What causes high unemployment, and what does this mean for the future? For Shyam Mehta, the outlook is bleak
It is fashionable these days for politicians to support a minimum wage. This has disastrous social consequences. The natural rate of unemployment in an economy is around 3%. There are always some people moving between jobs.
Because of the recognised benefits of free trade, there are relatively few hindrances to the movement of goods, and therefore there is an international market in employment. Jobs get exported to the countries with the lowest wages, as adjusted for the efficiency of labour. But there are always local services that cannot be traded between countries and so, in the natural state, unemployment in each country is low.
There are four factors that push up the unemployment rate:
?the minimum wage, which causes employers to reduce or cease operations in a given country, owing to increased expenses but no corresponding rise in productivity;
?high taxes on income, including employer and employee social security taxes;
?means-tested benefits, which result in people tending to prefer benefits over employment;
?poor education, which means that the person is unemployable for the types of
work that he or she could otherwise do in the world marketplace.
Because of these factors, unemployment rates across the world are typically around 11%, instead of 3%. All the minimum wage does is to create a trade-off between having more people in employment and having fewer people in employment but with better pay. In my view, it is better to have more people in employment.
For young people, the effects of the four factors mentioned above are disastrous. These government policies typically increase the unemployment rate for the young to around 20%-25%, and as high as 50% in some countries. The unemployed youth sits at home with nothing to do except watch television, and at risk of rapidly degenerating into a zombie-like state.
Unemployment is completely disheartening for anyone, let alone young people. They lose all faith in humanity, their love of life is destroyed, they become senile - which has nothing to do with age, but is simply a result of lack of use of the brain - and they lose their health.
By supporting the minimum wage, this is what the media and the politicians are, in practice, encouraging.
Poor education, also the effect of government policy, is leading to approximately 95% of young people becoming disaffected, and subsequently developing other poor health issues and habits. Even if they are lucky enough to get a job, they are likely to lose it or be off sick.
It should be noted that, from an economic rather than a financial point of view, the real economy is not in recession now - it is normal. Utility functions are normal, and further analysis that I have conducted, shows that people are generally happy with their current levels of income, and that they value leisure activities just as much as income from work.
Unemployment levels of more than double the free-market level are caused largely by unemployable young people, who cannot do either office or manual work, and who do not have a trade. This may be due to poor health and a lack of education, caused by various factors that had not existed for older generations.
If the trends in unemployment and inactivity rates that have been seen over the past two decades continue into the future, together with a further deterioration among young people as schooling gets progressively worse, then unemployment could be over 30% in 20 years' time.
A change in policy is urgently needed.
Shyam Mehta is a former investment banker and insurance risk practitioner who has studied financial markets and economics for 47 years. He writes on a variety of topics including financial economics, life insurance, pensions, general insurance and investments.