THE LAW OF SUPPLY AND DEMAND
AND WORKER MARKETS
M. Northrup Buechner
A series of essays elaborating Objective Economics: How Ayn Rand’s Philosophy Changes Everything about Economics by the author.
My last blog ended with these questions: What would the unemployment rate be if there were no government controls on worker markets? Who would be unemployed?
The best designation for the unemployed in a laissez faire economy is “people changing jobs.” In an economy with a labor force of some 160 million workers, many millions of workers always will be in the process of moving from one job to another. These workers are looking for better opportunities, for potentially many different reasons.
They are also disproportionately composed of young people who are just beginning their employment careers and have not yet found the occupation in which they want to invest a significant part of their lives. Recent graduates from high school or college are quick to leave jobs they do not like, which is as it should be.
Across the economy, every day, some workers quit, some retire, others are fired, some return to the worker markets after an hiatus, some find new jobs and others start old jobs with a new employer. On average over time, one million workers leave their current jobs every week and one million workers take new jobs every week. As a result, the purest laissez faire economy we can imagine will have an average unemployment rate that reflects the fact that there are always many people moving from one job to another. The standard estimate for that rate is about two percent.
If all worker markets were completely free, no one would be unemployed for very long. In a dynamic, growing economy, there are always new jobs to be done, and recessions when they occur are short-lived, because politicians do not try to do anything about it and no one thinks they should.
Like the five percent vacancy rate for rental housing, the two percent unemployment rate is a good thing for the economy. It is a measure of the incredible dynamism and flexibility of a capitalist system. Think of it! One million workers leaving their jobs and another million taking new jobs every week. And the current worker markets in which this is true are far from free.
The practical meaning of these numbers is this: if businesses of a particular kind or type anywhere in the country need more workers of a particular kind or type, they can raise the wage and the workers will come—just as they came to Detroit in 1914 when Henry Ford raised his wage rate to $5.00 a day.
But we have not yet dealt with the law of supply and demand. What role does the law of supply and demand play in the unemployment rate? We will take up that question next week.