Labor Laws Cause Unemployment

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Unemployment
is not the result of any one cause. It makes its appearance in a
great variety of circumstances, some in personal factors, some in
economic changes, and some in legislative and regulatory conditions.
Throughout the year some workers may appear in the labor market
and then withdraw. Students work during the summer and return to
school in September. Building and construction activities, logging
and lumbering, slaughtering and meat packing are very seasonal and
give rise to a considerable amount of temporary unemployment. Similarly,
industrial and technological changes may force workers to readjust
and relocate. Jobs, wages, and working conditions always point the
way.

The Bureau of Labor Statistics of the United States Department of
Labor keeps careful watch of unemployment and diligently counts
the numbers. But in its long history the Bureau has never prepared
a systematic collection, organization, and analysis of the unemployment
created by labor laws and regulations. Yet this kind of unemployment
is more important by far than seasonality or industrial and technological
change to which labor markets readily adjust. It is chronic and
lamentable as it creates large armies of unemployed, impoverishes
many people, breeds discontent, indignation, anger, and, worst of
all, being interpreted erroneously, may turn public opinion against
the enterprise order itself. In the end, it may even deliver the
economy into the very hands that cause the unemployment.

Whenever government forcibly raises employment costs it causes marginal
labor, that is, labor that barely covers its costs, to become submarginal.
It does not matter whether government orders wage rates to rise
or benefits to be improved, the workday to be shortened, overtime
pay to be raised, funds to be set aside for sickness and old age,
or any other benefit to be granted. A small boost renders few workers
submarginal, a large boost affects many. In matters of employment
they now are “unproductive” and cannot be used economically.

It is obvious to all but politicians that any worker, male or female,
old or young, Yank or Chinaman, whose service is worth only $10
an hour but must be paid $20 or more cannot be employed profitably.
He would inflict clear losses on anyone who would hire him, which
condemns him to a life of idleness, uselessness, and emptiness.
Unaware of the very cause of his affliction, he is likely to take
umbrage at society that apparently sentenced him to lifelong unemployment.

American labor laws evoke such feelings every day. At this time
they enforce a minimum wage of $5.15 an hour, plus 7.65% payable
into a Social Security account, plus 2% to 10% into an unemployment
compensation account, plus 10% to 100% for workmen’s compensation
which is a fund that pays an employee who is injured in the course
of his work. The compensation assessments vary from state to state,
but the levies together readily double the employment costs in many
occupations.

The Bureau calculates total fringe costs of $5.80 an hour for service
workers and $8.73 an hour for construction workers. Skilled and
trained workers surely are able to cover their fringe costs by way
of takehome-pay adjustment; instead of earning $18.73 an hour they
receive only $10. But how can an unskilled service worker who is
to earn $5.15 an hour to cover additional fringe costs of $5.80
an hour? He obviously must render services worth at least $10.95
an hour to cover his employment costs. Anyone unable to render $10.95-services
cannot be employed productively.

Competition forces many employers to grant additional fringe benefits
such as paid vacations, sick days, holidays, health and life insurance,
pensions, and other gratuities. Employers may even boast of the
benefits which nevertheless are covered by employee productivity,
just like the legally required benefits. Highly productive workers
may soon cover them, but unskilled minimum-wage workers who expect
the same company benefits obviously would be unable to earn them.
If there is no demand for their services at $10.95 an hour there
will be none at any higher rate.

Chronic unemployment obviously is a political disease that springs
from the primitive notion that government can improve everyone’s
income and working conditions by legislation and regulation. It
is an affliction that stems from misinterpretation and misinformation
about work and income and from an undaunted faith in collective
force and coercion. It clearly reflects the spirit and mentality
of our age. Unless they soon will give way to the spirit of individual
freedom and enterprise the rate of unemployment is likely to rise.
It may even reach the levels of the old European welfare states,
such as France, Germany, and Italy, where unemployment rates usually
exceed 10 percent.

There is no ready escape from the consequences of such labor laws.
Surely, most young workers are willing and ready to accept employment
at honest market rates; they are even prepared to ignore the labor
laws and work under market conditions. But most employers do not
dare to violate the laws. The penalties leveled at them always are
onerous and degrading no matter what their motives may be. Nevertheless
economists estimate that some 30 percent of unskilled youths find
ready employment in the “underground economy” where wages
are paid according to productivity. Many small family enterprises
employ and train millions of young people.

In
the coming years the rate of unemployment probably will rise as
Congress raises the minimum wage, boosts Social Security taxes,
and increases the benefits, that is, the costs of labor. But times
change; we may learn anew that labor laws that ignore basic economic
principles and build on brute force have hurtful consequences.

April
18, 2005

Dr.
Hans F. Sennholz [send him mail]
was professor and chairman of the department of economics at Grove
City College. See his website.

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