This may sound harsh, but can we really call something “unemployed” that is not a good (in the economic sense)?

Let me explain… We are talking about labor here, which is a subset of capital goods. If a good is defined as a means to an end (i.e. production then consumption), then can we include severely retarded people and sufferers of alzheimers under the category “good?” How are they valuable in production? And if we can’t consider them goods–that is, labor–then how can we say they are unemployed? Does “unemployment” have any meaning when describing something/someone that is non-economic?

Hopefully that makes some sense…

What Mises and Hoppe both seem to be stressing in these treatments is that “catallactic unemployment”, a speculative action taken on the part of either party to a wage contract, indeed exists, and is an attempt to adjust to changing conditions. This is what the mainstream calls frictional unemployment, as Mises notes.

Further, they both reject the term “involuntary unemployment”, which they regard as another category, especially in the context of criticism against Keynes’s system. (This is partially unfair, since Keynes allowed for the fact that if it were possible to lower wages, the labor market would clear. He just considered the inelasticity of wages downward to be an exogenous factor — but, this was Keynes’s great sin, I think.)

Instead, Mises prefers the term “institutional unemployment” to refer to situations like today, where there are legal barriers such as wage and price controls, regulation, licensing, and other laws that keep unemployment rolls high.

On the question of unemployables, Mises treated them in this way: they are not to be considered part of the social division of labor. Just like young children, when a person is not capable of being employed, then his unemployment is an objective fact, not be counted in the unemployment rolls, and certainly not a mark against the market system.

To get all hermeneutical, there are two discussions going on, here. One is a discussion regarding the market system versus interventionism/socialism. In this discussion, the key insight regarding employment is that the latter system results in institutional unemployment, and the previous system can only have catallactic unemployment, but not sustained “involuntary unemployment”. In this discussion, the claim that there is no such thing as involuntary unemployment on a free market makes sense, especially in contradistinction to Keynes’s system.

The other discussion is the scientific question of “what’s going on here?”. Palmer seems worried, I think, that Hoppe is not at pains, in his critique of Keynes, to cite all of the other circumstances of unemployment that Mises did in the Human Action passage cited above. In this sense, Hoppe, and even Mises’s position against Keynes, may appear to be missing a complete description of unemployment.

But, to defend Hoppe, I think what he was at pains to do, is to show the reader in what consists catallactic unemployment. He explains why the term “involuntary unemployment” is nonsensical, just as the term “involuntary non-selling of Tide” would be nonsensical. It’s not to say that sometimes merchants can’t unload their Tide — it’s that it takes two to Tango.

In short, Mises was right that “involuntary” should never apply to the term unemployment. The adjectives “insitutional” and “catallactic” describe unemployment under intervention and the free market, respectively.

Mises’ view is presented in Human Action, Chapter XXI. WORK AND WAGES, Section 4. Catallactic Unemployment, p. 599, where he said, “Unemployment in the unhampered market is always voluntary.”

He also writes: “If a job-seeker cannot obtain the position he prefers, he must look for another kind of job. If he cannot find an employer ready to pay him as much as he would like to earn, he must abate his pretensions. If he refuses, he will not get any job. He remains unemployed.

“What causes unemployment is the fact that–contrary to the above-mentioned doctrine of the worker’s inability to wait–those eager to earn wages can and do wait. A job-seeker who does not want to wait will always get a job in the unhampered market economy in which there is always unused capacity of natural resources and very often also unused capacity of produced factors of production. It is only necessary for him either to reduce the amount of pay he is asking for or to alter his occupation or his place of work.”

I am not sure but I assume Mises here disregards the temporary time period that must occur between jobs, when one is looking. Maybe he views it this
way: if there is a long time period between jobs, then the unemployment during the gap is voluntary; the worker is choosing to wait, until a better job is found. But if you are willing to lower your price as low as possible and take the very first job available as soon as possible after the end of your last job, then the necessary time-gap between the two, maybe Mises does not “count” this as unemployment. I don’t know. Perhaps, since the nature things requires some small, but finite, period of time to pass between two actions, he does not count it, since this is omnipresent and would be the case in any society.

Even when one is employed there are time periods when one does not work–at night when you are sleeping, on weekends, when you are driving to work. And yet one is still regarded as being in a state of “employment” even during these time periods, even if you are paid hourly only for the working hours. So the concept of “employment” seems to have some kind of “buffer” built into it, where it “covers” small time periods of literal unemployment because of nature of employment necessarily means one is not working 100% of the time. And if this is the case, and if a small period of time is necessary between jobs, maybe the “buffer” covers this too. Just some musings.

One other possibility: there is no reason one can only have one job at a time. Presumably it is possible to arrange one’s affairs–work 2 jobs–so that when one job ends one is still employed while one looks for a new second job. In this sense, even if the gap between jobs, no matter how short it is, is regarded as unemployment, it is still voluntary since the worker could have had a second job in place already.

One of the issues that other people have already commented on is that this is partly a question of agreeing on terminology. Gil Guillory cited the term frictional unemployment and I wanted to enlarge on that a bit.

All employment contracts have some degree of transaction costs to them for both the employer and the employee. Even if we consider the situation of a contract renewal and assume that the cost to the parties of gathering information about one another is zero, there is still friction. Both parties must take the time to consider the terms of the contract in light of current market conditions.

Even if all of the legal restrictions on employment were removed, that would not completely remove the friction. In fact many of the employment laws serve the purpose of reducing the friction for the employee by mandating some of the terms of employment. I’m not trying to make any arguments here about whether the specific mandated terms are good or whether they should be mandated. I am simply pointing out that the prospective employee does not have to consider those particular terms in evaluating individual job offers, thus reducing his transaction costs to some degree.

In the case of employment contracts terminated by the employer, some fraction of the employees will experience a period of unemployment simply because of the transaction costs involved in obtaining a new position. The only way to avoid that would be universal self-employment with each person serving a sufficiently large number of customers. That wouldn’t eliminate the transaction costs. It merely eliminates periods of total unemployment for some individuals by moving the transaction costs to a different kind of transaction.

Whether we choose to call temporary unemployment when an employer terminates a contract “involuntary” is splitting hairs. The employee certainly must endure some initial period of unemployment during which he is finding an available position for which he is qualified and applying for it.

What is being referred to as “employment” or “jobs” above is in the strict economic sense “trade”. Employment or a job is just a regular routine of trade between the same individuals.

An employee *trades* his labor for something. This is true whether of for himself in any mundane daily activity whatsoever, or its operation on the resources of another for another’s benefit in exchange for something else.

All trade occurs (AND ONLY OCCURS) because both parties to the exchange increase their subjective wealth. Even the most disabled individual can be employed if their presence or use increases the subjective wealth of another. A social worker, in addition to remunerative wages may at the same time be trading caring compassion to the disabled in exchange for the good feeling the social worker gets from helping others less fortunate. Thus, the disabled and the social worker both increase their subjective future states of satisfaction by interacting with each other. The situation is the same for all exchange between all individuals: increased subjective wealth.

“There are no services that a severely mentally retarded person can offer, nor are there any services that someone in the terminal stages of Alzheimer’s can offer.”

That statement misses something. “Services” is not an objective concept. Only in the sense that a severely mentally retarded person or someone in the terminal stages of Alzheimer’s is unable to act, to lack the capacity to purposely exchange, can they be held unable to trade, unable to *offer* services. And in that sense, they are not a “someone”, but a living organism lacking the human faculties of action like a plant or animal whose survival may be said to more dependent on the benevolence of others than pets.

This, however, does not mean that someone else (who possesses the human faculties of action) cannot employ them or derive services from them or their benefactor, just as the owner of a cat increases his subjective wealth by caring for it. All services and production is subjective wealth increase, not objective wealth increase.

Voluntary unemployment: I cannot sell my work at my price.
Involuntary unemployment: I cannot sell my work at any price.
Can involuntary unemployment happen on the free market? Yes. Can the state reduce it? No. Can You reduce it? Yes – buy my work.

When Mises, Rothbard, Hoppe et al. propose that there cannot be involuntary unemployment on an unhampered labor market, they simply mean that labor is a scarce good and like all scarce goods has a market-clearing price at which all sellers can find a willing buyer and conversely.

On the labor market this implies that a worker is always employable or able to sell his labor services as long he is willing to work at a wage rate that does not exceed his prospective marginal revenue product to a firm, i.e. the addition to the total revenue of the firm that it anticipates from hiring him.

The case of physically or mentally handicapped individuals does not contradict the proposition because their expected MRP may well be zero or negative in all endeavors meaning that their labor services are not scarce. Nor does the fact that an individual who is laid off from a job is not instantaneously re-employed contradict the proposition. The worker could have offered to work for a nickel an hour or some other low wage for the firm that laid him off, the local McDonald’s, or doing domestic chores or errands for his neighbors and he would be re-employed in short order (assuming his expected MRP exceeded $.05 per hour).

More realistically, markets are temporally separate in our world, meaning that the fact that he had to wait until the next day because labor markets do not operate at night or wait until he traveled to a prospective new employer does not contradict the proposition because where there is no market, buying and selling are necessarily absent.

Third and finally, the proposition is not falsified by the fact that prices in labor markets are never the final prices of a fictional final equilibrium or state of rest. The economy never achieves a final state of rest and a structure of final prices.

This does not mean, however, that prices actually paid in real markets are not market clearing prices in the Mengerian sense. The fact that a seller withholds some of his stock of goods or a laborer decides to pass on an employment offer and keep searching because the prevailing market price does not meet his expectations is fully consistent with market-clearing and full employment in the labor market.

It is a speculative and voluntary refusal to exchange that is fully consistent with a dynamic view of supply and demand curves which both include speculative elements because of uncertainty.

Menger was the first to conceive an exchange equilibrium that gives rise to actual prices and wages and in which the mutual benefits of perceived exchange opportunities at a given moment are completely exhausted. He called it “points of rest”; Boehm-Bawerk, a “momentary equilibrium”; and Mises, “the plain state of rest.”

All three regarded this condition as a recurrent and observable characteristic of all real world markets.

You and the local grocery store are in a plain state of rest when you purchase and walk out with a gallon of milk, two pounds of steak, five pounds of potatoes, and two bottles of red wine, no more and no less. The precise price and quantities of these items were strictly determined by the interaction of your (concurrent buyers’) maximum buying prices and the minimum selling prices (probably determined by its speculative reservation prices) of the grocery store.

The discussion about voluntary unemployment reminds me a Von Mises Institute meeting at Auburn many years ago that I attended. In the paper that was named the best one presented it was claimed that women are paid less than men because they are inferior to men as, otherwise, employers would hire them because they are cheaper and will do as well. Employers who hired them would out compete others, forcing them to hire women. This competition for women workers would raise their salaries to level of men’s. This conclusion does not conform to my experience.

In the early 60s I worked for an electric utility that would not hire women as accountants, engineers, or even copywriters in their advertising department. (Because their policy was widespread, very few women studied accounting or engineering, however, I was quite capable of being a copywriter by education and experience, as were a fair number of other women.) Blacks were only hired as laborers (men) and maids (women). The only women in supervisory positions were the head home demonstration agent and the head telephone operator.

I was refused a promotion the head of my department recommended me for because the vice president he reported to said that he would not have a woman in a supervisory position. This lowest- level clerical supervisory position involved supervising only the person in the clerical job I’d held for 5 years. (All the very few male clerical workers at this company had supervisory positions.) I had just gotten a MBA and been accepted in the DBA program. (I ended up getting a Ph.D. in economics.) The man given the job had never done clerical work; had completed only two years of college; and had worked for the company for 2 years, while I’d worked for it 5 years. (Incidentally, my Father was a very well respected head of another department in this company.)

Fortunately, I was ready to quit the job, which I’d kept because I needed the money, and the work was very easy–so easy I had time to study during business hours, though I had to pretend to be working in order to do it.. Within a couple of years the man they gave the job to quit because it didn’t offer him enough opportunity.

I might mention that all the men in my MBA program who worked for this company had their tuition paid for by the company. I paid my tuition out of my own pocket.

Relative to the claim that all the unemployed are voluntarily unemployed I will recount my Mother’s experience in 1932. She was a nice looking, well spoken, high school graduate who could type in excess of 60 words a minute and take shorthand at better than 120 words a minute. (These were the typical cut off point for employers.) She offered to work for free in order to get experience. Nobody would hire her. The explanation she was given was that it would upset the other employees too much.

The logic employed by the author of the paper I mention above when applied to blacks also brands them as being inferior, as otherwise they would be hired instead of whites. As one who grew up in segregated Atlanta and has studied southern economic history, I find this ridiculous. Cotton mills in the South in the 19th century and early 20th century, for example, were unable to put blacks in the better jobs because white workers refused to work with them, particularly when it would cause black men to work with white women.

Even in a totally free market environment employers would have to deal with the kinds of attitudes that explain the behavior I describe above. (Can what can reasonably be labeled a totally free market exist when people have the attitudes that caused none of the downtown stores in Atlanta in as late as the 1960s to hire any black clerks?) Unless you assume, which is ridiculous, that every woman and every black in Atlanta when I lived there was inferior to the least qualified white man, there is no bottom-line explanation for the fact that there were no women or blacks employed in the great majority of occupations, including all of the best ones, in white-owned firms, which accounted for nearly all the firms in the City.

I think we are misleading things.

Of course, it is rationally possible one person’s services not to be valued by anyone. So, nobody would hire him.

But the important fact it is not that. Assuming that under unhampered market everyone would find a job is equivalent to say that the market would, in fact, be a hampered one. I mean, that everyone would have some kind of obligation to hire other people. This is not the case.

Obviously, following Reisman, due to labor is the only scarce factor, the uses of that scarce factor are almost infinite. One can easly think in tasks he would hire if the opportunity cost were low enough.

Under an unhampered market one could find a job and full employment could arise. Unhampered market doesn’t guarantee full employment, but neither block it. In some way, we could see that a hampered market guarantees not to obtain full employment.

I think the point to understand involuntary unemployment is not to see it just from the perspective of the person who wants to work, but from both employer and employee’s. Hampered market makes that even if the employer wants to hire an employee (paying him below minimum wage) this contract is illegalized.

Another interesting detail is what has been mentioned above. Labor is always, by definition, employed, not maybe by a third person, but employed in seeking some end. We shouldn’t sacralize the fact of being employed by a third, because this circumstance is just one of the many alternatives (in many cases, the best alternative) that people has to achieve their ends.

Last thing I want to mention. Incapacitated people must be always dealt with charity. Either public (forced redistribution) or private charity. We cannot alter this state of affairs. Those who don’t have an arm cannot cut trees; this is not a question to be solved by a particular economic system. Constraints to human action have many forms; market economy erases institutional constraints, but it can’t convert (unless free reason and scince change that) a frog into a princess.

The utilitarian question is then, would forced redistribution be more effective than private charity in solving these people’s situations? In my opinion, obviously, no.

Dear Mr Heinrich,

< < empirical observations can never prove or disprove a ceteris paribus statement >>

Agreed, as long as one interprets “ceteris paribus” to offer a sufficient amount of wiggle room. The same applies to your statement that:

< < Depending on how you interpret it, the statement that all unemployment is voluntary is absolutely true in the unhampered free market. >>

Again we agree. One can certainly interpret the statement “all unemployment is voluntary …” in such a way as to make it true. As I see things, that’s not the issue. The question is how to interpret the statement in such a way as to make it useful in understanding the real world.

< < Everyone else can obtain a job if they lower their asking price enough. >>

That is a plausible statement, but it’s a far cry from “A is A” or “whatever is coloured is extended.” Yes, the statement does have plenty of wiggle room. For example, it does not specify how long the job-seeker must wait to get a job or how much he must lower his asking price. But note that even with wiggle room, the statement is not tautologous (true by definition) and it does not proceed by clear and rigorous logical steps from indisputable axioms. It is therefore not necessarily true, and given what I would consider a reasonable interpretation, it is falsified by even a cursory examination of the job market and firms’ hiring practices.

I come out of the philosophical profession, where many careers have been built on giving odd definitions to familiar words and then deriving “astonishing” conclusions from the definitions. A typical example is to re-define the word “knowledge” in such a way that knowledge is impossible and then arrive at the startling conclusion that no one knows anything. Certainly (and I’m not just being tactful) no major Austrian economist has been guilty of anything quite that egregious. But I worry that if we get too wrapped up in a priorism, Austrian economics will be little more than an intellectual exercise, like chess, which is fascinating but without much practical value.

No matter how we define “voluntary” and “unemployed,” the fact is that millions of people believe they are involuntarily unemployed and are ready to take almost any job they can get. Newspaper ads for clerical help now routinely draw hundreds of applications, many from people with college and graduate degrees who are begging for the chance to earn $9 or $10 an hour doing data entry. Sadly, those people rarely even get interviewed. As the months pass, their savings evaporate, their debts rise, and their self-respect plummets: these are the people we consider “voluntarily” unemployed?

< < Thus, your problem can be solved by that person simply keeping his mouth shut. >>

You might be right about that. However, I doubt that Mises would have approved of adding that everyone can get a job if he lowers his price, changes professions, moves to a different location, “and also misrepresents his qualifications.”

With kind regards,
Scott Palmer