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Market solutions needed to improve economy

BY ZACH HALSTEAD - GUEST OPINION | NOVEMBER 09, 2010 7:20 AM

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Unemployment is a major issue facing the state of Iowa and this country. The national unemployment rate is 9.6 percent, according to the Bureau of Labor Statistics. But in reality, it is much higher than that.

The official unemployment index, based on a monthly survey of sample households, only counts people who reported looking for work in the past four weeks. Itdoesn't account for part-time workers who want to work more hours but can't, given the tight job market. And it doesn't include those who have given up trying to find work. When the underemployed and the discouraged are added to the numbers, the unemployment rate rises to 17 percent.

Not only does unemployment result in the tangible effect of losing one's income, it also results in serious emotional strain. Pride, confidence, and self-worth can all be shattered quickly after losing a job. Unfortunately, the government's response to the unemployment problem is grossly inadequate and fails to recognize the underlying problems its policies create.

The problem of unemployment is a problem of disconnect between those who would work and those who would hire. What is this disconnect? It comes down to affordability. There is not a lack of work to be done in this country. It is merely too expensive to pay for the work to be done. Too many barriers are present that prevent the hiring of workers.

The first and most visible barrier is the minimum wage. Since the minimum wage increase a couple of years back, millions of workers whose marginal value of labor is lower than the minimum wage have joined the ranks of the unemployed. Politicians love to the tout the passage of a minimum-wage law as beneficial to its low-wage earning constituents. I concede that this is true — but only to those workers who actually keep their jobs.

In his 1850 book That Which is Seen, and That Which is Not Seen, Frédéric Bastiat pointed out this fallacy. He wrote, "Between a good and a bad economist this constitutes the whole difference — the one takes account of the visible effect; the other takes account both of the effects which are seen, and also of those which it is necessary to foresee."

Another reason unemployment has remained high has to deal with employment-protection laws. These laws, which mandate that no one can be fired without due process, are supposed to protect employees. However, if the government tells the employer that he or she must keep an employee no matter what, the employer will tend not to hire her or him in the first place.

This law, which appears to help workers, instead keeps them from gaining employment. When employers find it difficult to dismiss workers, they will create fewer jobs because of the risks attached to hiring employees who might become unruly, unproductive, or uneconomical over time.

In this case, jobs may be moved across the border to more employer-friendly environments, or the employer may substitute more capital and technology for labor, as has been the trend in the last decade in the United States.

The No. 1 issue on the minds of voters is the economy, and they are growing impatient. We saw this attitude prevail in the election last week, in which incumbents were slaughtered. Tackling the unemployment problem has become the focus in Washington, and rightfully so. It is my hope that the new Congress focuses on repealing burdensome and confusing laws and regulations, instead of creating more.

Central economic planning has failed time and time again throughout history, and this time is no different. Market-based solutions are desperately needed to promote employment in this country and move the economy in the right direction.

Zach Halstead is a sophomore in the Tippie College of Business.


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