Why Unemployment Stays High

“The process of readjustment is a slow process…. People are slow to free themselves from the self-deception of delusive prosperity. If workers cannot find jobs, the reason can only be that wages asked are too high.”—Ludwig von Mises, Human Action (1966).

Why is it taking so long to see an recovery in jobs? Everything else is up—corporate profits, GDP, stock prices—so why not employment? 

The Minneapolis Fed has come up with a fascinating study of all the recessions since World War II, and everyone of them has seen a V-shaped recovery in output and employment—except this one.

For example, here below is the recovery phase of the Reagan years compared to the Obama years.

Reaganonomics vs. Obamanomics in One Simple Graph

For more information, please click here.

After consulting with several top economists, I’ve come up with five reasons why we’re suffering from a jobless recovery:

1. The New Normal in response to the shell-shock of the Great Recession. The unprecedented impact of the real estate boom-bust cycle on the global macro economy was unexpected and devastating. Austrian economists (Ludwig von Mises, Friedrich Hayek, Murray Rothbard, and others) have long predicted that easy-money policies cause unsustainable imbalances and asset bubbles, and when they collapse it may take years to recover from the mal-investments in labor and capital.

Business and consumers know that we almost fell off the cliff, and both are pulling in their horns and being more prudent and thrifty in their spending and borrowing habits.

2. Extreme uncertainty about taxes and regulations under Obama and the Democrats that is causing business to delay hiring and investing. This is main thesis of Gary Becker, leader of the Chicago school of economics. He states: “Among the issues of concern to business are how severe will be the new regulations of the financial sector? Will taxes be raised on individuals with higher incomes and corporations? Will a stiff carbon tax be introduced? Will trade unions be encouraged? Will the Justice Department adopt a new approach to anti-trust policy that is less pro-consumer and more pro-competitors of successful businesses? Will caps and other restrictions on the pay of top executives be continued and expanded? Members of Congress and persons close to President Obama have discussed these and other possible policies that may have discouraged many businesses from rapidly increasing employment and investments in capital.”

3. Overly generous ‘safety-net” welfare system: Today over 5 million Americans are on unemployment benefits, 40 million Americans are on food stamps and 50 million on Medicare. In the midst of the Great Recession, Congress has repeatedly extended unemployment benefits. Normally benefits last 26 weeks (6 months), but the government has extended it for another 73 weeks. This liberal policy practically guarantees that the unemployed won’t seriously seek new work until November.

4. Sharply higher minimum wage law: Since July 2009, the federal minimum wage law rose 41% to $7.25 per hour, plus benefits. This has caused a ratcheting up effect on all wages, and reduced the incentive to hire new, untrained, and teenager workers. Teen unemployment has risen sharply. The higher minimum wage law has been especially harsh on male blacks in the United States. Since taking effect, the unemployment rate for male black teenagers has risen from 39% to 50%. As Milton Friedman once said, “The minimum wage law is the most anti-black legislation ever passed.”

5. The delay in the recovery of the real estate and construction business. A large percentage of the unemployed sector came from the real estate and construction business, and it has been slow to recover.

What can Obama and Congress do to encourage sustainable employment? Among other things: cut the corporate tax rate, stop extended unemployment insurance, and reduce the minimum wage law.