The Costs and Incentives of the Labor Market

Today, we’re faced with continued high unemployment and slow economic growth. The unemployment rate dropped slightly to 8.6%, but considering the holiday season and influx of temporary workers this drop is only temporary not to mention that the real unemployment is much higher than 8.6% the government reports. The problem with the high unemployment is that there is an abundance of labor but the demand for labor is still quite low. There are a few reasons for such a high and persistent unemployment rate. The cost of labor is just too high for employers. Not only has the government made low-skilled workers artificially more expensive but certain policies have contributed to additional costs that make employing people in general more expensive. Another contributing factor is that unemployment has been made more financially attractive to individuals causing them to have unreasonable expectations in their search for employment.  

If we break it down to the basic economic principles of supply and demand we can see that our nation has a surplus of labor due to a low demand for it. Demand is always a function of price. The higher the price, the lower the demand. These principles apply to the labor market just as much as any other industry. The high cost of labor could be a contributing factor to the decrease in demand.  When employers are analyzing their labor and capital needs, it is cost that is the major factor in determining what their course of action will be. If the cost of hiring a low-skilled worker exceeds the benefit they would receive, jobs are priced out. Lowering the minimum wage would contribute to a lower cost which would result in an increase in the demand for labor. These low-paying jobs allow a lower-skilled worker to improve one’s skills for future employers and future higher paying jobs. Raising the minimum wage just above that threshold results in no job for the low-skilled worker at all and no foot in the door for future advancement. Although, removing the minimum wage would effect the unemployment rate somewhat, it is only one factor contributing to the overall cost of labor.

There are other costs associated with labor other than wages. Minimum wage laws effects the employment of lower-skilled workers, but lowering these other costs could effect a wider spectrum of employment. Payroll taxes, healthcare and other benefits as well as liability costs, and regulations, all contribute to the overall cost of labor. If one were to implement fiscal policy and regulatory policy that would decrease these costs for employers (lowering taxes, deregulation) it would result in the overall cost of labor decreasing which would then lead to an increase in the overall demand. Instead, these higher costs force employers to look for alternative ways to do more with less. They resort to outsourcing certain skills, invest more in capital that would require fewer employees or they do without completely due to the costs. 

In addition, the incentive of earning a living has been replaced by the incentive to not earn a living. Unemployment insurance has made being out of work fiscally acceptable. The unemployed spend more time searching for jobs because they receive these payments. This additional time spent searching raises the unemployment rate. In recent times, unemployment payments have continually been extended causing these individuals to have unreasonable standards in their job search turning beggars into choosers. 

High costs of labor and the over-extended unemployment benefits are but two factors that could be perpetuating the high unemployment rate as pointed out by the article. Addressing these two factors directly would be significant enough to increase labor demand. By following the law of supply and demand and its effect on the relationship between cost and employment and the powerful effect of incentives we should be able to affect positive change in the labor market. 

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