Daniel Sutter: Unemployment and prosperity

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Markets operate on voluntary exchange, meaning that people must have things of value to exchange to get goods and services. For most of us, this means that we trade our labor, making finding work imperative and unemployment a catastrophe. Ironically tying consumption to work both enables and ultimately threatens prosperity.

We have an incredibly complex division of labor and division of knowledge in society today. We can only produce the dizzying array of goods and services for our high standard of living by specializing in narrow tasks. We couldn’t produce everything we consume today ourselves because no person could possibly know how to make all of the goods available in the department store.

But our highly specialized labor is of value typically to only specialized employers. I can give economics lectures for a university; I would have a hard time giving lectures to my neighbors in exchange for groceries. Our ability to support ourselves and our families depends on employers’ demand for our highly specialized skills, or market forces far beyond our control. The disappearance of demand for our special skills looms as a potential disaster for all of us.

Unemployment often wrecks lives. We can see this ourselves, and social science research confirms it as well. The unemployed face a greater risk of bankruptcy, are more likely to turn to crime, and can face lower lifetime earnings even after returning to work. They also have higher rates of depression, heart disease, and suicide, and lower life expectancy and life satisfaction.

That unemployment entails such mental health costs is in a way a healthy sign for our society. The goods and services of the modern economy must be produced by the efforts of people. Nature does not provide us with cars, cell phones, and big screen, HD TVs. The psychological and health costs of unemployment show that many people have internalized the work imperative.

This results, however, in tremendous pressure to prevent jobs from being lost, or to create new jobs. We don’t want to see a factory that has provided hundreds of jobs for decades close. We want to see businesses bring new jobs to our communities and government to employ people.

But there’s a catch. Prosperity requires more than hard work; people must do the proper jobs. High living standards are possible only when jobs create value, meaning produce the goods and services that people want now, not 100, 50 or even 5 years ago. People rode in horse-drawn carriages before we had cars. Jobs making carriages, horse harnesses, and buggy whips created value in the 1800s. Maintaining these jobs today would reduce our standard of living.

The pressure to avoid unemployment can threaten prosperity. Economists (including me) often decry the popular view that creating jobs is the end goal of the economy, but the prevalence of this view really should not surprise us. People see the catastrophic consequences of unemployment, while it is hard to see in our daily lives how it matters if jobs create value. For instance, your paycheck does not go farther if your job creates value, and it can be hard to even know if your job actually creates value.

Alternatively, if you have ever faced the potential elimination of your job and were spared the loss, you were probably happy and didn’t worry that perhaps your job should have been cut to help boost prosperity. Or if somebody was willing to pay you $1,000 a day to dig holes using a steam shovel and then fill them in, you’d probably jump at the opportunity. Digging and filling up holes does not create value, so it will be hard to find such a job on Monster.com, but if you do, you are unlikely to worry about the bigger picture.

Humans have worked hard throughout the ages. Prosperity is a recent development. Tying consumption to work enables the market economy to deliver prosperity, but makes employment imperative. The prudent desire to avoid the disaster of unemployment leads us to protect existing jobs and create make-work jobs that imperil prosperity.

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Daniel Sutter is the Charles G. Koch Professor of Economics with the Manuel H. Johnson Center for Political Economy at Troy University and host of Econversations on TrojanVision. The opinions expressed in this column are the author’s and do not necessarily reflect the views of Troy University.

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