Unemployment and Liberty

Benjamin Zycher is Vice President for Research at the Milken Institute for Job and Capital Formation in Sherman Oaks, California.

Involuntary idleness is an unpleasant experience, so it may seem absurd to speak of the “benefits” of unemployment. It often wreaks havoc with people’s lives, and can impose costs upon its victims from which long-term recovery may at best be difficult.

But that is not the whole story. There is a difference between the sources and effects of unemployment as viewed by an individual on the one hand and by society as a whole on the other. To put it differently, individuals may opt for an economic system with particular kinds of unemployment that yield important benefits over time, not all of which are narrowly economic. Before a quick conclusion is drawn about unemployment, it is useful to consider its sources in a free market.

Consider first someone entering the labor force. This might be a former student looking for a first job, or a homemaker returning to the formal labor market. Should such people accept the first jobs they are offered? Or should they search for more elusive opportunities providing higher pay, greater compatibility or upward mobility, a closer fit with qualifications and interests, or other desirable features? Most people would agree that it is usually best to spend some time considering various options, but many forget that a period of unemployment may be needed to uncover the ensuing benefits.

Bear in mind also that wages and salaries under capitalism tend to reflect the value of expected productivity in alternative employments. Someone looking for a better-paying job is seeking more wealth, but whatever his motivation, he is searching for a job in which his expected productivity—his contribution to the social basket valued by others—is higher. Thus, the period of unemployment increases (the present value of) his stream of contributions to society, as measured by market prices reflecting individual preferences. Again, most would agree that this outcome is positive, but forget that a period of unemployment may first be needed. These are examples of what economists call “frictional” unemployment.

Now, the individuals described above, searching voluntarily for new or better jobs, face conditions very different from those confronting a worker suddenly handed a pink slip on a Friday afternoon. Yet strictly speaking, the two situations are identical in principle, in that the worker facing a layoff possibly could avoid unemployment and the need to search for new employment by offering to accept a pay cut. A refusal to do so, followed by an effort to find a new job, is the same analytically as the refusal of our job seekers above to accept the first available opportunity.

However, as a practical matter, not all market adjustments can be both incremental and economic. In a world of constant change, the expectations of some people are bound to be disappointed, and important among these are their (prior) decisions about jobs, careers, and training. Tragic as such outcomes are for those affected adversely, it is important to keep in mind the sources of unexpected change.

In a free market, unexpected shifts in consumer preferences can alter the value of the labor that produces various goods and services. Any attempt to blunt the effects on workers, therefore, will implicitly deny consumers the right to express their changed preferences. At a normative level, laid-off workers who previously displayed shifting consumer demands that caused other workers to be laid off are in no position to complain—if we agree as a society to honor individual preferences, we cannot say that they are to be honored for some but not others. Each person risks unemployment in exchange for greater expected wealth. Such economic shifts resulting from changes in relative demands and/or costs yield what economists call “structural” unemployment.

The common thread linking frictional and structural unemployment is their origin in individual liberty, to wit, the liberty of the job seeker as he balances forgone opportunities against the possibility of better options yet to be discovered, and the liberty of consumers as they choose among goods and services and therefore among the many types of labor implicitly embodied. Thus, some unemployment is both inevitable and useful in terms of other human goals.

Other types of unemployment are less salutary. Various government policies cause “induced” or artificial unemployment. Foremost among them is the minimum wage, which prevents the employment of low-skilled workers whose expected productivity lies below the legal minimum. The Social Security payroll tax, various safety and health standards, and other policies are likely to have similar unemployment effects. “Cyclical” unemployment results from macroeconomic mismanagement—in particular, excessive swings in monetary growth—by the federal government.

Once someone becomes unemployed “involuntarily,” unemployment is likely to be viewed in a completely negative light. But the decision to participate in an economic system offering the benefits and risks of unemployment is a decision made before the fact, conceptually identical to deciding at the beginning of the year whether to buy life insurance. Greater expected wealth often accompanies a higher risk of involuntary future unemployment, but any person may end up with great wealth and little unemployment or with great unemployment and little wealth.

Fairness requires that people be free to choose among occupations with alternative combinations of prospective wealth and unemployment risk, and then take their chances. That not all such combinations are available is due not to the nature of capitalism, but to our existence in a world of limits. Market processes in fact offer a broad range of such choices, as many occupations offer greater security in exchange for smaller incomes. If we are to allow individuals to make choices among such alternatives, and if consumers are to be allowed to indulge their preferences, some unemployment, harsh though it is, must be seen as an adjunct of human freedom.

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