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Source link: http://archive.mises.org/17070/what-drives-higher-unemployment/

What Drives Higher Unemployment?

May 24, 2011 by

In an unhampered free-market system, the Ricardo effect is benign and progressive. It is just an interesting observation. FULL ARTICLE by Patrick Barron

{ 11 comments }

economics9698 May 24, 2011 at 8:37 am

“Government itself needs the unemployed in order to perpetuate its labor-regulating empire, which provides it with high paying and secure jobs. What would all those labor lawyers, judges, advocates, investigators, insurance providers, and record-keepers do if the country scrapped all labor laws? And what would happen to all the welfare administrators and caseworkers if all men were forced to be responsible and self-reliant, because government refused to enslave their fellow citizens to provide for their upkeep?”

What a wonderful economics teacher. Government is truly a bunch of lazy thugs stealing.

Dave May 24, 2011 at 10:45 am

Interesting article. But I can not agree when Mises explains that machinery replaces men only when the market is driving the cost of labor higher. In the next sentence he contradicts himself when he says that labor costs are rising because capital investment is making labor more productive. This statement is quite the opposite of the first sentence. Firstly we have the capital investments and secondly they lead to rising labor costs and not vice versa.

And note: You can’t increase productivity by simply employ more people at lower costs. You will certainly increase the output but you won’t be more productive because productivity is output from a production process per unit of input. Therefore the only way to increase productivity is by investing in capital goods to specialize work force and simplify work task. That means that you’ll have either more output with the same input or you’ll have the same output with less input (work force will be made availabe). So to invest in capital goods is not a matter of labor costs. Otherwise in India and China there would be no need but in fact businessmen in China and India invest as well in capital goods. But due to a lack of savings it isn’t that easy. To get more savings by full employment you’ll need to pay higher wages.
So if you want to increase productivity you have to invests in capital goods and this will generate demand for capital goods. And this is the key… because the work force made redundant in the consumer goods sector by investing in capital goods will be needed to produce these capital goods.

And due to the ‘extention of production’ by specialized work forces and therefore shortended ‘work stages’ there is even more need for work force overall. Let me try to explain: The slaves picking cotton where replaced by cotton picking machines. But the whole assembly line for John Deere and its external suppliers will need even more workers (but highly specialized) then the redundant work force form cotton plantation to produce the cotton picking machines.

Anthony May 24, 2011 at 11:06 am

“productivity is output from a production process per unit of input”

There are multiple ways to measure productivity… in this article Patrick was discussion productivity of labor, which is the amount produced from a given amount of labor.

Overall productivity can be increased by increasing the productivity of labor since labor is one of the inputs (along with raw materials and capital goods) that need to be factored in to any productivity analysis.

Dave May 24, 2011 at 12:39 pm

Anthony, I don’t know what’s your point. How do you increase productivity of labor? You need to make the process for the work force ‘easier’. In other words you need to invest.
Even in India where they build foundations they use picks and shovels (which are capital goods). They are much more productive then anyone digging with bare hands. Because capital is scarce they only can buy picks and shovels. But you need someone to construct your picks and shovels, therefore you need redundant work force. In a full employment economy the only way to get redundant work force is by increasing productivity. As long as you don’t have full employment to invest in (high-price) capital goods isn’t really important. And if the producer of the picks and shovels wants to increase productivity he needs to invest in capital goods as well…

Mashuri May 24, 2011 at 1:02 pm

I agree. The Ricardo effect is not “cost pushed” but “productivity led”, so to speak. Investment in capital happens first, which leads to higher productivity per unit of labor, which leads to higher compensation for said labor.

Concerned Friend May 24, 2011 at 2:05 pm

“Interesting article. But I can not agree when Mises explains that machinery replaces men only when the market is driving the cost of labor higher. In the next sentence he contradicts himself when he says that labor costs are rising because capital investment is making labor more productive. This statement is quite the opposite of the first sentence. Firstly we have the capital investments and secondly they lead to rising labor costs and not vice versa.”

I may be speaking completely out of turn, but perhaps he means the point when at that level of labor (for example, at ditch digging with shovels) where A) The supply of labor for this job is extremely low and/or B) The wage costs are too high (assuming both are results of the aforementioned increased capital investment) that it becomes more effective to start supplying the labor demand completely with machinery?

Dave May 24, 2011 at 3:47 pm

Concerned Friend, I don’t know if I understand you, but if supply of labor is extremely low the wage costs will be high indeed. But this case may not happen in a developing country where work force is ‘unlimited’. In a devloping country the main goal of investing in capital goods will be to produce more goods with the same input. In this case – with ‘unlimited’ labor force – wages can not force investments in to machinery.
Let’s assume that we have full employment in a country. The only way to increase productivity and produce more consumer goods is by investing in capital goods. An increase in wages won’t do it because productivity won’t increase with wages. So in this case high wages are not a solution and therefore not the main reason to invest in machinery.
In the other case, to reduce the costs of consumer goods in a saturated market you’ll have to invest in capital goods too. Indeed you will have redundant work force in this case BUT if capital can flow where it is most needed redundant work force will be hired by the producers of capital goods and overall wages do not necessarily fall. But in this case too, high wages are not the main reason to invest in machinery because this will also happen if you have low wages in a country with saturated markets.
So the costs of labor have nothing to do with the investment in capital goods – but the investment in capital goods may increase wages because of specialization in task. Therefore Mises is wrong when he says that machinery replaces men only when the market is driving the cost of labor higher.

G8R HED May 24, 2011 at 4:37 pm

@Dave -
If you would read the section of Human Action (pg 767 ff.) referenced in the article you ought to realize that you have been misrepresenting Mises’ position.

Clayton May 24, 2011 at 6:13 pm

I think this articles ignores the issue of entrepreneurship. It is a bit careless to say that anyone can find employment. The truth is that many are not capable of identifying market opportunities and having the means to capitalize on them. We certainly could get into a situation where a lack of good entrepreneurs leads a situation where people would have to live off of others or starve.

The truth is, even I as an able minded/bodied computer guy would not earn as much as I do without an entrepreneur to work under.

Inquisitor May 27, 2011 at 6:55 am

Lack of entrepreneurship is fostered by heavy regulation/welfarism. They’re inter-linked problems. Entepreneurship entails risk-taking and alertness to opportunities. Opportunities almost always exist. It’s being inculcated into a box-ticking/multiple-choice mentality that deprives one of the ability to spot them, and the government plays a huge part here. Not to say everyone can or should be an entrepreneur, but how many children are taught any fundamentals of selling or starting a business? How many teens? Imagine what this does as they mature. They’re skills that need to be developed, and for many people they’re simply not. Business and money-making are often vilified outside the context of some sacrosanct professions like law and medicine, which carry with them an element of prestige. In short, for entrepreneurship to flourish, a cultural paradigm shift is needed. People need to first realise that there’s nothing wrong with wanting to make money, and that there’s many ways to do it, other than the established paths, however suited those may be to some people.

Adam May 25, 2011 at 11:59 am

Great article and sopt on where it comes to the cost of “employing” vs paying for work. This happened to me where someone who was clearly and independent contractor filed unemployement when I would not book him for future jobs. It started a spiral of beauracracy that became an exercise in self serving interests, from the IC, to the Unemployment Commission, to the lawyers. The government really does need the unemployed at many levels. I went to the Unemployment office and what I saw amazed me. Dozens (maybe more than a hundred) state empolyees, a brand new facility, thirty or so computer stations for use by the “unemployed”, etc. It was crystal clear as to why they needed me to pay unemployment insurance to the state although I never employed one person.

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