On Unemployment

Remarks delivered at the September 3, 2000 service of the North Texas Church of Freethought

Unemployment is a subject that is high on the list of economic facts with moral implications. Let it be understood that by "unemployment" I mean - and I think most people would mean - an involuntary condition that afflicts people who would like to be employed - earning an income - enough to be out looking for work and who aren't unreasonably particular about the sort of work and compensation that they will accept.

Now the question is, how do we know how many people are in this situation? The unemployment rate is arrived at simply by asking people if they are looking for work. It doesn't ask them whether they were fired from their last job for embezzling or quit because the boss was a damned atheist. It doesn't ask them how they're going about the business of looking for work or how hard they're trying to land a job. It doesn't ask them whether they've had a job offer that they thought was "beneath them" or that didn't promise to pay them what they think they are worth. It doesn't even ask them whether or not they're collecting unemployment or living comfortably on the income of a spouse or ample savings and, if so, whether they wouldn't rather stay unemployed until the payments run out or it gets too boring around the house.

Is this a callous way of thinking? Sure it is, because we can almost certainly find people who were fired because their boss found out they're a damned atheist. We can find former college professors - maybe even professors of economics - driving cabs. And we can certainly find people whose unemployment has been a devastating blow to their financial and personal well-being. On the other hand, what's really wrong with the other sort of people, except, of course, for the embezzler and the dolt who couldn't abide an atheist boss? If sympathy is in order for people who were laid off because of corporate downsizing, why should it make a difference that some of them could have moved to another position at the company's plant in Cleveland? And if someone is holding out for a good deal more than what others might think they're "worth," well, what of it?

But all of these different elements that are lost in the statistics make for great theatre when it comes to trying to make sense of macroeconomic reality. Consider NAIRU. That's the "non-accelerating inflationary rate of unemployment," also known as the "natural unemployment rate." This idea was apparently originated by Milton Friedman, who argued that the nature of the modern economy was such that a certain amount of unemployment was normal and even desirable.

Desirable? How could being unemployed be desirable? Well, of course, it never is, any more than being put to sleep and having your gallbladder cut out of you is a nice way to spend your day. But it may nevertheless be necessary. Because, as the saying goes, stuff happens. And it's been happening faster and faster lately.

The nature of the modern economy is such that jobs are being created and destroyed - or moved from place to place - all the time. It would be nice if this didn't impact people's lives, but do we want FAX machines and cell phones and more kinds of bread and cheese or not? Even if we don't, other people do. And they're not going to subsidize us in the kind of life we're comfortable living just because we only just got there. As a result, some people will find that their career track has turned into a dead end. Others will find new opportunities when they least expected them. With luck, they might even be the same people. Or not. In any case, many people are already on their second career.

The point is that in a static economy in which for every X number of people there is work for A farmers, B policemen, C garage mechanics, D telephone operators, and so on, there is no good reason for anyone to be more than fleetingly unemployed. Because if there were, say, Y unemployed people, then they could simply be assigned in the same proportions among the various forms of work and the whole economy would become one of X+Y. But in an economy subject to change, the proportions of people needed to do these things - as well as new things that have never been done before - is also changing. Making these changes is seldom entirely easy or fun. But change can be a very good thing. After all, if the number of people needed to build a car can't be reduced by some means, where are the people going to come from that are needed to build things like communication satellites and the International Space Station?

So NAIRU, properly understood, makes a whole lot of sense. But is also one of those situations in which the correspondence between the idea and reality is a great big question mark. No one even knows what NAIRU should be. Should it be 5%? If the government were successfully pursuing policies that targeted that figure, there would be more than a million people out of work that are employed now with the unemployment rate at 4%. Or, if NAIRU should be 1% there are already several million people out of work that shouldn't be.

The problem with NAIRU is not that it's a terrible idea as much as it's an incomplete idea. The economists' macroeconomic equations are just not good enough to tell us what it ought to be. Probably they can't.  Because how can the academic models anticipate things like the number of workers that will be absorbed into the biotech industry in a few years? That may depend on discoveries that haven't even been made and processes that haven't even been tried yet.

Another problem with NAIRU is that it's nebulous. It sounds great that a dynamic economy is constantly destroying and creating jobs. That's progress and who in their right mind can object to that? But Friedman's original idea included all the reasons that might sustain what he called the "natural rate" of unemployment, including minimum wage laws.

Oh, yes! Try as some might to say that minimum wage laws are an unmitigated good thing, the simple fact of the matter is that if you can price widgets out of the market you can price people out of the market as well. Many people don't own a Mercedes simply because they can't afford a Mercedes, while it's obvious that those who do own one can afford it. Who would be so foolish as to argue that, in fact, the price of a Mercedes doesn't deter anyone from buying a car who really wants one? Only those for whom "really wants" means "will do whatever it takes - beg, borrow, or steal - to afford."

Now a good case can be made for saying that minimum wage laws not only unfairly price people out of the market but are also an unjust infringement of inalienable rights. The government will let you work for free, after all, but not for anything greater than zero and less than $5.15 an hour. Obviously, the concern is that if someone works for $4 an hour, they are being unfairly exploited, whereas if they work for free they must be intending to be "taken advantage of" so to speak. So the only way you can work for $4 an hour is to be your own boss, which is what do-it-yourself is all about. Just go to your nearest Home Depot and you'll see some of those slave-driving, stingy employers and their tired, exploited workers in line at the checkout counters.

Yet there's another side of minimum wage laws, one which, surprisingly, is seldom brought up by those who always want to raise them. This involves looking at matters from the point of view of the real costs of a resource like labor. When air and water are cheap or "free," for example, the result is pollution - what economists call an "external diseconomy." The solution is to take some action that causes the true cost of such resources to be borne by those who want them, which can be done by allotting or even auctioning off a fixed number of "pollution credits." This provides an incentive for those companies that are able to reduce their emissions inexpensively to do so and even to sell their credits to other companies that cannot reduce their emissions as cheaply. But the total amount of pollution is thereby limited, which benefits everyone.

Likewise, the true cost of labor is more than what people are paid by their employers. This is because workers are not like any other kind of economic resource. For workers are also husbands and wives. They are fathers and mothers. They are friends and neighbors. They are students, citizens, voters, and a hundred other things, the importance of exceeds that of the employer-employee relationship, and goes beyond the concept of Homo economicus.

When people neglect to maintain their personal and family relationships, when they fail to raise their children well, when they are not active participants in society, and when they do not inform themselves and reflect sufficiently on matters of common concern, without which a democratic form of government becomes a hollow ritual, it hurts us all. These things, which can only be done by individuals, individually, represent a collective value - a public good - that is of as much, if not more importance, than clean air and pure water. So why should this value not be reflected in the cost of labor? Seen this way, we may think of the minimum wage as a kind of minimum dollar value that we assign, as determined by an admittedly political collective process, to all the other roles that people are expected to play in our society besides that of a wage-earner.

Is this paternalistic? Perhaps it is. But, looked at in this way, it is no more paternalistic than speed limits or building codes or even taxes and especially the military draft, all of which serve the general welfare at the cost of our personal liberties.

In addition, as with any external diseconomy, imposing the true cost of a resource causes that resource - in this case human effort - to be used more effectively over the long run. As long as it is not raised too high or too fast - whatever that may work out to be in practice - the minimum wage is an incentive to improve the productivity of labor. This might happen in any number of ways. Someone who is unable to sell their labor at $5.15 an hour, for example, may face the fact that they have to finish school or actually get out of bed in the morning to be able to find work. Or, a company may find a way to get $5.15 an hour or more of work out of someone who would ordinarily be worth less than that.

The only remaining difficulty is that there may be people who will just never be able to provide labor that is worth $5.15 an hour to anyone. There may also be jobs that it will simply never make sense to pay someone $5.15 or more an hour to do. In these cases, as with the external diseconomy of pollution, it may make some sense to allow for a limited number of positions that pay less than the minimum wage and to make these positions transferable. In this way, those few people who can't or don't want to do the sort of work that pays minimum wage would have a chance and employers would still have an incentive to try to eliminate such positions in favor of higher-paying jobs that more truly reflect the social costs of human beings.

This leaves one big question unanswered, though. For in the utopia of the future, human beings won't have to work at all because robots will do all the work. Beyond pushing a few buttons to satisfy their needs and wants, people will devote their time to learning, the arts, and companionship. In a perfect world, in other words, unemployment will be 100% and everyone will be "on unemployment."

Now how, exactly, will that come about?