August 2nd, 2005

Brad @ Burning Man

Natural Unemployment = Unwanted Productive Workers

I mentioned the other day that one way Democrats can advance in the war of ideas is to accuse the Republicans of endangering our free market way of life by letting capitalism fall prey to its own worst instincts. I had a beautiful example in mind, but left it out for reasons of space. Then, in the process of checking some facts for one of the paragraphs, I stumbled on a website manifesto that's currently fascinating me. I had a very similar idea to theirs, but they've taken it much farther than I have. Perhaps they've taken it too far, as they're touting it as the cornerstone for a third party in America. But anyway, here's the part that they and I agree on, where the natural, obvious behavior of companies in an unregulated capitalist marketplace is bad for the long-term survival of capitalist marketplaces.

Let's say that you need 60 widgets made, every week. (That can be 60 clients to see, 60 forms to complete, 60 subroutines to debug, 60 gauges to recalibrate, or whatever. Let's call each distinct unit of work a widget.) Arnold can finish one widget per hour. Bob can only make finish one widget every two hours. Compare two alternatives. You can hire both Bob and Arnold for forty hours a week. In that 40 hours, Bob will finish 20 widgets and Arnold will finish 40, so there are your 60 widgets for this week. Or you can lay off Bob and only hire Arnold, but pay Arnold time and a half to work an extra 20 hours a week of overtime. Assuming you pay the two of them more or less the same, you're paying Arnold for the equivalent of 70 regular work hours, instead of paying Bob and Arnold for the total of 80 work hours. So it's cheaper to lay Bob off and pay Arnold the overtime. What's more, that doesn't even include any overhead costs, like extra hiring costs to hire two employees instead of one, extra training costs, extra workspace so they can both work at the same time, more management overhead because you have twice as many employees to supervise, two parking spaces instead of one in the parking lot, and on and on down the line.

But what if it's not just a matter of Arnold wanting to work harder? What if Arnold really is naturally talented? What if Bob already has taken every applicable training class, and is working to the peak of his performance -- but Arnold took the same classes and is also working to his (higher) peak of performance? If Bob can never keep up, what's he supposed to do, lie down and die? Well, according to current economic theory (read: "justification for what we wanted to do anyway"), that's not really a problem. There are only so many Arnolds. Even if there isn't anything Bob can do faster than Arnold, Arnold only has so many hours in the day. What some economists like Bush economic adviser (and Harvard professor) Gregory Mankiw have been telling us for 20 years now is that it will eventually be in the economy's best interest to take the least important jobs, the ones where efficiency matters the least, and stick Bob with those jobs, and have all the important work done by Arnold.

Where this breaks down is that if you suppress demand hard enough, no, you don't need more work than you can squeeze out of an economy's best performers. That leaves about a quarter of your potential workforce who would like to work, who are competent to work, who can produce perfectly good work at a perfectly satisfactorily economic rate, one where any company that hired them could still make good money selling stuff they made ... but nobody wants them. That's what the debate over the "natural unemployment rate" is really about. It's about the question of how many human beings out there should we be grinding down into poverty and degradation and starvation, how many families should we be destroying, to keep the productivity rates as high as possible? Except you know what? That quarter of the potential workforce votes. So do their relatives and friends. You can distort the reported statistics for a long time, but people eventually figure out that it's not some temporary recession, your really are fine-tuning the economy so tightly that there's no room in it for about a quarter of us. How long can you play that game before people rise up and demand that something be done about it, and will you like the outcome of that uprising? (Hint: See Russia in 1917.)

That's why several times over the last hundred years it has been rich people and Republicans who fought to reduce the number of hours worked per worker in the workplace, so that companies have to hire less-than-perfect employees. (Of course, this was back before the Party got taken over by social conservatives and "supply side" economic charlatans.) Those people need jobs too. And nearly all of them do good enough work that you can still make good money hiring them. And giving them jobs increases the market for your products, so any reduced margin you'll make back up in increased volume. Ah, but if everybody else hires more people and you, instead, pay overtime, then your margins will be higher, and you can use the extra money to destroy and/or buy out their companies. So there's a powerful incentive to do that which, if everybody does it, creates huge public suffering and eventual social upheaval. The only solution that makes everybody do what's right for everybody so long as everybody does it is to make it mandatory, or at least use government mandates to make doing the wrong thing more expensive. That's why we (used to) have overtime laws.

If you want to see this particular example, expanded out until it becomes the philosophical basis of an entire political movement, see There was also an interesting editorial by Paul Krugman in Friday's New York Times on what effects it's had on the French economy, both good and bad, that they've reduced their workweek far below ours and increased vacation time far longer than hours, specifically to fight unemployment; he titled it "French Family Values."