Do wages cause unemployment?

Rather than merely assuming that wage rises and labour regulations cause unemployment, as do many commentators, let’s look at the facts.

Many comparative studies have been done on this subject; typical is one from the Journal of Economic Perspectives (vol 11, no 3, 1997), but just google them yourself like I did, it’s not that hard!

These studies show many things that contradict free-market orthodoxies, for example, the following factors do not cause unemployment:

  • Strict employment protection and labour market legislation
  • Generous unemployment benefits, provided they are not open-ended
  • High unionization, provided it is in a context of co-ordinated bargaining   with employer organisations.

Other relevant findings:

  • Minimum wage levels only affect youth unemployment when combined with high payroll tax, and do not affect adult unemployment
  • Poor education levels correlate strongly with unemployment
  • Historically, the amount of work to be done adjusts in line with the available labour supply, rendering attempts to control unemployment by adjusting working hours futile
  • A very clear influence on unemployment is demand, which is improved by wage increases.

So there is no clear evidence that wage rises cause unemployment; in general, employers hire as many people as they need, not as many as they can afford!

Obviously they will oppose wage rises, because each individual employer wants cheap staff but well-paid customers!  But that doesn’t mean that decision makers or opinion-makers should accept (let alone actively peddle) this employer-centric view as valid economics.

In these potentially dire economic circumstances, it’s time we did let the facts get in the way of a good story.

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