Unemployment as a Game of Musical Chairs

So many politicians and commentators believe that the only limit to employment is the willingness of persons to work. Thus the Great Depression was really the Great Vacation, and every now and again (especially after global financial crises) a significant minority of people become even lazier than usual.

Indeed, historically, approximately half the time the constraint on aggregate employment has been labour supply. These are periods of "expansion" and "full employment", such as the 1960s and the mid-2000s.

The other half of the time, we have experienced periods of relative "contraction" and unemployment. In these times, employment has been constrained by the aggregate level of spending. It is in such times that the labour market operates like a game of musical chairs. In these times, increased saving - which by definition means less spending - simply tightens the "aggregate demand" constraint on employment. It is politically irresponsible for governments to exhort people who already have substantial savings to save even more during a contractionary time such as the present.

In a simple game of musical chairs, we can imagine the game starting with 100 people and 95 chairs. When the music stops, five people miss out on a chair. That's equivalent to 5% unemployment.

It may well be that the five laziest people were the ones to miss out. But the reason that five people became losers is not because five people were lazy. It's because the rules of the game required that there be five losers. And those administering the game can influence how many losers there will be. In the analogy, it is the level of aggregate spending that determines the number of chairs, and the amount of saving that determines how many chairs are withdrawn. Fiscal and monetary policies can encourage people to spend more.

We could make our game of musical chairs into a reality TV show. In Round 2, we would have 95 players and 90 chairs. Another 5 people would become losers. In the final round, say Round 25, we are left with 1 chair and 2 players. Will we still be inclined to call the loser "lazy"? It is likely that this final loser will be the second-least lazy of the original 100 players, but unemployed nevertheless.

Welfare "reforms" in NZ and elsewhere are predicated on the assumption that joblessness (aka welfare dependency) is largely caused by the moral shortcomings of the unemployed, and that a bit of tough love is all that is required to solve the problem. Deep down, most of us know that this is not true. It's just that the problem becomes too hard; if bad outcomes are not caused by people we can label as bad (eg lazy people), then we have to conclude that they are caused (albeit unintentionally) by good people. Our brains are not wired to accept such realities.

We might note that three of the big issues of this election campaign - youth unemployment, welfare, and the retirement age - are all arithmetically connected, given that we are presently in an environment where employment is constrained by aggregate spending.

Let's say we have 2.2 million jobs in total, and 60,000 unemployed people under 25. If we require most of our 65 and 66 year-olds, and most of our domestic purposes and sickness beneficiaries to occupy these jobs, leading say 40,000 more people over 25 do gain or hold such jobs, then there will be 40,000 more (100,000 in total) unemployed young people.

At present, in New Zealand, the labour market is like a game of musical chairs with 2.2 million chairs and 2.35 million players. Raising the retirement age and increased tough love for beneficiaries will raise the number of players to say 2.4 million without raising the number of chairs.

These touted "solutions" to the perceived problems of retirement unaffordability and welfare dependency only aggravate the serious problem of youth unemployment. It is today's young who must support tomorrow's old. If our neglect of our young means they cannot or will not provide that support to their elders, the life expectancy of today's middle-aged will be lower than current projections suggest.

Keith Rankin is a lecturer at the Dept of Accounting and Finance Faculty of Creative Industries and Business at Unitec.