The Unemployment Myth

The simple fact is that, due to a combination of market forces and political expediency, the unemployment rate in free-market western democracies is effectively maintained between 5% and 10%.

If unemployment approaches 10% the government doesn’t like it because it puts a strain on the budget, and creates a lot of unhappy voters that could topple them at the next election. This not only motivates the government to do something, it gives it an excuse to go against neoliberal dogma, and adopt Keynesian policies aimed at stimulating the economy, such as an increase in public spending and a deficit budget.

If unemployment drops below 5% then employers have to compete for workers, rather than workers compete for jobs. This means employers have to offer higher wages to fill a position, which reduces their profit margin and makes it harder to remain viable a competitive market. The higher cost of wages discourages people from starting a new business, and impedes existing companies from expanding. This will eventually increase unemployment until workers are competing for jobs again, which drives down wages.

If we want to bring unemployment to an end we have to find a way to share the available work. This has been tried before by mandating a shorter working week and imposing overtime rates to discourage employers from letting their workers go beyond it. Unfortunately it did not work, rather it just forced employers to pay higher labour costs.

If we do find a way to achieve full employment then we will need to address the pitfalls, such as a wage blow-out. One way to do this is for companies to implement a wage-sharing system. This should also address the issue of wage disparity. It will lead to a shift in income from executives to workers though, so it will not be popular with management.

Another issue we would need to address is a variable wage. If we want to keep everyone employed during economic cycles, then when there is less work available people will have to work less hours, rather than having fewer people in work. This will mean people earn less during an economic downturn, but it would also mean less tax revenue going to unemployed people who are willing and capable of working. To help manage the drop in income we could adjust mortgage payments and taxes, especially income tax and consumption taxes like the VAT.

Endnote

Whenever I hear people say they are worried about machines or AI taking our jobs I think WTF? Machines have been taking our jobs since the start of the Industrial Revolution, and we have gone from working 60-96 hours a week to produce not a lot, to working 35-40 hours per week and producing loads of stuff. Okay, a lot of what we produce is cheap crap that ends up in landfill, but the point is we have a lot more stuff to enjoy with about half the effort.

Unemployment is a result of the system, not a lack of available work.