The Causes of Unemployment: What’s Missing?

By Walter Block, Foundation For Economic Education

Everyone is now concerned about the unemployment rate, it would appear. The scribes are busily scribbling as to the possible causes of this economic debilitation.

Their list is long, creative, and clever. One explanation is that the quit rate has plummeted. People are sticking around in jobs they would have left in rosier markets. Well, yes, if this replacement source of new job openings is decreasing, that could well account for fewer new employment slots opening up. But this is a two-way street. Presumably, people are not downing tools for fear that new appointments will not be open to them, at least not on better terms, overall, than they now enjoy. So, it is likely that the unemployment rate is at least partially a cause of this phenomenon, not only a result. Further, this is a sign of economic health, rather than disarray. After all, if workers are satisfied with their lot in economic life, that is all to the good, not something about which we should complain.

Some say that unemployment is due to a “mismatch” between labor supply and demand. That hits the nail on the head, but in the view of Allysia Finley of the Wall Street Journal: “Government subsidies and public schools have funneled too many young people to credential mills, which churn out grads who lack the skills that employers demand. Many would be better off training in skilled trades, for which demand is enormous.”

This is not a simple supply and demand challenge, but a disparity between skills needed by employers and those taught in schools and colleges.

But the real gap between supply and demand is in minimum wage laws, something, curiously, not at all mentioned in the widespread analysis of the problem. As students of Microeconomics 101 are taught, when these laws are enforced, and set above the equilibrium point, the supply of labor is greater than the demand for it. QED. That gap is unemployment.

Suppose that the market-clearing wage for a certain type of labor is $20 per hour. This means that the productivity of a person with that skill tends to be that amount. Wages reflect additions to the bottom line supplied by the employee (“discounted marginal revenue product,” in technical terminology). The economy rarely if ever equates the two, but we are forever moving in that direction. Any gap between productivity and salary sets up market forces to quell it. Wages are not predicated upon employer generosity, but, rather, on how helpful the worker is to attaining the goals of the business.

Now stipulate that the level mandated by this pernicious legislation is $30 per hour. New York City Mayor Zohran Mamdani intends to....(READ THIS FULL ARTICLE HERE).