The unemployment rate has been high for the last couple of years. The Austrian Business Cycle Theory helps explain why the rate has been so high and has remained high. The Federal Reserve, under Greenspan, artificially lowered interest rates and created new money out of thin air. This sent false signals to the market and injected money into places where it most likely wouldn’t have otherwise gone. For example, money flowed into stocks and real estate. When Bernanke became Fed chairman, he actually stopped the loose monetary policy for a while. This revealed that much of the previous investment could not be sustained. It revealed a misallocation of resources.
The reason for the high unemployment is that these resources are trying to realign with consumer demand. Some of the people that became real estate agents and construction workers due to the housing boom should not have gone to those jobs in the first place. This error, caused by the Fed’s monetary policy, has to be corrected (without government interference). To make matters worse, the Fed has been printing money like crazy since 2008 with very low interest rates. In addition, the government is bailing out certain businesses as well as running huge deficits. With all of these things and all of the uncertainties, it has prevented the unemployment problem from correcting itself.
Now let’s forget about the Federal Reserve and monetary policy for the sake of discussion. If the Fed kept a neutral stance and did not change the money supply (I know this is virtually impossible over the long-run), what would unemployment look like? Now we have to consider all of the other interference by government.
In a completely free market, there would be virtually no unemployment for anyone wanting a job. I wouldn’t say it would be zero, because there would be temporary unemployment for those in between jobs. It is also the case that there may be a very tiny percentage who are too sick or disabled to work at all. But in a truly free market system, unemployment would be close to zero.
The government causes unemployment in a number of ways. Regulations on businesses cause unemployment. Taxes cause unemployment. Labor laws cause unemployment.
If you are willing to wash my car for $10 and I am willing to pay you $10 for my car being washed, then I can employ you to wash my car. Let’s say that the government imposes an income tax of 20%. Now you will only make $8 to wash my car, but that may be too low for it to be worth your time. I could pay you more so that your take home pay is $10, but I may not be willing to pay over $12 to get my car washed. My time is not worth that much, so I would rather do it myself than pay that much. So, because the government instituted the income tax, it broke our deal. It caused unemployment.
Of course, minimum wage laws are the biggest job killer. If there were no minimum wage, just about anyone could find a job at any time. I would be willing to pay someone $1 a day to be my personal assistant. Sure, the wage is extremely low and most people would be foolish to do it, but it is a job offer. But I can’t make that job offer because of the job destroying minimum wage. With no minimum wage, I’m sure someone else would be willing to pay someone at least $20 per day to be their assistant. If you were unemployed, you could at least do this until you found something better.
To top it all off, not only does government do things to destroy jobs, it actually subsidizes not working. Unemployment “benefits” encourage people not to work. I have personally heard stories of people intentionally collecting unemployment benefits with no intention of getting a job. I heard of one person who got displaced and was about to retire anyway, but collected unemployment because it was there.
There are people that have been on unemployment for over 2 years now. While we can certainly sympathize with people who lose their jobs, it is hard to sympathize with someone who has been out of work for over 2 years. You can work in a fast food restaurant if you have to. If it is beneath someone to do that, then it should also be beneath them to collect unemployment. I don’t blame people who collect unemployment as many of them are just getting some of their money back from the government. But the system is horrible and it just encourages people to stay unemployed.
To summarize, there are a lot of reasons for unemployment and they all go back to government. In a truly free market environment, there would be work for anyone who wanted a job and was willing to work.