Saturday, September 3, 2011

Why We Are Not in a Period of Permanent New High Unemployment

Any economist who understands the basics of supply and demand should also understand that the economy is not in a period of permanent new high unemployment. Put simply, markets clear. If there are huge numbers of unemployed at a given time, it is because of factors surrounding the unemployment rather than some mystical permanency to the unemployment.

This is not to deny that current unemployment is not high. It is very high, as is the length that many are unemployed.

There are two key factors that are keeping unemployment high and if reversed would do much to change the unemployment picture, even in the face of what is considered a period of high regime uncertainty.

The first factor is the extension of unemployment benefits for many to 99 weeks. Quite simply, if you pay people not to work, many won't. The second factor is minimum wage laws, which impact those whose skills do not match up well with the current economic environment. If someone has skills that will only generate $5.00 per hour in marginal revenue for an employer, an employer will not employ that person at $7.25 per hour, the current minimum wage.

Some have argued that the ever changing complex regulatory environment forced upon employers ("regime uncertainty") is a direct cause of some of the unemployment. This is unlikely the case. RU may, however, be an indirect cause.

What RU does directly is force down wages, rather than eliminate jobs. This decline in wages may then cause unemployment because the new RU wage is below the minimum wage or because at the new lower offered wage a person chooses to continue taking unemployment payments.

Why do I say RU may force down wages rather than eliminate jobs? Simple math. Suppose that an employer in an environment without RU knows he can afford to pay a certain group of new hires $10.00 per hour. But the picture changes under RU because he may not know, say, whether new requirements will kick in that will require him to pay Obamacare payments of $3.00 per hour or $6.00 per hour. What would happen under such conditions is that wages offered by such an employer could fall to as low as $4.00 per hour, if such an employer were completely risk averse and not willing to take on any of the risk of RU.

But at $4.00 per hour, the wage falls under the minimum wage laws and the employer doesn't even put the job notice out. Eliminate the minimum wage laws and more jobs will appear, even if there is RU. Eliminate RU and wages will rise (and if they climb above the minimum wage unemployment will drop)

It's the same with those collecting unemployment payments. In an environment free of RU some of those collecting unemployment may be able to earn $20 per hour and would be willing to forego unemployment benefits. But, because of RU, that previous $20 per hour wage may be down to, say, $12.00 and some are thus, at the lower wage, prefer to simply sit things out on unemployment payments rather than work at RU caused $12.00 per hour wage.

In short, minimum wage laws, unemployment benefits and, indirectly RU, are the key components of the current high levels of unemployment. Eliminate minimum wage laws and unemployment benefits and the unemployment picture would improve very rapidly, even if there is high RU. High RU will only push the wage levels down, if there are no minimum wage laws or unemployment payments, and not result in higher unemployment.

But, the important thing to understand is that there is not some new permanency to current high unemployment, an idea that is being promoted by many economists and pundits. That's a fallacy. On a short-term basis, during the central bank caused downturn of the business cycle, unemployment on a temporary basis can climb quite high, but this would be very short-lived if the laid off had no unemployment payments to look forward to. They would start to offer their services on the market at rates where they would eventually find jobs. That's supply and demand. Markets clear. Current, high unemployment could be resolved by elimination of two key government interferences that cause unemployment, minimum wage laws and unemployment benefits. Further, by eliminating RU, wage rates would climb.

If these changes are not made, sadly the economy will look like we are in a new period of permanently high unemployment. This "permanency" will continue until Federal Reserve money printing creates such price inflation that the minimum wage becomes irrelevant and the purchasing power of unemployment payments becomes so meager that those receiving unemployment payments seek more income. If, however, minimum wage laws and unemployment payments are adjusted for price inflation, it is possible to prolong high unemployment in an unnatural high state into infinity. Bottom line, high unemployment is caused by government regulators. It can last a very long time, but with almost a snap of the fingers, it could be ended.


  1. WTF is this?

    1.) Unemployment is at a depressionary level of 22%, that IS a period of permanently HIGH unemployment.
    2.) Wages are circa 1970s. The BOOM of the 2000s was fueled by HELOCs/CREDIT, for example, consumers put 9 billion on their HELOCs so they could buy 5 dollar Starbuck coffees.
    3.) Putting people to work at $4 an hour won't do anything to service their existing debt so they won't consume.

    I feel like my browser was hijacked and I went to CNBS's site, hope I don't see Palin ads next.

  2. Very nice explanation, Doc. I had never thought through the implications of R.U. on wages and employment. Thank you for doing the 'heavy lifting (thinking)' for me.

  3. I'm not sure it's as simple as reducing unemployment benefits and eliminating minimum wage although I'm sure those things would help. As you know, we also have an insolvent banking system, interest rates are too low, discouraging savings, the currency is corrupt, the government has grown too large and is consuming too much of the economic pie. We're involved in too many wars. The list of major problems is pretty long. I think it's time to brace for impact.

  4. I am an employer. When considering offering permanent positions, since I consider employment to be a reasonably long term commitment on my part, for some years, I need to have a future view of the demand for the employee's services as well as the cost. In this current economic environment, demand has high uncertainty and also the policies that apply to employment and its costs have high uncertainty. Accordingly, I delay hiring for as long as possible until I get a better picture and if I must hire to meet current demand, I will do so through temp contracting.

  5. @anonymous 11:36

    You are thinking within the current minimum wage/unemployment framework.

    There is a price you would hire them at. Would you not hire them at 10 cents an hour?

  6. We're going down a slippery slope with this thread. A Bernanke slope of Ivy League misguided theories.

    Robert, I was at a client's yesterday. He owns umpteen fast food joints. Owns as in he bought from a franchise.

    He has the closest thing to .10cent an hour labor. One girl told him EFF YOU I Quit.

    So let's say I don't hire .10cent an hour labor and my competition does. I go out of business because my competition sold my product/service at 1/1000th the rate I could.

    My competition now can't service his existing overhead/debt. Gas isn't going to come down. Gas is an integral part of everything.

    So now we have workers ALSO KNOWN AS CONSUMERS making so little they can't even consume food.


  7. @ Davos

    Re-read what you wrote, your a damn Keynesian. Consumption is not the key to a growing economy, as Keynesians would have us believe.

    And you are joking that someone who is able to pay labor 10 cents an hour is going to go out of business, right?

  8. It seems people do a lot of misunderstanding for a living in the comments section. Debt overhang does not cause unemployment, nor does an insolvent banking system. There is no "need" for credit to have jobs come into existance. Higher gas prices, insolvent banks, federal reserve inflation and an overgrown and overregulating government does not cause unemployment - it just causes wage rates to fall. There is always jobs that needs to be done, at a correct wage rate. This has always been the case, and will always be the case, until the economy deteriorates back to a state where everyone is a subsistance farmer.

    Only laws that forbid work, and free handouts from the government cause unemployment, as Robert points out. The rest will just lower wage rates, lower return on capital, lower standards of living etc. These are of course not nice things either, but they are not reasons for unemployment.

    Unemployment as most economists talk about it is a myth.

  9. @ Robert Wenzel

    Perhaps Davos forgot to mention his clent's fast food joints are in India or that he hires illegal aliens.

  10. Davos' pathetic attempt at refutation falls under the tiring guise of "workers need to consume, pay them more so they consumer more!"

    Lord almighty it looks like the key to prosperity is just paying people more! But wait a second, if businesses could increase their sales by paying workers more, why haven't those greedy capitalist pigs done so already?

    Something doesn't compute...

  11. @Robert: Calling me a Keynesian is insulting.

    An economy needs consumers.

    Consumers need decent jobs.

    Consumers with jobs today earn 1970s wages. They are debt slaves --- so they consume little but essentials.

    The economy did good until the consumers credit (HELOC) card got yanked.

    If you want to get rid of high unemployment you have to reset the all debts, bring manufacturing jobs back and produce slightly more than we consume.

  12. Davos, you are imputing value in reverse. Also, you're ignoring the fact that if demand decreases, that prices must necessarily adjust in order to clear the market.

  13. Davos doesn't realize that America still does manufacture a lot of goods. The idea that American losing its manufacturing base leads to our economic ills is simple ridiculous:

    The real question is if Davos would support ending the Federal Reserve which has really been responsible for providing an implicit guarantee to banks to extend credit wildly.

    He also contradicts himself when he says an economy needs consumers (no sh!t sherlock) but then we need to produce more than we consumer. Obviously I agree, production drives economic growth, not consumption, but Davos tries to have his cake and eat it too.

  14. While I mostly agree with what you say here Robert, I don think you underestimate the effects of RU, even if they are somewhat indirect. Lots of state and federal laws kick in when an employer passes 10, 20, 50, etc. numbers of employees (I'm somewhat pulling these numbers out of my butt since they change from year-to-year, and my company has shrank to the point where none of them kick in at the moment). Lots of smaller companies operate just below these boundaries so avoid the massive increase in either employee costs, or the costs and headaches of the extra paperwork (and associated attorney/accounting nightmares).

    This doesn't take away from your overall point, but I suspect RU has more effect than you are crediting it with.

  15. "Also, you're ignoring the fact that if demand decreases, that prices must necessarily adjust in order to clear the market."

    Demand has decreased.

    PRICES HAVE NOT ADJUSTED. Wheat up 74%, corn up 14%, oats up 68%, canola up 36%, heating oil up 29%, beef up 18%, coffee up 27%, sugar up 44%, cotton up 66%, copper up 37%, pork up 60%. All this stuff is in everything we consume.

    Save for the popped bubble sector --- everything but existing home prices have gone WAY UP.

    Some of you guys aren't looking at what just happened, or what is happening.

    You might want to take a second look.

    None of this stuff works with our high debt loads, business debt, consumer debt and most of all government debt. None of these ideas work with high oil prices. None of this works with a population of 7 billion. None of these ideas/theories work when Fiats are being debased.

    We are in a world of .10cent wages now, we've been here since the 1970s. It is why the economy has tanked ever since the HELOC credit went away in 2007. Until the debt is cleared unemployment will only skyrocket.

    Lowering wages just tosses the consumer further under the bus.

  16. James, in the 1950s 28% of jobs were good paying manufacturing jobs. Today it is 11%.

    If you take a minute to read the fy2005 FOMC minutes you'll see them laughing at exploiting workers and how CEOs want to off shore good jobs to increase profits. If you read any of my work you'd know the answer to what I think about the Fed.

    There is NO contradiction in producing more than we consume. A country either runs A.) A surplus nation or B.) a deficit. Since the 1970s we produce less than we consume. It is like a family making 50k a year manufacturing eBay widgets in their garage and consuming 65k. We need to produce what we consume and sell (export) slightly more than we need so we have a savings.

    The root of the problem is that money is loaned into existence, and therefore when we don't have x percent growth per year the debt service implodes causing deflation.

    We don't have deflation because we have idiot Bernanke.

  17. Robert, I went back and reread your RU analysis, and I think there's another minor flaw in it. It seems your analysis treats RU as a marginal risk for new-hires when in fact it is worse than that. RU not only adds risk with the costs of new hires, but you have risk over your entire employee base. In other words, you already have an anvil hanging over your head, and stacking more weight on top of it is not particularly appealing. You can't offset that just by lowering the wages of new-hires. You could go to your employee base and ask them to take a pay cut to offset the risk, but most employees aren't too keen on that.

  18. Davos, I am well aware of the prices of commodities and producer goods. But, to show commodity and producers' goods price increases as a retort to my statement completely ignores monetary concerns, state interventions, and the time structure of production.

    Ceteris paribus, my statement is correct.

  19. Davos-

    What is the definition of a "good" manufacturing job? Isn't every job good for those who have it, or does your own definition of "good" override their preference to work at said position?

    It seems like we agree on the Fed, Bernanke, and the need for deflation, but the idea that trade deficits are a "bad" thing is foolish. It's funny you bring this up because I was literally just reading Chapter 11 of Man, Economy, and State. So as an individual, if I decide to part with my money and purchase a soda, am I not running a deficit? If so, why is this bad for the country, as an aggregation of individuals to do so?

    Ar we not trading services, currency, or labor for foreign goods? Do U.S. dollars not make their way back to the U.S. to purchase other goods denominated in dollars?

    I think we can agree that the purchase of government debt misdirects investment to an inefficient institution. You also seem to be arguing that we need to increase our savings rate more in order to grow, that which I agree, but individual preference is always different so it doesn't work that way for everyone.

    Your concentration on wages and trade deficits is a Keynesian fallacy (even though you deny being a Keynesian) that money represents wealth when it is only a unit of transaction in the end.

  20. Why would anyone work a life/soul-sucking minimum wage job when anyone can easily collect $600 per month for free from the governments? That's like $3.50 per hour tax free for doing exactly what you want to do. Only fools work for a living.

    Now...Get to work my tax slaves! I need the money!

  21. I suspect that what Davos is trying to say - the apparent 'enough to buy back the product' error aside - is that canning the minimum wage and unemployment benefits wouldn't end the problem 'with a snap of the fingers'. There is no bloodless solution. Life in modern America simply has too many built-in mandatory costs, many of which, given the current laws and infrastructure, would likely not fall far and fast enough to keep people from starving, going postal, or both. That isn't a defense of the minimum wage or unemployment benefits; it's a cold look at the facts. A century's worth of interventions piled on interventions, malinvestments piled on malinvestments, can't be overturned 'with a snap of the fingers' unless you want a civil war or worse. Everything is not going to be okay. Even free markets do not miraculously heal the sick. There's no sense pretending otherwise.

  22. Gawd, this was a waste of time.

    First, we don't have a capitalistic system. I wrote about this in "Why we are totally finished."

    Second, "money" loaned into existence doesn't work without the @$$inine 3%+++ growth each year, which I vehemently oppose since our economy is nothing more than taking resources and selling them. With 7 billion people exponential growth is an unmitigated disaster.

    Third and lastly, with off-shoring/globalization we compete with LCD's whose work force makes 2 bucks a day. Because of that we have a wage freeze. Because of the wage freeze the only fuel that can be juiced into the economy is vis a vis credit.

    Saying people should work for less is @$$inine.

    If you want to put people back to work wipe out the debt. Consumers today have cancer of the circa 1970s wages and cancer of the 50% of what little they make goes to taxes (hidden and overt) to pay for @$$inine political bread for votes circuses.

    If you differ God bless you and your opinion but these are and will remain my views.

  23. I am going to defend Davos. It's more than wages that is the problem.

    What comments does anyone have on Denninger's piece? Anybody here a business owner or entrepreneur?

  24. Davos, I'm going to both defend and attack you tomorrow when I have a chance to sleep on this, and think it through thoroughly. You have some good points.

    The thing is, we can have exponential growth of individual wealth- each person, if they utilize their skills and mind properly can increase the good in the world- but not until a truly free market, sound currency, anti- war/corporatocracy system replaces the current failed system.

  25. Ritholtz had a super chart on wages. If you pay attention to the women part you'll see how families, in addition to shooting up on HELOC and revolving credit held it together.

  26. @Davos

    Yeah, but if you look at those charts, there is a lot of BS numbers that don't mean anything. Also, Robert Reich put it together!

  27. Davos, you don't have a clue. Wages are an essentially irrelevant indicator. In the 80s, business started replacing wage increases with benefit packages in response to government tax incentives. Total compensation today (wages + benefits) is higher than it's ever been, a fact that totally destroys any argument you were trying to make. No surprise, though...getting a bunch of misinformation from a guy who links to a Robert Reich propaganda piece.

  28. KPres: Take your effing benefit package to WalMart and buy some groceries with it.

    Benefits, like medical insurance, are akin to student loans and the cost of education --- without student loans college cost wouldn't be up 700% because tuition would be affordable.