Mr. President: Stop our Government’s Destructive Attempts to Solve Unemployment

Having exhausted Americans’ patience for healthcare reform (still pending with no agreement in sight), President Obama used his State of the Union speech to shift to job creation as his new top priority. I suspect he will continue this theme in the coming weeks as unemployment continues to hover at 10%, nearly double the rate during the Bush years. However, an examination of the root causes of unemployment, coupled with the Administration’s legislative agenda of increased taxes, government spending and regulations, suggests that Obama will also fail at this next “priority.”

Farrell Block writing for the CATO Institute states: “Economic growth and employment go hand in hand. Taxation and regulation discourages business and the demand for labor.” He is joined in this assessment by many other economists including Llewellyn Rockwell of the Ludwig Von Mises Institute who comments: “All this talk of unemployment is preposterous. There is always work to be done, and therefore, always jobs. There is not a lack of work to be done.” The reason this work does not translate into new jobs is a function of labor costs which are aggravated by government intervention and policies that distort the labor markets.

Perhaps the best example of counterproductive government labor policy is mandatory minimum wage laws that price labor out of the market. This is especially true of immigrant labor, unskilled workers and new entrants into the labor market such as teenagers. Simply put, a teenager may be worth $5.00 per hour but no more. So, with the minimum wage artificially set at $8.25, no new job is created. Not surprisingly, today’s unemployment rate among youth exceeds 20%. While minimum wage laws may be well-meaning, they effectively knock out the bottom rungs of the employment ladder. Worse still, they help create what Professor Martin Haberman from the University of Wisconsin calls “a perpetual unemployed class of workers [with] behaviors and beliefs which form an ideology that is the source of their failure in the workplace.”

High payroll taxes are also a problem. These taxes prohibit employers and employees from setting their own wage rate by adding to it the cost of the employee and employer contribution to Social Security Medicaid and Medicare.

Still other culprits include:

• Laws that threaten employers with lawsuits if an employee is terminated.
• Laws that establish conditions on new labor such as hiring quotas based on ethnicity or gender.
• Exceedingly generous terms for unemployment “insurance” that pay people not to work for almost a year.
• Labor union contracts and work rules that force employers to keep union labor in a job even if the work could be performed at a lower cost or though another means.
• Employer mandates and restrictions imposed by various regulatory bodies including the complexity and high cost of compliance.

Economist David Rosenberg, formerly of Merrill Lynch, expects the unemployment rate to keep rising in the near term. Furthermore, he believes that the manner in which the government counts unemployed workers actually understates the real number. For example, he cites the fact that 9.3 million Americans work only part-time, so “technically” they are not unemployed – but they fully-employed either.

Another significant problem with the “official” unemployment rate is the fact that the government stops counting unemployed people when their unemployment insurance runs out. Here is a group of people that have been out of work so long that their unemployment insurance has expired and yet, somehow, they are conveniently dropped off the statistics? How can the official number, ignoring this still very valid element, possibly be an accurate reflection of what’s really going on?

We can expect a flurry of speeches and activity out of Washington in the coming weeks and months as our elected officials attempt to publicize all their solutions but the bottom line is that unemployment is currrently running at 10% when economists try to tell us that America’s full employment rate is really closer to 5%. It is important that we keep the pressure on Washington and judge their policies based on their results. Yes, they may get kudos for their fine speeches but at the end of the day, if the unemployment rate does not begin to really fall back towards an accurate 5%, then we should demand new policies that include significant reductions in government spending, taxation, deficits and regulatory relief. In short, we should demand that government stop trying to fix the problem and let the free market, small businesses and entrepreneurs succeed where government has failed.