August 3rd, 2005

Brad @ Burning Man

More About "Natural" (By Which They Mean, "Desirable") Unemployment Levels

In response to yesterday's article, andrewducker wrote:
People always want more stuff. And if you decrease your costs by paying overtime, chances are your competitors are doing the same thing, so you have to compete on price. Which leaves your customers with more money to spend on something produced by a new company, which has to be staffed by _somebody_.
No it doesn't. It leaves your customers who have jobs with more money to spend.

I've mentioned this before, but my thinking on this is somewhat informed by something I saw happening in Lexington, Kentucky right before the end of the dot-com bubble. A Wal-Mart Supercenter-alike (only better) called Maiers was coming to Lexington to compete head-to-head with Wal-Mart and the other big box retailers and grocery chains. And every employer in town opposed it, but not for the reason you'd think. The reason was because the dot-com bubble had lead to sufficient investment and demand that there were no "productive" workers left to hire in all of Lexington. By official "seasonally adjusted" unemployment numbers, the Lexington metro area had negative unemployment.

When they published the newspaper article after the official report claiming negative unemployment, the Herald-Leader wrote an article explaining what I'd already known, that something like nine different classes of people that you or I would call unemployed are not called unemployed by the government. So if unemployment goes negative, it means that even the discouraged workers, and the disabled, and people on parole (to pick three examples from the news article, because they had examples of all three) who couldn't find jobs before were suddenly working.

So what everbody was predicting was that if Maiers opened a store under those economic conditions, in order to fill their store at all they'd have to raise wages and hire workers away from other employers. Those employers would have to both raise their wages and reduce their output because they'd still lose some workers and have to do without or hire less productive workers. Higher wages + lower output = inflationary spiral. Oh no! We're doomed!

What happened instead is that the town never had it so good. They kept finding "not unemployed" people who didn't have jobs to hire. Wages went up a little, a one time bump of about a quarter, not even enough to catch up with past inflation. However, demand for consumer goods went through the roof, and not only did Maiers make money, but the local Wal-Mart reported also sales increases from the roof, and tracking it, the newspaper found that even Wal-Mart was selling a lot of stuff to Maiers employees who hadn't worked in forever. Which meant that their kids needed clothing, they needed cheap furniture, they needed new tires for their car, and in general a lot of previously unemployable people were now buying all the other stuff you make do without when you can't find work and are dependent on charity.

Eventually the dot-com bubble popped and one of the town's largest employers, LexMark, laid a bunch of people off. Unemployment went back to the "natural" level. Demand dropped perceptibly in every retail establishment. And it is my hypothesis that if they had all cut hours across the board in order to find jobs for those people, Lexington could have kept the good times rolling. And from that experience, I came away with the belief that anything that boosts private sector employment is good for the economy, that nearly all of our economic problems come from the fact that American employers simply do not want to hire about 1/4 of the population, no matter how badly impaired consumer demand hurts their own companies.