A student recently asked me why unemployment remains so stubbornly high, especially for lower-skilled people. Here’s an adaptation of my answer.
No one can know for sure the precise causes of unemployment; the economy is a fantastically complex system, like an ecology but still more complex, so unemployment is sure to have a variety of interacting causes. I do, however, have a strong opinion as to what some of the main factors are that affect employment.
For the least skilled, the main problems are legal obstacles to working. One that has a terrible effect on the least skilled and educated is minimum wage laws. Fortunately minimum wage laws affect only a small percentage of the workforce, most of whom are not trying to support a family, but it clearly reduces employment opportunities for them. This is because whenever an increased minimum wage makes it more expensive for companies to hire low-skilled people, they hire fewer than they otherwise would. Maybe businesses don’t lay off many, or any, when a minimum wage is increased, but they surely don’t hire as many as they otherwise would.
Another bad obstacle to employment for lower-skilled workers is occupational licensing requirements. One cannot legally work as a hairdresser, a carpenter, an electrician, a plumber, or in lots of other fields, without permission from the government in the form of a license. And those licenses can be difficult and expensive to get.
Another obstacle to employment is the expense and hassle of getting a permit from the government to go into business for oneself. Just getting permission to operate a food cart, for example, is usually an expensive hassle.
All of these obstacles, placed by the (possibly well-meaning) government in the way of low-skilled people, effectively cut off the bottom rungs of the employment ladder. In my judgment, they should all be repealed.
A fourth kind of obstacle similar in its effects to these first three, but usually affecting higher-skilled workers, is various laws which one way or another reserve some kinds of work for union members.
Other obstacles include various taxes on businesses that make it more expensive for them to hire and grow, and the substantial uncertainty for banks about the rules they must follow under the Dodd-Frank Act: the uncertainty makes banks hesitate to lend businesses the money they need to expand and hire new people. Businesses face further uncertainty about health insurance requirements, mandates, and penalties they might face under Obamacare. When businesses are not sure about the rules they will be required to follow, they hesitate to hire.
Restrictions on workers’ freedom to work, and impediments to businesses’ hiring: surely these contribute substantially to unemployment.