May 17th, 2013

Welfare vs. Opportunities

Eurostat estimates that 26. 521 million men and women in […]

Team AEC

Eurostat estimates that 26. 521 million men and women in the EU-27, of whom 19.211 million were in the euro area (EA-17), were unemployed in March 2013.

Can unemployment be solved with more state intervetion or more freedom?

“One may point out that Mises’ analysis is more than 85 years old. Moreover, Mises did not really test his persuasive argument. Contemporary econometricians did do it. According to Feldmann (2010) and Fedeli and Forte (2013), less economic freedom, more government intervention, high taxation and high deficits create unemployment. Although econometrics became fashionable only after Mises’ death, although there are reasons to doubt that he would have endorsed its techniques, modern cross-national studies support his views. Nevertheless, criticism of government failure remains unpopular outside of Austrian or Public Choice economics. In a recent publication on youth unemployment, the ILO (2013) did not even discuss the idea that the availability of benefits, or minimum wages, or other types of government regulation might increase unemployment. But their study (ILO 2013: 18 and 26) did point out that sometimes more privileged people suffer from more unemployment than less privileged people, for example those who benefitted from tertiary education in North Africa or those who enjoy incomes above the poverty threshold (of 1.25 $ per person and day) in India.” (Erich Weede, May 9th 2013, Speaker at The Free Market Road Show 2013 ).

“New Classical economists would tend to see structural unemployment as an example of government failure. Labour markets do not clear, they argue, because wages are not allowed to adjust effectively, and the price mechanism is distorted. By removing distortions and imperfections in the labour market workers would move more quickly from job to job. For example, by keeping welfare benefits to a minimum there is an incentive to retrain and look for paid work. Welfare benefits can trap individuals into a life of unemployment because of the effects of moral hazard and the disincentive effect it creates. This increases labour immobility, and hence contributes to structural unemployment.
However, labour immobility can also be addressed from the perspective of labour market failure. Training and re-training are regarded as merit goods, where individuals under perceive the long term benefit to themselves. They also fail to appreciate the positive externalities that training and re-training generate for the wider community. This means that there is a significant role for the state in providing free or subsidised training and retraining programmes.
In addition, there is the potential situation of labour market poaching. Why should a firm in the booming service sector provide free training to a displaced worker from the manufacturing sector if the worker will leave for another job shortly after training? Why should firms do any training at all if they believe that workers will be poached by higher wages? The poacher can, of course, afford to pay higher wages because of savings in training costs. (published on “Economics online“).

The Economist (2013: No.:49) recently summarized academic research on the dire effects of youth unemployment: “People who begin their careers without work are likely to have lower wages and greater odds of future joblessness than those who don’t. A wage penalty of up to 20%, lasting for around 20 years, is common. The scarring seems to worsen with the length of joblessness and is handed down to the next generation, too.“ Since youth unemployment is above 50 percent in Spain or Greece, above 30% in Ireland, Italy and Portugal, and still above 20% in Britain or France (ILO 2013: 110-112), the damage looks frightening. (The Economist)

“Thus, the message is simple: More economic freedom, less harmful regulation, and more useful training generate opportunities, well-being, and growth instead of welfare traps and unemployment.” (Erich Weede, May 9th 2013, Speaker at The Free Market Road Show 2013 ).