Invisible Unemployment

unemployment
When governments get involved in any activity to create jobs or to create employment, they are also getting involved in the business of creating unemployment. However, the unemployment they are creating is the factor that most people do not consider. Hence, the idea of invisible unemployment.

Many people believe that money spent by the government to fund projects that ultimately require workers to be hired to fulfill the completion of those projects is good business for the government to be involved in. A superficial review of the situation may cause one to think that this use of funds can only help the economy, because the wages provided to each worker will ultimately be spent in the economy, and therefore provide a healthy boost to the economy. After all, the best thing a consumer can do for the economy is to spend money in the economy. In terms of it being “good business”, it goes without saying that most people believe that providing jobs by any means is a worthy endeavor for the government.





Furthermore, if people who are otherwise unemployed can become employed using funds that are already on hand with the government, then that seems like a winning proposition. Using this logic, this can not only be a positive endeavor for the government in terms of individuals being able to earn a wage but also for the other previously employed individuals and businesses, as they can only benefit from a stronger economy.

There are at least two problems with this idea. First, one of the most foundational ideas to understand about government revenue and spending is that whatever funds the government acquires to spend (in this case, to employ people) must first come out of the economy, in the form of taxes. Generally speaking, the government does not manufacture products nor provide services that in turn produce revenue (profits) from the natural working of the economy. There are some exceptions, but by in large, their revenue is acquired in the form of taxes (taking funds from consumers that would otherwise be used in the economy).

In a scenario where a business operates in the free market, the business obtains its funds from the business owner’s own capital, other investor’s capital or other funds that have been “saved” from previous market activities in order to start the business. The business, using its own funds, begins making products and using its own resources, employs people to assist them in carrying out the function of the business. If all goes well, the business will spend less money to make the product than it earns for selling the product and will make a profit, thus allowing them to continue the business and to continuing employing people. Notice, that in this rather simple illustration, the business obtained its capital privately, without having to take money out of the economy to ultimately employ people (provide employment).

On the other hand, in the scenario where the government starts a project (business), the funds used to start that venture or project that will ultimately require people to be hired must first be taken out of the economy. When I say these funds are “taken out of the economy”, I mean that the only way for the government to obtain funds to start these projects is to take the funds from its citizens in the form of taxation. The same $100 dollars that the government takes from an auto mechanic in taxes to fund the project, is the same $100 that will not be spent in the economy by that individual.

To get at the heart of my argument that government creates unemployment by using their projects to create employment, consider this. That $100 that was taken from the auto mechanic in taxes can no longer be used to buy a new toaster that his wife wanted. It cannot be used to buy the shirt and tie that he needed for a interview at another auto shop. These funds taken out of the control and use of the auto mechanic create “unemployment” on the backside of the equation.

And that gets us to the second problem. Whenever these arguments are made, only one side of the equation is really ever considered. Everyone loves to hear the stories of the government creating jobs for those people who otherwise would be out of work. The stories of people regaining their self-esteem, being given a chance to provide for their family and the other countless instances of goodwill are very nice to hear about. If we could consider the number of toaster manufacturing workers and garment manufacturing workers that are not employed because the government had to take the funds away from the consumer that would have employed those workers who would have benefited from the consumer’s funds, then we would have a fuller picture of the offset of job creation in this scenario. We all can see the actual outcome of actual jobs created by government because we can read the stories and see the news reports and perhaps even see our friends and neighbors benefit from them. But, we don’t see the jobs that will never be created because the government took away the opportunity for those jobs to even exist. And this is what I mean by “invisible unemployment”.

So, what we are really dealing with here is a net zero proposition. For all of the jobs that are “created” by government, there are an equal amount of jobs never created, or “lost”, because of the missed opportunity to employ people in the first place.

Note: This idea of “invisible unemployment” is further explained in a similar fashion with the timeless analogy of the “The Broken Window” in Henry Hazlitt’s book “Economics in One Lesson”. Economics in One Lesson

Tell me what you think.

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The Minimum Wage Debate- part 2

minimumwage

A recent opinion article published on CNN’s website, written by Gov. Peter Shumlin and Gov. Dan Malloy expresses their support for a minimum wage increase. While on the surface, an increase in the minimum wage (or a minimum wage at all) would be beneficial to those minimum wage earning employees (or the economy, in general), there are some unintended consequences that need to be considered. In the article, there were 3 reasons cited for these two gentlemen’s support of a minimum wage increase. In this second part of the 3-part series, I will address the second point in their article. Note: You can read Part 1 at http://thelion.us/the-minmum-wage-debate-part-1/

Their second point is:

Two, it’s good for women. Women account for roughly two-thirds of workers whose incomes would rise by increasing the minimum wage to $10.10 an hour. These women currently work 40 hours a week to make just $14,500 a year. These women are our daughters, sisters and mothers who are often the only breadwinners in their families. Our country is in a stronger position when women are in a stronger economic position. We need to make that a reality.

First, this is a political statement and not a statement on how a minimum wage increase is economically viable or makes economic sense. It seems to me that no matter if the wage earner is a woman or man, black or white, born in the US or an immigrant, the same economic dynamics apply. Why is it a fact (as they imply) that “our country is in a stronger position when women are in a stronger economic position“. Does it matter who is entrenched in this low wage dilemma? No, it doesn’t. This seems to be a classic example of identity politics, where arguments are made concerning specific social groups in order to advance a political position. And I understand that this is probably the very intent of the writers of this article (two politicians) and therefore of great expectation. But, there is no value in solving the problem of the low wage dilemma by making this point. Higher wages are good for men, college students, and every other political identity group, not just for women.

Second, the statement that “these women are our daughters, sisters and mothers who are often the only breadwinners in their families” again has nothing to do with the economic viability of an arbitrary raised minimum wage. This is more of a commentary statement of our current society. The assumption is that these women are working because they have to, forced by family dynamics not only to earn an income to supplement another income, but also to act as the breadwinners. And as breadwinners, they are working a minimum wage job. If that is not a sad commentary of our society, I don’t know what is. But, what is the connection between this heart-stringed statement and the economic impact of a raised minimum wage?




Third, since there is no economic reasoning in this second point of the article, I will offer one. The thought that keeps coming to my mind is why are people (women in this case) working minimum wage jobs, while having to act as the breadwinner of the family. I can understand that there will be some people in this dilemma, but the article claims that “women account for roughly two-thirds of workers (that are working minimum wage jobs)” and that they “are often the only breadwinners in their families“. The implication is that there are many women in this position. Why are so many women relying on minimum wage jobs as the sole source of income to raise a family? Minimum wage jobs are not intended to be jobs expected to support a family. Why should business owners be burdened with the social responsibility of making bad up for past and current decisions of their employees. Businesses that employee workers at minimum wage do so for a reason. First, they are in an industry where the work is generally un-skilled labor and the workforce is easily expendable or replaceable. In other words, if their fry cook, making $7.25 an hour quits today, the business owner can reasonably expect to hire another person replace him the next day (or in a short period of time) for $7.25 an hour, without expending many resources. Second (as mentioned in part 1), businesses generally do not have stash of cash sitting around waiting to be spent. The capacity to absorb an arbitrarily raised payroll expense is something that has to be carefully considered by the business owner, and often times the requires measures that produce unintended consequences.

In the third and final rebuttal of the article written by Gov. Peter Shumlin and Gov. Dan Malloy, I will talk about the minimum wage I general, and how the minimum wage actually works contrary to unskilled laborers, in ways that you probably have never considered.

Please comment!

Note: You can read the original article written by by Gov. Peter Shumlin and Gov. Dan Malloy at http://www.cnn.com/2014/03/05/opinion/shumlin-governors-minimum-wage/.