Friday, January 2, 2009

Where Do Lost Jobs Go?

Here is a disturbing article from today's New York Times. Obama is apparently really planning a New New Deal (I'm crossing my fingers and hoping this is all very exaggerated).

But I wanted to talk about one specific line from the article, "His address on Saturday followed the report on Friday indicating that the country lost 533,000 jobs in November alone, bringing the total number of jobs lost over the past year to nearly 2 million."

So where did these jobs go? Did they just evaporate into thin air? There were 2 MILLION things that one year ago needed to be done, but today no one can afford to pay someone to do. This is very difficult for me to believe!

To me, it seems to be fallacious to speak of jobs as if they are some kind of product, e.g. "The government vows to create X new jobs by this time next year" or, as above, "Y jobs were lost during the last Z months." Jobs are neither a good or service, they are a contract between an employer and employee. The contract itself is not a good or service.

Employers are buyers of labor and employees are sellers of labor. Some people buy their own labor, these people are called "self-employed" or "entrepeneurs." Labor in itself is not really a good (you could say the employee is selling a service to the employer, but we have to be careful not to think of labor as a generic service... most labor is a specialty, requiring some kind of skill, experience, certification or qualification) but labor is usually employed in the production of goods and services. Labor has a price, like anything else, and this price is called "wages." Different kinds of labor have different prices in different areas of the world, depending on the demand for and supply of the kind of labor demanded.

Of course, labor prices for wage employees are highly political since the vast majority of people prefer to work for wages. This is why there are many kinds of price controls and other regulations on labor services. If labor prices were not political, however, there would be a free market in labor. During economic downturns, a free market of labor would result in a broad-based, relatively smooth, decline in the price of labor, usually along with a decline in the prices of lots of other things (like gas). In other words, the big, bad D-word.... deflation.

When price floors are implemented (to keep the price of something up), the inevitable consequence is surplus. This is for two reasons. Buyers buy less of something when the price is higher and sellers make more of something when the price is higher. The price tells buyers, "stop buying so much of this high-priced thing" and it tells sellers, "go make more of this high-priced thing." When the price controls of labor keep the price high, buyers buy less of it (employers cut their staff or hire fewer people) and sellers make more of it (more people want to be employed when wages are high than would want to be employed with lower prevailing wages). In other words, the number of people wanting a job, but not able to find one, increases during an economic downturn with wages fixed through price controls.

What are the price controls on labor? The most obvious one is the minimum wage, but this doesn't affect a lot of people. Other price controls are administered indirectly by restricting supply of a specific kind of labor through licensure (electricians, doctors, etc.) Union contracts* and wage laws that make it difficult to reduce pay or benefits also result in a kind of price-control effect as employers have to show people the door rather than offer them lower pay. Companies may lay off workers at one wage and then hire a slew of new workers at a lower wage to replace them if this is cheaper than the expenses entailed in trying to bargain reduced wages with their existing employees.

In short, jobs don't just disappear. The price of labor may go down during an economic downturn like the price of anything else. Employees seeking employment may have to readjust their wage expectations down during economic downturns. Those who have not yet adjusted their wage expectations down will remain unemployed. As wage expectations begin to adjust downward, the effective price of labor (as seen by labor-buyers, employers) goes down, resulting in increased purchasing of labor by employers.

The best way to get back to full employment is to allow the labor market to naturally readjust wages down. As wages go down, some people will stop wanting to work at the new, lower wages (preferring to take their leisure instead) and employers will begin to buy more labor - as the price of something goes down, that tells buyers, "buy more of this cheap thing" and it tells sellers "stop making so much of this cheap thing."

2 million jobs didn't disappear - the wage expectations of labor-sellers are readjusting during this period of general price deflation.

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