Tuesday, March 22, 2011

Why Is Unemployment So High? - Robert P. Murphy - Mises Daily

Why Is Unemployment So High? - Robert P. Murphy - Mises Daily

  • Resources were misallocated during the boom period. In the standard Austrian theory of the business cycle, the boom period leads entrepreneurs to start too many long-term projects, for which there are insufficient real savings. The underlying capital structure of the economy becomes distorted, and it takes time for market forces to clean up the mess after the bubble pops. For certain pockets of the labor force, the "optimal" thing to do is wait it out. (See my "sushi article" for a simple numerical example of how this all can play out.)

    In some respects this process is what Keynesians interpret as a "fall in aggregate demand," when businesses and consumers come to believe they are on an unsustainable trajectory and slam on the brakes. Of course, only the Austrians recognize that the boom really is unsustainable, whereas the Keynesian efforts to prop up spending only perpetuate the problem and postpone the genuine recovery.

  • The government made low-skilled workers artificially more expensive. In July 2009, the federal minimum wage (due to legislation from 2007) rose from $6.55 to $7.25 per hour. Thus, anyone with productivity worth more than $6.55 but less than $7.25 per hour to an employer was turned into a money-losing proposition when he otherwise would have been profitable to hire.

  • The government made unemployment more financially attractive. By extending unemployment benefits repeatedly, the federal government has made it easier for job-seekers to maintain unreasonable expectations as they try to find new work.

  • The government is making employee health benefits more expensive by an unknown amount. "Obamacare" is leading to rising health-insurance premiums for employers, but on top of that the total impact is unknown, because of court challenges and Republican promises to reform or even repeal the legislation. Consequently, employers have an incentive to postpone long-term hiring decisions until the issues are resolved.

  • The Fed is making long-term planning far more difficult. Although most analysts think that the Fed's policies reduce unemployment while possibly risking high price inflation, I submit that the paralysis striking the private sector is partially due to Bernanke's unprecedented actions. If thousands of business owners are stocking up on canned goods and gold, because they think there is a small but definite possibility that the dollar may crash within a few years, that doesn't bode well for expanding employment opportunities.

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