Friday's Unemployment Is a Creation of Politicians

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Tomorrow the Bureau of Labor Statistics will announce the unemployment rate for September. While economists' projections ahead of the announcement suggest it's going up, the bigger story is how government intervention in the private economy drives what should be a naturally low number much higher.

For background, in his 1978 classic, The Way The World Works, the late Jude Wanniski addressed per capita income within countries. While income per individual in the U.S. dwarfed that within India, Wanniski argued that India's low number was almost certainly unreliable given the desire among its citizens to hide their economic activity from an overbearing, socialist government.

In much the same way, historians to this day point to a period during the Great Depression when U.S. unemployment reached 25 percent. Jobless calculations back then were very crude to begin with, but even if carefully calculated it's a near certainty that 25 percent of all able-bodied workers were not completely idle.

More realistically, rising taxes and the federal government's empowerment of unions with regard to wages created incentives among businesses and laborers to not report actual work being done. This is in no way meant to minimize the desperation of the Great Depression years, but it is meant to say that government measures of anything are faulty, including measures of joblessness. Economist Walter Williams has pointed out that unemployment figures were overstated during the Depression given the number of statistically unemployed Americans who were working in non-traditional ways that federal statisticians could not detect.   

Looking at Europe today, politicians and economics writers not infrequently blanch at the possibility of the U.S. economy morphing into one similar to those of France and Germany. They do this with good reason given the state's outsized role in the economies of both countries, not to mention the high levels of unemployment.

But when it comes to joblessness in France and Germany, it's fair to assume once again that the numbers calculated by government bureaucrats don't tell the whole story. Indeed, it's well known that it's hard to hire in France and Germany precisely because it costs too much in unemployment benefits to fire workers. In that case, it's probably a safe bet that 10 percent of the French aren't unemployed as much as there are incentives among businesses to hide employees from the government, along with incentives among workers to obscure their activities from the tax man.

At the same time, it should be said that generous unemployment benefits in Germany and France go far in explaining why the rates of unemployment are so high. When you subsidize anything you get more of it, and unemployment subsidies by definition drive up the number of jobless in France and Germany. More to the point, the cost of being unemployed in France and Germany is low, so unemployment is high.

Looking at the U.S. unemployment rate, it's widely expected that tomorrow's will rise from 9.7 percent to 10 percent. A scary level of unemployment for sure, and one not seen since the 1982 recession.

Still, to some degree this number has to be viewed in the way that European rates of unemployment should be. While the number of Americans out of work is doubtless high, it's also likely true that many who fall into the unemployed category aren't completely idle. Many are working, but not drawing the traditional or stable paycheck that confers on one the status of "employed".

Some are picking up odd jobs to make ends meet, and some are essentially working for themselves on the way to building businesses that will thrive and employ a great deal more Americans in the future. So while the rate of joblessness reported by the federal government is presently at nosebleed levels, the rate surely doesn't account for a lot of work being done by individuals that does not fall into the category of employment.

When we consider unemployment benefits and their impact on the U.S. jobless rate, the great 20th century economist Benjamin Anderson observed in Economics and the Public Welfare that "any country can have heavy unemployment if it is willing and able to pay for it." That in mind, and taking nothing away from the miseries wrought by our present recession, the other reason so many Americans are unemployed right now has to do with the willingness of Congress to pay them to be unemployed.

Along these lines, Congress recently passed a law extending unemployment benefits in the 27 states where the jobless rate is above 8.5 percent. Congress has rarely been known to get incentives right, but the work disincentives contained in the bill are remarkable even by Washington standards.

Indeed, not only do extended unemployment benefits raise the cost to employers of luring workers off the sidelines, but in delaying the day of reckoning when the unemployment checks stop coming, they extend the amount of time that individuals can choose not to work. This may not at first glance seem important, but as Harvard professor Lawrence Katz told the Wall Street Journal in a recent article, "Someone unemployed for six months is much less likely to find a job in the next month than someone unemployed for one month."

The article went on to say that a frequent question asked by potential employers is how long the job candidate has been out of work; the point being that some employers look askance at those who've been jobless for an extended period. It's also true that work skills often decline the longer someone's idle, not to mention that long-term unemployment can reduce the level of individual confidence necessary to find gainful employment.

Unemployment benefits make this possible because they raise the costs associated with actually finding a job. Absent jobless benefits, a great deal more Americans would be working out of financial necessity. And while it may be that the quality of their employment wouldn't be as robust as in the past, it can't be stressed enough that unemployment is a creation of governmental policies that make not working a legitimate possibility.

So in trying to divine the message from tomorrow's unemployment announcement, readers should look no further than the policy failings of their elected representatives. Government policies of the tax and "benefit" variety create incentives among individuals and businesses to hide real work, and to the extent that policy makes not working economically feasible, potential workers will drive up the unemployment rate precisely because politicians are paying them to do so.

John Tamny is editor of RealClearMarkets, Political Economy editor at Forbes, a Senior Fellow in Economics at Reason Foundation, and a senior economic adviser to Toreador Research and Trading (www.trtadvisors.com). He's the author of Who Needs the Fed?: What Taylor Swift, Uber and Robots Tell Us About Money, Credit, and Why We Should Abolish America's Central Bank (Encounter Books, 2016), along with Popular Economics: What the Rolling Stones, Downton Abbey, and LeBron James Can Teach You About Economics (Regnery, 2015). 

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