In U.S. government statistics, a person is unemployed if he is 16 years of age or more, and that person is able and willing to work at prevailing wages. The labor force includes the employed and the unemployed. If one is not employed for wages because one does not wish to work or to seek work, that person is not in the labor force, and not counted as unemployed.
The unemployment rate in the USA is now about six percent, down from a peak of ten percent in 2009. About one percent of the labor force is in “frictional” unemployment, meaning that the worker is between jobs or recently graduated from school and engaged in job search, or about to be hired. When the economy is depressed, there is “cyclical” unemployment, those not working as firms reduce employment. There is also the “structural” unemployment of workers losing their jobs in declining industries, and the seasonal unemployment of those employed only during a season such as in resorts or during harvests.
An economy is in full employment when the only unemployment is frictional. The economic puzzle is why there is any other unemployment. Cyclical unemployment is no mystery, as firms have fewer sales as demand falls, and falling demands become a downward spiral as falling purchases by some become falling production by others. The recession ends when materials prices and real estate rentals have fallen so low that production becomes profitable again.
Since recessions are caused by monetary and fiscal subsidies, a pure market economy would have neither, so it would have no recessions and no cyclical unemployment. So the puzzle consists of chronic unemployment, those unable to obtain work even during prosperous times. Most of the unemployed have been out of work for months or years. Those long unemployed have even more difficulty finding employment, because employers wonder why that person can’t find any job.
Some economists consider idle labor to have a positive side. You car is not wasted when you don’t use it, because it provides the service of availability. Empty seats in a theater have value because the theater needs that capacity for popular shows. Likewise, in this viewpoint, idle labor provides workers when firms need to hire. Also, the unemployed need time to engage in job search, so they are busy even if unemployed. But one can be employed at least part time while looking for better work, and while idle labor may be good for employers, it is bad for workers who need the income, and for taxpayers who have to support those not working.
In a pure market economy, there would not be any unemployment at all. There would be no seasonal unemployment, because workers could find other jobs in other seasons. There would be no structural unemployment, because workers could shift to other industries, and work in temporary jobs while searching for full-time employment. Even workers in frictional unemployment would be able to work some of the time, since job search is not full-time.
One of the premises of economics is that human desires are unlimited. There is always a demand for something. That demand provides an opportunity for workers to be employed to satisfy that desire. In a pure market economy, one could also be easily self-employed. Any person who is not totally incapacitated would be able to offer some service at some wage. If the wage one can obtain is too low to bother with working, then that person would not wish to work, not be in the labor force, and not be unemployed.
Unemployment exists because there are barriers that prevent labor from having access to land and capital goods. If the cost of hiring a worker is greater than his productivity, he will not be hired. In a pure market, the wage would be set where the quantity of labor supplied by workers equals the quantity demanded by employers.
Government policy raises the cost of labor above the pure market wage. Minimum wage laws prevent employers from hiring the least productive workers. On top of the minimum wage are imposed costs: the employer’s share of payroll taxes, mandated medical insurance, worker accident insurance, and the unemployment compensation tax. The firm also has to withhold taxes from wages and send then to the government. There is also a litigation risk and cost of hiring labor, as labor laws promote excessive litigation to combat malpractice, discrimination and sexual harassment. Also, union labor monopolies, and laws favorable to unions, push up the wages of union workers at the expense of less employment. Finally, laws making it costly to fire workers raise the cost of hiring them, creating more unemployment.
In a full-employment economy, when firms seek to expand, they would pull workers away from other firms, or pulled into the labor force, by offering higher wages and better conditions. There is no need for idle labor.
The best policy for labor is full employment. Labor laws that seek to protect workers end up imposing barriers that prevent employment. Full employment requires hiring flexibility and the removal of government-imposed costs. Full employment requires the elimination of taxes on labor, exchange, production, and consumption. Public revenue from land rent or land value could replace all these labor-hampering taxes, while promoting the productive use of land which would further increase wages.
A shift in taxation from labor to land would both increase employment and increase wages, while letting the worker keep his wage. It is not unemployment that is a puzzle, but rather why workers are not demanding the abolition of their wage-tax burden.