation are responsible for this situation. Another cause of unemployment is unemployment insurance. The more you pay for something, the more of it you will have. If you subsidize unemployment, its rate will rise. Yet another cause of it is the Fed, Ron Paul's favorite institution. By artificially lowering interest rates to virtually zero levels, this central bank leads entrepreneurs to invest in excessively roundabout methods of production for items that take a long time to produce (houses, cars, mines, etc.). But, in so doing, the Fed increases the danger of inflation. Eventually they have to stop this mad policy, or slow it down, lest too high inflation, or hyperinflation, ruin the economy. At this point the malinvestments made in these earlier orders of goods are shown to be unsustainable.
This calls for a jettisoning of many of these investments, with concurrent unemployment. Also, policies such as the Community Reinvestment Act, Obamacare, Fannie, Freddie, HUD, affirmative action, continually changing regulations and tax policies, and lack of support for private-property rights all play a role in creating unemployment.
Why do males earn more money than females? Is this due to the intrinsic sexism of the free enterprise system? In the webinar to be presented on Friday, January 27, 2012 at 7 p.m. EST, I will explore these and other related issues.