“There Just Aren’t Enough Jobs”

As long as the amount of ends is greater than the amount of means with which we (human beings) can achieve them, there will always be ends to allocate those means toward. In other words, in an economy, as long as the wants we have exceed the resources we can use to satisfy those wants, we will always have wants to allocate those resources toward.

If this is too abstract for you, take a hypothetical example. Imagine a world where people only have 100 total wants. They have 20 resources (which include land, labor, and capital), and with these 20 resources, they can only achieve 60 of their wants, meaning 40 remain unsatisfied. Now suppose that one resource, due to technological reasons or whatever, displaces another resource. Now 19 resources can achieve 60 wants, where 20 (resources) were needed before. What will the displaced resource now be used for? Clearly, it can now be geared toward one of the remaining 40 unsatisfied wants.

(A reader might quickly object, but what if the resource isn’t applicable to any of the 40 remaining wants!? The answer is that it might not be used at all, but in this post, we are examining labor in particular. Labor is the most nonspecific resource: it can be applied to a huge variety of different wants. Thus, this objection is not very relevant to this discussion.)

Is this example applicable to the real world? Certainly, and in greater force. In the real world, we essentially have an infinite amount of wants. If I could have the Starship Enterprise, I’d love someone to build it for me. If I could have 100 lam 100,000 1 million lamborghinis, well sure, why not? Resources, meanwhile, are finite. There is only a certain amount of land and natural resources, capital, and labor in existence at any time.

Since labor is a scarce resource, it seems, then, that there is no reason to assume that it could never be allocated toward some end. There should always be a job available if a person is willing to work. So why the mass unemployment?

The real reason is intervention with the price system – but before explaining that, let me introduce two types of unemployment:

1) Voluntary unemployment – this occurs when an individual chooses on his own not to work. He can be an elderly person who has saved enough money to retire. Or he can be a person on a job search who simply hasn’t found a wage worth working for yet. In this latter case, the individual would rather continue searching than accept some low wage. This is because he has enough funds saved to keep his job search for an extended period of time. As his funds dry up, he will become more desperate to find a job and will be willing to accept a lower and lower wage as time goes on. Eventually, he will choose something.

We would expect some amount of voluntary unemployment to constantly exist – there are always people searching for jobs and there are always people being displaced. However, we generally wouldn’t expect any particular individual to be perpetually unemployed – eventually, they will always be able to find another job (examples where this is not the case include where the individual is addicted to drugs, etc.)

2) Involuntary unemployment – also called structural unemployment, this occurs when the government interferes with the free market. The free market is the amalgamation of all voluntary decisions and voluntary exchanges. Involuntary, structural unemployment then occurs when the government intervenes with the price system.

The minimum wage is the easiest example to expound this theory with. Let’s say a homeless, unskilled woman, if put even at her best field of work, can only accomplish $5.00/hr of productivity. If the minimum wage is then, $7.25, she will be permanently unemployed. Employers will not hire her for $7.25 if she only contributes $5.00. As the minimum wage rises, then, the number of individuals permanently unemployed rises. The only way to escape this, is for the unemployed to somehow gain skills without work, which can be tough to achieve if they are not young and in school. The path of learning on the job has completely been taken away from them.

Therefore, when we see the perpetually homeless and the perpetually unable to find a job, there are no obvious effects of harmful choices such as drug addiction (note: even such cases are possibly due to government intervention, if a person is already unable to find a job due to some law, and then becomes a drug addict), and such laws are in existence, the first place we should look at as the culprit are those laws. Other examples include regulations such as laws mandating benefits, such as health insurance. This essentially creates its own minimum wage based off of the cost of the insurance. Workers who contribute less than the amount of cost of insurance will be unable to find a job. (These regulations add up, a minimum wage + mandated benefit would then have a larger effect than that expected from the minimum wage alone). A final example would be government manipulation of the interest rate, a price itself, and interestingly, it is this manipulation that causes the business cycle.

Photo Credit: Andrea Nissolino via Compfight cc

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Posted on December 31, 2013, in Economics and tagged , , , , , . Bookmark the permalink. 3 Comments.

  1. I don’t think anyone in their right mind could come to the conclusion that minimum wage actually increases employment, or even that it has no causal relationship with unemployment. The thing is, though, I would expect the amount of resultant unemployment as a function of minimum wage to be very different from a linear one. I’d expect it to be highly dependent on the density of marginal workers for that minimum wage.

    For instance, let’s say a rich woman (maybe even an Indian diplomat 😉 ) hates having to clean her house so much that she’s willing to pay anything less than $15 an hour for someone to clean it. Now there will certainly be takers for that job, but I very much doubt the rich woman will actually end up paying out $15 an hour. There will be probably be labourers for whom anything above $5 an hour amounts to an overall positive utility (all this is a big simplification, no doubt, but I guess there is no better way to proceed). So the question is – what is the wage the woman will finally end up paying? Will it be closer to $5 or $15 an hour? My intuition tells me the rich woman’s superior leverage in negotiation – or the fact that the labourer needs the money more – will lead to the wage’s being closer to $5 an hour.

    So an increase of the minimum wage to something like $7 an hour should ideally lead to nothing but a grumpier rich woman, in this case. If there is reason to believe that the above argument applies to a very good majority of jobs at the lower end of the wage spectrum for the particular value of minimum wage that you’re choosing to set, then there is perhaps reason to go ahead with minimum wage.

    Which is why I find it frustrating when some politicians say “Well, now that you’ve started on this path why not increase it to $15 or $30 or $100 an hour?” It is true that any value of minimum wage will cause unemployment, but a good selection of the value may lead to more workers getting a living wage without causing too much unemployment, with a reduced overall strain on the welfare system.

    Of course, this isn’t taking into account the fact that minimum wage laws if enacted will apply only in that country, and there is nothing to stop employers from going abroad to make better profits if they choose to.

    • Hi Aditya,

      “Which is why I find it frustrating when some politicians say “Well, now that you’ve started on this path why not increase it to $15 or $30 or $100 an hour?””

      Agreed, this can only be used to show someone that some sort of causal mechanism between the minimum wage and unemployment exists if they think it doesn’t. At lower levels, it might not be so obvious, but at $100/hr, it becomes absurd and clear even to the economically illiterate.

      Also, as you’ve said, the minimum wage can increase a worker’s wage in any bargaining position where there is a range of possibly wage values. But I believe that (I need to read more about this) if the demand for labor includes more than one person (i.e. if there is more than one employer), a market clearing wage will occur, and there will no longer be room for bargaining. Competition between employers for the worker will drive the wage to one particular price, and the minimum wage will no longer be able to have an effect on increasing the wage. It will simply become a law outlawing people with certain productivities from working.

      I’m not able to flesh this out ^ very clearly at the moment, but I will probably make a blog post about it in the future when I do.

      Bharat

      • Thanks Bharat! Looking forward to the post.

        Just to reiterate my position, I agree that unemployment will occur. However, the question is whether all or a majority of the marginal workers will become unemployed. Wages for labourers are determined by some mechanism based on market forces like you said (as opposed to a random number in the profitable domain for both parties being pulled out of the air), but what I have a hard time accepting is that it will not make economic sense for all or most employers to pay their workers more than that wage. I can’t say why though, just a gut feeling (probably based on real life experience – I’m sure it wouldn’t have made a big difference for my folks at home to have paid the maids a little more).

        As always, willing to be convinced otherwise.

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