Acton Commentary

Unemployment and Social Cohesion


As the U.S. economy continues to slide into a recession, those in our society who are truly disadvantaged are less able to absorb the economic shocks and must remain a priority. With deep job cuts in retail, manufacturing, and construction contributing to the highest unemployment rate in 14 years, we are confronting the implications of the minimum wage in those sectors and the effects of joblessness in low-come neighborhoods.

The current unemployment numbers are more alarming because of the relationship between employment and social cohesion. Joblessness has a profound effect on the social stability of families and communities. There is a dynamic relationship between economic life and moral life. High levels of joblessness are catalysts for breakdowns in social organization with issues ranging from crime, violence, and drug trafficking to break downs in marriage and family life.

Also affected are intermediate institutions that make communities work. Working families are in a better position to support churches, community and non-profit organizations, recreational facilities, and the like. When these institutions decline, the ways in which these intermediate institutions foster civil society is severely compromised.

According to the Labor Department, the October unemployment rate rose to 6.5 percent, with an increase in the number of unemployed persons by 603,000 to 10.1 million. Over the past 12 months, the number of unemployed persons has increased by 2.8 million, and the unemployment rate has risen by 1.7 percentage points. The unemployment rates rose for adult men (6.3 percent), adult women (5.3 percent), whites (5.9 percent), and Hispanics (8.8 percent). The jobless rates for teenagers (20.6 percent) and blacks (11.1 percent) remained stable, while the unemployment rate for Asians was 3.8 percent.

Recent increases in the minimum wage have compounded economic problems.

In his book Basic Economics, Thomas Sowell reminds us that surpluses of capable workers creates unemployment more often in economies with minimum wage laws than those with truly free markets. Imagine what would happen if employers had the freedom to pay people less instead of laying them off completely?

It is not accident that many of the job losses are occurring in lower-skilled labor sectors. The Labor Department reports that total nonfarm payroll employment fell by 240,000 in October, bringing job losses thus far in 2008 to 1.2 million. Employment declines are heavily leveraged in manufacturing, construction, and several service-providing industries.

When revenues decline, companies cannot afford to pay workers wages that are artificially set above their productivity and demand for their skills. Additionally, laying off capable workers is not preferable in the long-run because unemployed workers are not continuing to develop the skills and experience that enables them to increase their productivity or move beyond low-skilled and entry level jobs to those of higher pay.

Only economic history can provide the definitive narrative regarding the additional role the recent increase in the minimum wage is playing in the current surge in joblessness. Back in 2007, Congress voted to increase the minimum wage to $6.55 per hour effective July 24, 2008 and $7.25 per hour effective July 24, 2009.

The U.S. Chamber of Commerce opposed a minimum wage increase because it destroys entry-level jobs, stunts new job growth, and harms small businesses. In a 2007 survey, the Chamber found that 60 percent of small business owners would not be able to off-set the cost of the minimum wage increase. That, in turn, would lead businesses to make tough decisions like slashing benefits, raising prices, and laying off workers.

Although many industrialized countries have minimum wage laws there are many exceptions, including Norway, Sweden, Finland, Denmark, Switzerland, Germany, Austria, Italy, and Cyprus. Switzerland has no minimum-wage laws and one of the lowest unemployment rates in the world. The latest numbers are 2.6 percent.

In manufacturing, construction, and retail sectors, for example, one can only wonder how many jobs would remain available if labors unions and government did not force companies to set wages higher than what the job is worth.

The way out of this recession should include establishing the conditions for companies to negotiate wages freely with current and potential employees. The most essential need from unemployed workers is a job. Any income in a tight market is better than no income and having workers continue to improve job skills is better than capable workers sitting idle.

If economic history is any tutor, President-Elect Obama and Congress would do well to do whatever is necessary to free the private sector from the regulatory shackles that stifle job creation. But if the new administration is simply going to do the bidding of Big Labor, the prospect of regulatory reform is remote. A good place to start, however, would be taking a cue from countries like Switzerland. The results speak for themselves.