Myth: People on welfare should just find jobs.

Fact: The natural rate of unemployment is 5-6 percent -- and impossible to reduce to zero.



Summary

The U.S. economy averages a 6 percent unemployment rate. When it drops below that, the economy starts "overheating" -- that is, inflation starts climbing. Therefore, the Federal Reserve keeps unemployment stabilized around 6 percent -- which means it's impossible to eliminate welfare by finding everyone jobs.



Argument

Many welfare critics believe that anyone who wants a job can find one. The fact that so many millions are on welfare, they believe, is a sure sign of a poor work ethic, laziness, immorality, sloth, etc.

However, Milton Friedman won a Nobel Prize for his discovery of the "natural rate of unemployment" -- which is the unemployment rate that inevitably results when inflation is what the markets expect it to be. Today, most economists calculate that the natural rate of unemployment is about 6 percent. When the unemployment rate starts dropping below this, the economy starts "overheating" and developing a bad case of inflation. To combat this, the Federal Reserve tightens the money supply, which brings unemployment back up and inflation back down.

The upshot of all this is that we will always have 6 percent of our workforce unemployed. It is therefore wrong-headed to demonize these temporary unfortunates for not having jobs, or accuse them of lacking a work ethic. Even if we could put them all to work, the result would be runaway inflation -- a prospect which sends shivers down the backs of markets. Furthermore, a small reserve pool of labor is healthy for the market, because it keeps the economy flexible and capable of change. It means that there is always a percentage of workers who are moving between jobs, finding a better match between their skills and the jobs available. It also means there is a percentage of the workforce leaving obsolete jobs and now training for more modern ones. Because a reserve pool of labor is a benefit for business, it should be a cost of doing business -- hence, the rational for social benefits and public job training.

Calling for the unemployment rate to be reduced to zero is terrible economics. Yet this is precisely what many welfare critics are trying to do by chasing everyone off the welfare rolls and into jobs.

We should also keep in mind that because there are more workers than jobs, there is a bit of competition for those jobs. This means that those workers who do not compete as well as others might find themselves unemployed more often. (This trend is slight to moderate, and should not be overestimated.) In any society of unequal talents, we should probably accept this as inevitable. However, let's suppose for a moment that society becomes outraged over this state of affairs, and accuses these unfortunates of all manner of moral shortcomings. And suppose that the unemployed, chagrined by these criticisms, pull themselves up by their bootstraps, retraining themselves and successfully landing jobs. In that case, another group of workers will take their place in the ranks of the unemployed, and they will become the objects of society's scorn. What, then, should we do about this persistent underclass? Apply the Final Solution? (But then someone else will become the 6 percent unemployed. Sigh…)

Of course, this opens up the debate on whether inequality is natural or socially caused. Ironically enough, if it's natural, then conservatives can't criticize those who remain on welfare longer than others - it's completely unavoidable, at least in a meritocracy that must keep a 6 percent unemployment rate. Most thinking persons will realize that inequality has a large social component, which provides a rationale for social programs to help unemployed workers become even more competitive.

The best society can do is rotate more workers in and out of the reserve pool of labor, as obsolete or temporary jobs close down and new, more modern jobs arise. And the only economically sound way to do that is to provide training and personal development opportunities for the unemployed, so they are qualified when the labor market rotates them into those newly-created jobs.

The 6-percent natural rate of unemployment should dramatically tone down, or at least qualify, the debate on welfare. Critics are faced with a surprisingly difficult question: what alternatives are better?

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