Mon, 12 May 2003

Creating Jobs by Firing Workers

Steven den Beste writes about Hiring and Firing, defending the American practice of actually firing workers when there is no longer a business requirement for their labor. Bing! Right on, Steve! He didn't say so very much about it (in contrast to some of his other writings which go on for pages and pages) probably because he doesn't think much of himself as an economist.

I, on the other hand, have no such modesty, and plenty of reason to write about economics (I am The Angry One after all). Everything Steve said is true, and I'll assume that you've gone off and read it, and have come (back) here. His main point is true. American businessmen do not suffer the risk of being forced to employ when the reason for the hiring has lapsed. Ironically, this results in less unemployment because of a coincident effect: the ease of growing or starting a business. If that was not present, then a company's ease of firing workers would be difficult to justify. I don't know enough about the difficulty of growing or starting a business in Europe. I suspect that it's hard: A customer in Norway told me that a business was required to supply every employee with a view of sunlight.

Steve didn't answer John's question fully: "I'm curious what your views are on corporations rush to save money by laying off or letting go (a nice term for firing), employees. I think its somewhat foolish to go that route first. If every company were to do this then how could anyone purchase their products or services?" One implication of free markets is that a company not only can, but should fire every worker possible. There are two reasons why

The first reason to "fire a worker if possible" is that everyone in a market is better off if the same output can be produced from the same input with less labor. It doesn't matter if the employee is purposefully or accidentally being unproductive. In either case, if their labor doesn't eventually contribute to the bottom line, their employment should be terminated. This comes from having a free market.

Now, some people would read this and say "Well, obviously this is a problem with free markets." Not so. It is what causes free markets to create and share such wealth. In the short term, yes, the corporation gains all the benefit from the worker's loss of their job. In the longer term, though, that benefit is competed away. If Company A can fire a worker, so can Company B. They'll want to sell more of their output, so they'll cut their prices relative to Company A. Their sales will go up. Company B will either have to cut their prices as well, or live with reduced profit. Either way, the value of the fired employee's job gets returned to society in the form of lower prices for the product he (wasn't helping to) produce.

The compassionate person would say "fine, but that doesn't help the fired person". Ahhh, but yes, it does. That person also lives in the market, and gains his fair share of the increased productivity from his lost job. Not only does he gain it from his lost job, but also from everybody's lost job.

This brings us to the second benefit from firing workers: unemployment. Ahhhh, but how can unemployment be a benefit? It is a benefit if you're starting a company, or trying to add workers. When a worker gets fired, you increase the availability of workers. Workers become cheaper. When a business finds that a resource (and labor is a resource) becomes cheaper, it will try to restructure its business so that it uses more of that resource. So, when one business fires a worker who is not being productive, another business will go looking for that worker to be productive in their business.

Of course, some wags would point to persistent levels of unemployment and say "Okay, if you're so smart, why aren't all these people being employed?" This question is relatively straightforward to answer. Any particular level of unemployment has two parts to it: the natural level of unemployment, and the unnatural, or created level. Natural level first.

There really is a natural level of unemployment. Zero unemployment is unnatural. It is caused by interference in the free market, such as that by the USSR which forced all workers to either find a job, or be employed by the state doing menial labor. In a free market, where people make their own decisions, people need time to find a new job. Gainful employment is *always* available to everyone, at some low wage. Nearly everyone refuses to take the first job available to them, seeking instead to find a job which pays them better, or uses a skill for which they are trained. This is the natural level of unemployment. Exactly what it amounts to is a matter of the nature of the mix of people who are unemployed.

Unnatural unemployment is unemployment created by government edict. Yes, the government claims credit for creating jobs at the same time it destroys them. Anything that interferes with the natural functioning of the free market will create unemployment. For example, if you force employers to pay a minimum wage, not everyone will be able to find employment at that price. If employers are forced to supply health care, or unemployment insurance, or time off, or anything else, that will result in less employment.

One more note to answer John's concern: labor costs form the bulk of the cost of all but the most unusual businesses. If a business gets into trouble and needs to cut costs, the very first thing it's going to do is try to reduce employees. This is a natural consequence of the (relative) wealth of the ordinary laborer, and not something to be decried. For over five hundred years the lot of the ordinary laborer (those people formerly called peasants) has been improving. There is no reason why it should stop improving.

I know that all of this sounds cold and cruel-hearted. "Think about the workers!" no doubt some will cry. I do think about the workers. I want them to live in a vital and growing society where there are well-paying jobs enough for everyone. Such a society must be a free-market society, over the long term.

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