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Posted by on Feb 13, 2010 in Economy, Education, Opinion, TG Roundup

How Government Benevolence Contributes to Teenage Unemployment

Teenage unemployment is at 25.5%, an all time high since government started tracking these numbers in 1948. An estimated 1.64 million kids between ages 16 – 19 are unable to find jobs. Does government benevolence contribute to high rate of teenage unemployment?

Before going into the role of government as a contributing factor for teenage unemployment, let’s look at the history of government meddling with wages.

In 1700s, at the time of the founding of the United States, Europe was suffering under crippling government regulations. These regulations were made in the name of helping citizens. Yet, the results of government benevolence often had an opposite effect on the populace.

European nations of eighteenth century were worried about too many people entering into professions such as carpentry, weaving, tailoring, coach making, and watch making. Governments feared that too many people going into these professions would result in over-supply of workers and thereby bring wages down. The governments were also worried about over-production. For example, carpenters over producing furniture, can bring the cost of furniture in the marketplace down. This, they feared, will result in lower business profits and less money available to pay employee wages.

In order to prop-up the wages and limit indiscriminate production of goods, local and federal governments of Europe adopted several “charitable” regulations. For example, if you are a young man living in 1700s England and want to become a carpenter in an incorporated town, you had to do a 6 year apprenticeship under a certified carpenter. This then qualified you to start your own carpentry business. Regulations were not only imposed on young carpenter job aspirants, but also on carpentry business owners. For example, you are an owner of carpentry business and you came up with a unique design for living room furniture that became popular. Your business is now roaring. Unfortunately, you were not free to hire as many apprentices as your business demanded. The law limited the number of apprentices you could have to two. If you badly needed additional hands, you pay a fine of 5 pounds a month to the king for every extra apprentice you have working for you.

Similar restrictions applied to weavers, cutlers, coach makers, watch makers, and several other professions. Most of these professions, as you can imagine, did not require 6 years of training. In fact almost all of the trades only needed a few months of learning, some of these, such as watch making, only needed a few weeks of training. However, young men toiled under their masters, wasting 6 years of their productive life, to get that professional certificate.

The consequences of these ill-conceived benevolent government regulations were manifold. For example, the skill needed by a weaver of linen and a weaver of silk was very similar. If the demand for silk clothing grew unexpectedly, the linen weaver was not allowed to weave silk. The scarcity of silk weavers caused their wages to rise, while there were many unemployed linen weavers readily available to do the same job.

Free spirit always tries to find ways to work-around government regulation. When demand for certain professions fell, men started moving to other towns where better opportunities existed. Governments intervened to clamp down on this practice. They’ve introduced a 40 day residency program under the oversight of the local parish. When a linen weaver moves to a new town, he could not work as a weaver unless he lived there for 40 days. This not only made labor force immobile as they had to survive for 40 days without an earning, but also resulted in extensive corruption and nepotism. People even bribed the parish officials for fake residency certificates.

Adam Smith, in his pioneering work “Wealth of Nations”, bemoaned this curtailment of individual liberties by the governments. He theorized that these government restrictions actually crippled the economy. He argued that many of the government regulations made people’s lives worse and not better. When businesses compete, their profits fall. But, what the European governments could not grasp was that competition among businesses will actually help the consumers by offering them quality goods at a low price.

Just like current times, businesses then lobbied governments for regulation in the name of social welfare. Adam Smith argued for a “natural state” of economy where goods and services are exchanged by the buyers and sellers without coercion and regulation.

So, who was studying Adam Smith’s work in the American Colonies? If you haven’t already guessed, it was the founding fathers of the United States. Thomas Jefferson, James Madison, Alexander Hamilton all studied Adam Smith- the father of modern economics. Adam Smith’s influence can be found in Madison’s Federalist papers. Benajamin Franklin corresponded with Smith and possibly met him in England. A research assistant at Princeton, few years ago, discovered “Wealth of Nations” with George Washington’s signature, indicating he might have also read Smith’s masterpiece.

Founding of the United States on the principles of individual liberty and small government was not an accident, but a deliberate act. Upon its founding, United States quickly became a land of opportunities for Europeans suffering under crippling government regulation. Immigrants who came to the United States could produce what they could and sell it to whoever is willing to buy their products at a mutually acceptable price. There was hardly any government coercion.

United States is a different country now. Individual liberties and aversion for large government are no longer the core principles governing the society. The country that boasted to be the “Land of the Free” can no longer claim its right to that title. The U.S. national economy is crippling under state regulation and excessive taxation. There is a never ending supply of progressive social engineers and Ivy League elites who crawl out of the woods and claim to have solutions for every social malaise. Yet, scheme after scheme these elites come up with only makes the economy. The situation in today’s United States is not very different from the 18th century Europe.

With that background, let us now get into the specific topic of teenage employment and how government benevolence actually contributes to the unemployment epidemic.

When a business hires an employee, in a free marketplace, the business theoretically should only worry about employee salary. Law makers, with welfare of common man in mind, created reams and reams of regulation. As a result, businesses today not only have to deal with the employee salary, but also have to pay the government- social security tax, medicare tax, state unemployment tax, and federal unemployment tax. On top of this, many employers offer health benefits to their employees, only because government gives businesses a tax break on health insurance but refuses to give the same tax break to individuals. As if this is not enough, a business hiring a low skilled employee has to reckon with the minimum wage regulations.

No, we are not done yet. The government is now contemplating an 8% tax on all those employers who do not provide health insurance to their employees.

Over the years people have been led to believe that these myriad social benefits are free “give-aways” by the government. Yet, people fail to see that the money for these welfare schemes actually is being taken out of their compensation. For example, an employer hiring a worker never solely looks at worker’s salary of, let’s say, $75,000 a year. Instead, the employer always looks at the total cost of employment including all the benefits- that is, $75,000 a year salary plus, let’s say, $25,000 government imposed welfare taxes. The $25,000 paid to government is in fact coming out of employee salary. In the absence of benevolent government regulation, the employee salary would be in the ballpark of $100,000 a year.

We all know that a young person, fresh out of high school or college, does not usually have the skills needed to become a productive member of the workforce. As a result, they have an uphill task of finding a job. Entry level jobs are a great way for these youngsters to get their feet wet in the workforce. When you go to a grocery store, a retail clothes store, a coffee shop, or an electronics store, most of the people working there are young kids (you also see a few older people, and I will address them at the end of this note). These kids are doing “minimum-wage” jobs. Government in its infinite wisdom, every few years passes legislation, raising the minimum wages. The federal minimum wage now stands at $7.25/hour.

Why is this bad? Isn’t government helping the poor and helpless by forcing the employers to pay a decent wage?

Employers hire only when the money that the worker brings to the business is more than what a worker costs to the business. In other words, the worker has to make more than $7.25/hour or more in profit for the business, in order for the employer to hire the employee. Now add government imposed benefits and taxes, and the net compensation becomes, let’s say, $10/hour. The bar on the worker is raised further. Now the kid working as a sales person at GAP, Best Buy, or Abercrombie should bring more than $10 an hour profit for the business, to justify his existence. If the kid only manages to bring $9/hour profit to the business, the business is better off not hiring him at all.

Every time government forces a minimum wage hike on employers, it actually forces businesses to shed employees.

Is it any surprise that teenage employment is at an all time high? Yes, recession has a role in unemployment, but that in itself does not explain 25.5% teenage unemployment. Teenagers, more than compensation, need work experience. Government, with its benevolent regulations, makes the situation worse for these kids.

There are several other tragic consequences of government meddling with wages. The “self-checkout” lines that are now a common sight at grocery stores are also a partial consequence of wages of labor being artificially high. It is cheaper to invest in automating the check-out at a grocery store than to hire an employee to run the register.

Government’s benevolence also affects illegal immigration. Certain employers find it profitable to hire illegal immigrants as they only have to pay them a salary and don’t have to worry about welfare taxation or minimum wage rules. This further exacerbates the unemployment problem.

If you scratch deep enough, you will find similar tragic consequences of government benevolence in public schools, social security, medicare, unemployment benefits, affordable housing, and many other social programs.

Now to the issue of older men and women who are poor and work for minimum wages-

The sick, the old, the disabled, the unemployed, the colored, and the uninsured do not need government help. The only segment of the society that needs help is the poor.

If the government scraps all the social programs and just gives cash out to the poor, we will have a far better performing economy. These cash benefits should be gradually phased out with increasing income levels, and Milton Friedman termed this as a negative income tax. This will allow us to get rid of the bloated government bureaucracy. The money can be used by the poor-sick for their treatment, by the poor-old for their retirement, and by the poor-disabled to buy the equipment/services they need.

Nalamotu Chakravarthy