Friday, December 31, 2010

Why Mish is Wrong About Unemployment

Mish Shedlock has a long series of charts where he attempts to explain why the U.S. will add only 127,000 new jobs per month in 2011.

Here's why he is wrong.

First and foremost, there is no fundamental reason for long term unemployment. Markets clear, when they are allowed to do so. If businessmen are concerned about unknown health costs and other impediments, it doesn't mean they won't hire workers, it just means they will bid a lot less for workers. For example (and yes I know there are minimum wage laws, but just for example), if no one else is bidding $1.00 per hour for workers, I will. I'm sure I can make a profit by paying workers $40 per week. But, pay in the U.S. will never drop anywhere close to $1.00 per hour in a free market, because the marginal productivity of workers in the U.S. is much, much higher.

As businessmen understand this risk, they are getting around the risk of unknown health costs and other taxes by hiring through temporary agencies. In other words the market has come up with a solution, long-term temporary help. The long-term temp sector will boom in 2011.

But, the real impediment to reducing unemployment is unemployment insurance. If you pay people not to work, they don't. Unemployment benefits are running out for 99ers, so there is the beginning of a stop to this nonsense.

Most important, climbing unemployment was the result, in the first place, of the business cycle. We are now headed into the manipulated boom phase which will stop the unemployment increases. It will also cause those who have only casually been looking for work (because of unemployment benefits) to suddenly see higher pay offers.

Despite the elaborate charts that Mish is putting out for his analysis, he is pretty much just trend following.  He is saying, look unemployment hasn't gone up, so it won't go down. The only place he provides analysis for increasing unemployment, and he is correct, is among government workers, because of the budget problems across federal, state and local governments.

But, overall the dynamics are shifting:
The downturn is over so the number of new unemployed will decline

Unemployment benefits are starting to run out for some.

The Fed printing is resulting in a manipulated boom, which will cause capital goods sector employers to start bidding up for workers, causing many of those on unemployment to finally get back to work.

For businessmen concerned about heath tax risk and other tax risks, the market has figured out a solution that almost all businessmen are now aware of, long-term temporary workers.
It's very difficult to forecast exact numbers in a complex economy like the United States, but trends are a little clearer to see. Pessimistic forecasts for unemployment appear to way off for 2011. The employment picture is going to improve dramatically in 2011 with unemployment at some point significantly under 9%.

6 comments:

  1. It bothers me that they Keynesian statists (but I repeat myself) will take credit for the increase in economic activity resulting from the manipulated boom and determine that it is a good thing.

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  2. Economics can only regain it's status as a legitimate profession, let alone a science, if they contribute to flushing the fraud, corruption, and sophistry out of the system. That you would be willing to pay slave labor wages because no one else will is a strike against your character sir.

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  3. Anon,

    I wasn't aware slaves were paid wages, idiot.

    Wenzel,

    I had a friend I hadn't spoken to in a long time brag to me the other day that he's been "working for Uncle Sam" (aka unemployment benefits) and has taken the opportunity over the past few months to really brush up on his... surfing. He's happy to be an "underpaid" surf bum so long as Uncle Sam will pay him to do so.

    I don't think many people realize what a harmful culture unemployment benefits breed by giving people the opportunity to play without working.

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  4. Re: Anonymous -

    If laborers are willing to accept "slave labor wages", this implies they have no better options. Thus, if Wenzel's character is in question because you would rather they starve to death, please hang a right at good intentions and promptly find your way to hell.

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  5. Great call Bob!

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  6. Rothbard always said that it was no sin to be ignorant of economics, but it's not a good idea to debate topics of economics while in that state of ignorance.

    ReplyDelete