Unemployment theory

No, don't "turn over", you'll like it.

Recently I've been thinking about the causes of unemployment. I don't know a lot about the Austrian perspective on it, but no doubt there has been someone who has developed it. I want to come up with some ideas and see how they stack up.

The modern economists view inflation and unemployment as irreconcilable goals, since they believe that lowering inflation will increase uneployment and vice versa. Whether or not this is true under MMT I leave to other more capable minds than mine, but it does sort of make sense that if interest rates are high to keep inflation low then there is less money available for discretionary purchases and so you could see some short term unemployment shock.

Before we get into the details of what causes unemployment, however, it is enlightening to examine what situation would result in full employment. Firstly, I will consider such an economy as has a market money system, so forget about central banks and fractional reserves.
In a market economy everyone acts as an entrepreneur in every market transaction. All people are considering whether if they engage in a certain trade they will end up with more wealth than before. If the answer is yes, they trade, if not, they don't. Whether they have acted as a good entrepreneur is answered by whether they actually do end up with more wealth after the exchange than before. As I have mentioned previously, wealth is highly subjective and cannot be measured, so the only person who can know this is the one who made the trade. Money profit is easier to measure but it's only a small part of the picture. People donate money to charity not because they think they will receive something of cash value in return but because they have compassion for the needs of others and they feel better about being wealthy when others are not if they give some away.
In the same way, whenever someone is looking for work they are also acting as an entrepreneur. All people always want more goods and services, so it is impossible that there are simply no jobs available in the economy. It is simply foolish to say that jobs are "created" or "destroyed". Demand for labour flows from one region of the economy to another, but there is always infinite demand for labour and only a finite supply, and all regions of the economy always have infinite demand for it, so the prices for the labour control where it goes. When someone looks for work they are proposing to trade their labour for some price. If the utility of their labour is expected to be in some way low then they will usually get a low price for it. If it is high then they may demand high wages.

Now that we have some grip of the basics we can start to talk about unemployment. Firstly, unemployment is theoretically impossible. That is to say, there is always infinite demand for labour so how is it that anyone would ever be unemployed?

If the expected utility of someone's labour is very low then they might not be able to command wages even as low as the minimum wage, so in that case unemployment is the result of the minimum wage price control. So we have fact number one:

1. Minimum wage laws produce unemployment.

Now let us say that the Austrian view of the business cycle is broadly correct. In this case, when the economy shifts from high gear to low gear, there is a sudden drop in relative demand for labour in certain sectors of the economy, formerly booming. As a result those workers have to take a large drop in salary because the utility of their labour has become low, or there have to be layoffs. Fortunately for those driven below the breadline or the minimum wage line, there is always infinite demand for labour so they can move into other sectors of the economy. But now we have a problem, you see, because those people who were formerly skilled are now unskilled, so they have a low utility of labour and consequently low wages. Some might be only prepared to accept the same wages as before, until they capitulate, and this will also result in unemployment. Further, some jobs require years of training and this is usually chosen because of expected future demand in that sector. If someone trains as a civil engineer and an economic downturn puts construction on hold they will not be able to break into that labour market. As a result we can say that business cycles are responsible for unemployment, and since they in turn are caused by interest rate manipulation, we can say:

2. Interest rate manipulation causes unemployment.

We're not quite done with interest rates either, since there's something very few people know about them: they are a tax. Consider what the central bank in any country does if inflation is getting high: they increase interest rates. They way they do this is by decreasing availability of bank reserves by some boring way you needn't bother about. When they do this the cost of lending goes up for banks and the money creating process slows. In turn, banks increase their interest rates to encourage people to save and to make sure they stay profitable. There's one big fly in the ointment, though, and it's variable rate home loans. When interest rates go up these people's disposable income goes down, since more is needed to pay the bank because the banks costs have been increased by the central bank. As a result of this process, money is extracted from home loan payers and goes to the central bank, where the profit is sent to the government. In other words, interest rate changes are changes in a tax rate.

What has this to do with unemployment, I hear you ask? Well I am glad you asked because I now come to the third cause of unemployment. Any tax on the income of a business will cause that business to have to grow more slowly. Slower growth by definition means that it will be able to employ people only at a slower rate. This reduction in the rate of employee uptake can also cause people to stop working or move to sectors where they have little skill. Furthermore, individual income tax also reduces the rate of growth of business because it removes money available for discretionary spending that might have been spent on consumer goods. Thus we come to number three:

3. Taxes cause unemployment.

In fact, anything that distorts the economy, makes it hard to predict or extracts wealth from it will cause unemployment in some measure. And let's not forget what happens to the wealth extracted from the economy: a large part of it is given to the unemployed. This might seem like a great thing but in fact it lessens their desire to get a job again. This disincentive to work is at the heart of number four:

4. Unemployment benefits cause unemployment.

These four things - where do they come from? Are they produced by the market? Well, no. All of these are laws, functions or impositions of government, by government, for government. So we can create a new statement zero about unemployment:

0. State interference in the market causes unemployment.

Still think Obama's jobs plan might have worked?