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.
What is the relation of the law of supply and demand to the national unemployment rate? To answer that question, we need to know what the national unemployment rate is.
The unemployment rate for an economy is the number of people looking for a job in that economy divided by the total labor force (everybody holding a job plus everybody looking for a job). In 2010, in the United States, the total civilian labor force was 153,889,000 and the number of unemployed was 14,825,000. The unemployment rate was 9.7% (*The 2012 Statistical Abstract*; the most recent numbers I could find).
Does an unemployment rate of two percent mean that the number of workers looking for work is two percent greater than the number of workers businessmen want to hire? No, it does not mean that. Businessmen could be looking for workers to fill jobs representing one percent, five percent, or ten percent of the labor force while the unemployment rate was still two percent.
Does laissez faire and two percent unemployment mean that everyone who wants a job can find one? Not exactly. In the dynamic progress of a free economy, particular jobs are constantly becoming obsolete. A man who loses a job because his work is no longer valued is doomed to frustration as long as he insists on finding the same job somewhere else. Instead, he must learn a new line of work. In a laissez faire economy, this would be understood and accepted by everyone who is willing to face reality and think and adapt himself to the continuing onrush of new technology.
Since we are here projecting a world of laissez-faire, this must include a world in which people are sufficiently in favor of laissez-faire to keep it in existence. Those “willing to face reality and think” dominate the economy and set the terms of participation by those who would otherwise prefer not to face reality and think.
What role does the law of supply and demand play in determining the national unemployment rate? My answer is that it has no role. The law was never intended to apply to numbers representing an entire economy or even a sizeable portion of it. (This does not prevent its widespread application to the entire economy in beginning economics’ courses.)
Suppose the United States total labor force is 160 million and 3.2 million of those are unemployed [2% (160) = 3.2], and we know that across the economy businesses want to hire 2 million employees. What will happen? Will wages rise? Will they fall? Will the unemployment rate rise or fall? Will businessmen be able to find the workers they want? Will national output increase or decrease?
There are many other questions that could be asked. I do not know the answers and the law of supply and demand does not tell me the answers. Nothing whatever can be inferred about wages or output or employment from numbers like these. What happens depends entirely on what is going on in the thousands of local worker markets where wages are set and individuals are hired. We will take up the analysis of local worker markets in the blog after next.
Next time, I will discuss “discouraged workers” and the implications of an unemployment rate of zero.