Unemployment
Unemployment is generally considered a problem in our society. It seems that one of the chief goals of politicians is to make this number as small as possible. Australia currently has about 4.9% unemployment. This is considered very good, and historically very low. What it basically means is that one out of every twenty people who are looking for a job can't find one.
That seems to me still a worryingly large number of people. Suppose I know about 1000 people well enough to remember their names (I think this is about right). Fifty people I know can not find a job (at least statistically). Politicians don't seem worried about it, though, so I guess it must be OK.
However, what politicians seem to completely fail to realize is that it is not possible to remove unemployment completely, and in fact trying to do so can lead to some awful consequences. Let me explain why.
The first thing to realize is that in Australia, as in most economically liberal countries, the job market is essentially a free market. That is, there is little or no regulation on where you work and how much you get paid to work. Of course this is not quite true, because there are regulations that require minimum standards, but my main point here is that there is no upper limit on what you get paid.
As in all free markets, there is a supply and demand curve. For a given supply of labour, employees are prepared to work for a given sum of money. If the supply increases, competition increases and wages go down. If the supply decreases, competition decreases and wages go up. Similarly, employers are prepared to offer more money when there is a higher demand for labour, for the same market-based reasons.
Now realize this: the unemployment rate is a measure of the supply of labour. As the unemployment rate drops, the supply of labour is dropping; there are less people available to fill any new vacancies. This shorter supply of labour leads to higher wages. And it's not just those unemployed who get jobs that get the higher wages; increased competition for labour means that people already in jobs will be offered more money by another company to move, or by their present employer to stay.
This all sounds great for employees; as we approach full employment (ie 0% unemployment), we all get paid more. However, what I produce by my labour has not changed; I just charge more for the same amount of work I used to do for less. The effect of this is that my employer will have to charge more for whatever it is he sells. This is OK in a one-off incident, but when it is repeated throughout the economy, the cost of everything goes up to match the increase in labour costs.
What we have produced is not prosperity but inflation. This is the other number that governments are desperate to keep low, for reasons which I won't explore here. It's result is a slow-down in the economy and therefore increased unemployment.
This is a fundamental problem; low unemployment drives inflation up, and inflation drives unemployment up. So any time you start to get unemployment low, inflation will increase and start to drive unemployment up again.
Of course there are other things that drive inflation up, so if you can control them then you can get closer to full employment without causing trouble. But that just moves the problem a bit further away, it doesn't remove it.
What solutions are there? The obvious one is to regulate to control wages; set by law the wage that each occupation earns. But this has a number of serious flaws.
Firstly, it will be wildly unpopular, and any government that tries it will be voted out in short order. Legislating to cut wages is political suicide and no government will ever do it (at least not again).
Secondly, if you do that then workers will just leave and go to other jurisdictions where they can get paid more. This doesn't help the problem.
Thirdly, it has been consistently shown through history that any attempt to legislate to distort a market will end up causing more problems than it solves. See eg. the collapse of the Bretton-Woods system in 1971, the wool crash of the late 1980s and early 1990s, the sugar crash of the early 2000s... the list goes on and on. For the classic example, see the South Sea Bubble (although market distortion is probably only a smallish component of that story).
Fourthly, the irony would be just too much. Many governments have legislated to increase wages, and the ALP still argues this is vital to the Australian economy. But it seems what we really need is to legislate to decrease wages. Ironic, huh?
So, anyone got any clever ideas? How do we solve this fundamental problem of a deregulated labour market?
That seems to me still a worryingly large number of people. Suppose I know about 1000 people well enough to remember their names (I think this is about right). Fifty people I know can not find a job (at least statistically). Politicians don't seem worried about it, though, so I guess it must be OK.
However, what politicians seem to completely fail to realize is that it is not possible to remove unemployment completely, and in fact trying to do so can lead to some awful consequences. Let me explain why.
The first thing to realize is that in Australia, as in most economically liberal countries, the job market is essentially a free market. That is, there is little or no regulation on where you work and how much you get paid to work. Of course this is not quite true, because there are regulations that require minimum standards, but my main point here is that there is no upper limit on what you get paid.
As in all free markets, there is a supply and demand curve. For a given supply of labour, employees are prepared to work for a given sum of money. If the supply increases, competition increases and wages go down. If the supply decreases, competition decreases and wages go up. Similarly, employers are prepared to offer more money when there is a higher demand for labour, for the same market-based reasons.
Now realize this: the unemployment rate is a measure of the supply of labour. As the unemployment rate drops, the supply of labour is dropping; there are less people available to fill any new vacancies. This shorter supply of labour leads to higher wages. And it's not just those unemployed who get jobs that get the higher wages; increased competition for labour means that people already in jobs will be offered more money by another company to move, or by their present employer to stay.
This all sounds great for employees; as we approach full employment (ie 0% unemployment), we all get paid more. However, what I produce by my labour has not changed; I just charge more for the same amount of work I used to do for less. The effect of this is that my employer will have to charge more for whatever it is he sells. This is OK in a one-off incident, but when it is repeated throughout the economy, the cost of everything goes up to match the increase in labour costs.
What we have produced is not prosperity but inflation. This is the other number that governments are desperate to keep low, for reasons which I won't explore here. It's result is a slow-down in the economy and therefore increased unemployment.
This is a fundamental problem; low unemployment drives inflation up, and inflation drives unemployment up. So any time you start to get unemployment low, inflation will increase and start to drive unemployment up again.
Of course there are other things that drive inflation up, so if you can control them then you can get closer to full employment without causing trouble. But that just moves the problem a bit further away, it doesn't remove it.
What solutions are there? The obvious one is to regulate to control wages; set by law the wage that each occupation earns. But this has a number of serious flaws.
Firstly, it will be wildly unpopular, and any government that tries it will be voted out in short order. Legislating to cut wages is political suicide and no government will ever do it (at least not again).
Secondly, if you do that then workers will just leave and go to other jurisdictions where they can get paid more. This doesn't help the problem.
Thirdly, it has been consistently shown through history that any attempt to legislate to distort a market will end up causing more problems than it solves. See eg. the collapse of the Bretton-Woods system in 1971, the wool crash of the late 1980s and early 1990s, the sugar crash of the early 2000s... the list goes on and on. For the classic example, see the South Sea Bubble (although market distortion is probably only a smallish component of that story).
Fourthly, the irony would be just too much. Many governments have legislated to increase wages, and the ALP still argues this is vital to the Australian economy. But it seems what we really need is to legislate to decrease wages. Ironic, huh?
So, anyone got any clever ideas? How do we solve this fundamental problem of a deregulated labour market?
posted by Tom at
19:02
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