Free-market economists rarely declare, “We have to do X about unemployment.”  Why not?  Free-market economists’ standard reply is just, “We expect X to fail.”  Their critics, however, have a less favorable explanation: Free-market economists oppose X because free-market economists are cavalier and callous.  They cavalierly deny the reality of involuntary unemployment, and callously belittle the suffering of the unemployed.








I’d be delighted if my fellow free-market economists’ high theory and belittling quips were entirely correct.  But they aren’t.  The high theory’s wrong: Nominal wage rigidity is both strong and durable.  And the quips are far less insightful than they sound.  Yes, unemployment insurance discourages job search; but this hardly means that most unemployed people affirmatively prefer the dole to a job.  Yes, the unemployed could move to North Dakota; but in a market-clearing model of the labor market, workers wouldn’t have to flee their state to sell their skills.  Yes, some workers overestimate their own abilities; but the typical unemployed carpenter is competent in his craft.  Yes, many workers have low marginal products; but almost no one has a marginal product of zero.

Once you admit the severity and durability of nominal rigidities, it’s hard to avoid the conclusion that much unemployment is involuntary.  And once you admit that much unemployment is involuntary, it’s hard to avoid the conclusion that unemployment is a serious problem.  In terms of standard cost-benefit analysis, nominal rigidities have the same effects as price floors.  Society loses the difference between each involuntarily unemployed worker’s marginal product and his reservation wage.

Yet on further reflection, simple cost-benefit analysis grossly understates the horrors of unemployment.  We should also consider the effect of unemployment on happiness.  When workers don’t get a raise, they’re often disappointed or angry.  But when workers lose their jobs, they literally weep.  For most of us, a job isn’t only a paycheck.  A job also provides a sense of identity, purpose, and community.  Happiness research strongly supports this fact, but introspection should suffice.  Think about the shame and despair you’d feel if you were suddenly unable to support your children.

Free-market economists should be especially dismayed by the cultural and political effects of unemployment.  When every able-bodied worker can easily find a place to sell his skills, the economy reveals a clear connection between moral desert and
practical success.  You can fairly dismiss many complaints about capitalism by
harumphing, “Get a job!”  Workers can proudly tell statist activists and intellectuals, “I don’t need your charity.  I can take care of myself just fine.”  Once people lose their confidence that every able-bodied person can easily take care of himself, this individualist ethos withers – and the welfare state grows like a weed. 


At this point, good Keynesians will object, “Asking government to stop exacerbating nominal wage rigidity is a fine start.  But what about old-fashioned Aggregate Demand policies?”  There’s no reason for free-market economists to fear this question.  Tax cuts – especially tax cuts on employers – increase Aggregate Demand and employment, and they’re as free-market as Frederic Bastiat. 


I’m proud to call myself a free-market economist.  But free-market economics can and should improve.  Our cavalier and callous attitudes about unemployment are deeply misguided.  Free-market economists should eagerly share their insights on how to alleviate the grave evil of unemployment instead of putting their heads in the sand and calling idle misery “optimal.”