Monetary Policy & Unemployment

In this article we will cover unemployment and how it is affected by monetary policy. Firstly, any government policy has a level of uncertainty surrounding it. This can have an influence on the possibility of job seekers finding a job or a firm keeping on many employees. During such an uncertain ruling on a tax policy or even property right laws, for more on this see my article on Regime & Policy Uncertainty

Also, Unemployment Is Always Voluntary In The Unhampered Economy. As unemployment is when a job seeker is refused employment to a preferred job, or when the job seeker cannot coordinate to an employer willing to hire them at the asked wage rate. Therefore, the unemployed coordinate and make adjustments to their choice of occupation or the amount of wage rate they and their employer are willing to accept. Employment happens between market participants because there is an infinite amount of work to be done. Ludwig von Mises termed catallactic unemployment to explain this process as a market phenomenon just like any other market phenomenon.

Alternatively, institutional unemployment is the effect of government interference with market phenomena, as such through monetary policy. Note institutional employment is not individual job seekers coordinating in the free market, as the government is now enforcing and coercing job seekers and current employments by set wage rates (fiscal policy) or some other regulation, which can be purposefully set by trade unions higher than those that would have been determined on the unhampered market. Distorting these relative wages which tell people where there are good employments, the price system can no longer accurately direct workers that otherwise would had of drawn people into occupations that are best directed to factors of production which employ labour to produce goods and services that satisfy consumer needs best.

Politicians say unemployment is due to the lack of economic stimulus spending, however unemployment is because spending exceeds saving, see my article $pending > $aving = Unemployment. Now in the short-run the statistics can prove that this is the case, as people and businesses can afford to boost their spending and hire additional workers to fill their newly built factories, then yes it does reduce unemployment. However, the real case for unemployment is quite the opposite – in that there is a lack of savings to fulfil current expectations. Now it should not be justified that in order to fulfil for this lack of savings, that we must create more capital through credit expansion. As credit expansion can aggravate the issue by being confused for real loanable funds. Though, it is true that businesses do expand production, and we are often reminded of the enjoyable at the moment benefits, including more current employments. However, the pool of real savings in which the economy relies on for reducing unemployment is decreased as people decide to spend rather than save. These savings would had otherwise contributed as a benefit to the economy, to continue to save to provide for future employment. 

Credit expansion which uses short-run economic stimulus to counter for the lack in private savings is bad, even though it is proven to reduce unemployment in the short-run, it is bad precisely because it focuses on assuming unemployment is the main issue. As if this were true, would it be are main priority for us all that we must rid of unemployment as soon as possible, besides it is now considered to be the main driving force of economic growth. I suppose you could take the mainstream advice of John Maynard Keynes and Paul Krugman and go ahead and employ as many people possible to the most tedious work imaginable. Such an employment devised was to employ people to dig ditches with spoons instead of diggers, and all readily subsidized by the government. Then again, it is just but a simple unthought through assumption to the unemployment problem.

Only, in the long-run you have spent society’s real savings that would have otherwise provided for future employment and there is no market for their final goods and services.  As any employment whether productive or not must be funded. Only in this case it is unproductive and just ends up directing savings away from productive employments which generate an economy’s wealth. Ultimately hindering infrastructure that has earned itself the use of real savings for a necessary expansion, of which will promote wealth and satisfy the best employments for society in the production of final goods and services. Additionally, if central banks blunder in their operations, the government passes on the expense to the consumers, taxpayers, and those with mortgages. For more on this see my article Central Banks Interest For Resolving Unemployment. Also, governments don’t create jobs!



Rather than interfering, in an unhampered economy unemployment is always voluntary, as those job seekers coordinate and make adjustments to their choice of occupation or the amount of wage rate they and their employer are willing to accept. The price system draws people into occupations where factors of production produce goods and services that satisfy consumer needs best. However, the wage structure determined by trade unions distorts these relative wages, and confuse what are good employments and not so good employments. Additionally, having continuous inflation one could not adjust to a lower wage rate as they would struggle to make enough to keep up with the increasing prices.


This short-term increase in revenue does not last and these new employments can only be kept as long as there is continued inflation. The more credit expansion is confused for real loanable funds, distorts what is available to support current production and consumption levels. As there is not enough time available to equal the production of goods to the increasing supply of credit. The lower purchasing power and inflated asset prices are the result of the booms squandering malinvestments. While, busts even though are inevitable, should not be prolonged to delay market correction on grounds of devaluing currency and hurting savings. Ultimately, benefiting government’s large debt to repudiate and sell at low rates.

Interest Rates

If governments lower the gross market rate of interest to help unemployment, they distort prices and deviate from the originary rate of interest. That is, in a free market, market price signals communicate and reveal the subjective valuations of all market participants, each time preference toward present goods over future goods. Naturally, preference for future goods, increases savings and lowers interest rates, signalling investors to borrow. Artificial low rates force people to consume now at the expense of saving or investing in the future. Therefore, it is quite hypercritical when interest is said to be exploitation. As, the market provides employments not governments. And, if we didn’t have interest the economies productions would not seek to produce at a loss and provide no incentives to save.

Featured image supplied from Pixabay (cropped).

Copyright © 2016 Zoë-Marie Beesley

Creative Commons License Licensed under a Creative Commons Attribution 4.0 International License.


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