Unions Do Not Cause Unemployment, Governments Do.

Whilst having coffee this morning and browsing the Liberal Party of Australia’s Facebook page, I came across a post by Mark Kinnear who has a good grasp on who causes unemployment:

“ govts have full control on unemployment … If they wanted unemployment to go to 2% then it could be done …. but big business dont like that …and who sponsors both political parties ?
Since the loss of full employment, workers and the middle class have been losing services and conditions.
Technology is advancing but education and health are becoming more expensive because big business demand bigger profits”

In reply to his post, a gentleman named Ben Chesterman said, quote:

“Unions are the reason we have nearly 6 % unemployment.”

Mr. Chesterman’s reply is patently false.

As I detailed in my July 25th article, the sovereign currency-issuing national government controls the unemployment rate. Micro reasoning confuses the thinking of people like Mr. Chesterton into an errant view of unemployment. So, let’s review.

Micro tells Mr. Chesterman that the federal government’s budget is just like a household’s, because the federal government has no dollars of its own. Therefore, it must have an income. By taxing or borrowing first, only then can government spend. Following this nonsensical micro reasoning to its absurd conclusion results in the belief that the government is subject to sovereign capital. Furthermore, it can be seen that business, from the errant micro perspective is the job creator and so, unions, workers and consumers are also subject to business, totally dependent on capital’s supply of dollars. The question of wages then comes into play.

The micro viewpoint says that wages are nothing but a cost to business. Whenever business pays workers, it is losing precious dollars. If unions then demand and win greater wages, business suffers immense financial hardship and responds with mass unemployment. The micro viewpoint and its resulting argument is absolute nonsense.

Firstly, the government of Australia is currency-issuing and regulatory authority. Its monopoly product is the Australian dollar, meaning it is the sole issuer. All Australian dollars originate with the government of Australia. The government lays a tax payable only in Australian dollars and prescribes a punishment for not paying that tax, thus, private entities must find a way to obtain the government’s dollars. Since all of us are coming late into the game, dollars are already in private hands making it hard to see what is really going on. Much like a film, if you arrive halfway through, then you either need to back up to the beginning and start over, or find someone to explain what has happened thus far.

By laying a tax payable only in the government’s dollars, the government of Australia causes business to sell its goods and services to the government in exchange for the government’s Australian dollars. In doing so, business can now pay the tax and also pay labour and labour can pay any tax it owes. In this manner, the tax and the potential punishment if it is not paid causes a demand for Australian dollars.

Secondly, as mentioned, business uses dollars to pay the wages of workers. Workers, upon receipt of their paychecks, then spend their paychecks on goods and services supplied by business. When business pays the wage, that is initially a cost to business. However, when workers then spend their wage, that wage then becomes a consumer demand on business for its goods and services. On this correct macro viewpoint, wages are cost and demand functions in the economy.

As I’ve mentioned numerous times now, the argument that wages are a cost alone literally assumes that workers never spend their paychecks. Such a thing is obviously ridiculous to any adult, yet it is precisely the absurd reasoning used to argue that unions cause unemployment. When we understand that both capital and labour are mere users of the Australian government’s dollar, we then gain insight into not only who is in control, but also how jobs are created.

The Australian government, through its currency-issuing and regulatory authority, commands both business and labour. In short, the Australian government is the sovereign to which both business and unions are subject, not the other way around. The government funds business and unions through its infinite capacity to issue Australian dollars. Business, labour and Australian citizens do not fund the Australian government. Because workers are paid wages and wages are paid in the government’s currency (the Australian dollar) which the government of Australia alone has the authority to issue, this means, quite clearly, that it is neither business or unions which cause unemployment, nor does business create jobs.

Reduced to its essence, Jobs are nothing more than the result of interactions between consumers and business using the government’s dollar to facilitate that interaction. When consumers on aggregate have more dollars, over and above that which they wish to save, they will spend. We call that spending “consumer demand”. Demand is the act of spending, not the desire to buy goods and services. Desire doesn’t purchase food, clothing or dog food; dollars do and consumers must have the dollars necessary to purchase the goods and services. When consumer spending increases persistently, pressure is then applied on business to increase its production. The result of that consumer demand pressure is job creation. Therefore, in simple terms, job creation is a survival response by business to maintain market share.

Let us assume that Business A and Business B compete with one another. What we mean by the word “compete” is that they attempt to gain a market share advantage and increase it whenever possible. If consumers on aggregate persistently increase their spending and Business A has a larger market share, then consumers shop more at Business A. Business A wishes to maintain this share and increase it where possible. Business B also wishes for the same result. If Business A does not respond to consumer demand to increase its production by hiring more workers to keep the shelves full, then it risks losing market share to Business B. Simply put, if customers cannot obtain the goods and services from Business A, they will go to Business B and spend their dollars. If Business A remains reluctant to hire more workers and instead, continues to squeeze maximum production out of its insufficient labour supply, shelves will remain empty and the longer the condition is allowed to persist, the more customers will shop at Business B and the more income Business A loses. In order to attenuate the income loss, Business A can do two things:

1. Begin hiring more workers to offset consumer demand.
2. Begin unemploying workers to save dollars.

Choice number one is more likely, whilst number two would make no sense as it signals to both consumers and Business B that Business A is in business, not to earn an income, but to go out of business. Therefore, Business A will begin hiring more workers only when consumer demand pressures it to do so. The reverse of this condition is called a spending contraction.

When consumers on aggregate do not have enough dollars over and above that which they wish to save, they will spend less. If consumer spending decreases, demand pressure on business to produce decreases along with business income. As production decreases, business enters what we call the inventory cycle; a condition where it has excess inventory on hand that it is not able to sell. At this point, business then responds to the spending contraction by eliminating a number of workers to attenuate the fall in income. Those unemployed workers must then cut back on their spending, because now they too experience a fall in income. On aggregate, as consumer spending contracts, the unemployment rate increases. But what is driving this economic activity? The government’s dollars.

On the correct macro viewpoint then, we gain two important insights. Firstly, somebody’s spending is somebody’s income. The incorrect micro viewpoint that all can save is thus rendered invalid. And secondly, as we’ve previously discussed, because workers are paid wages and wages are paid in the government’s currency (the Australian dollar) which the government of Australia alone has the authority to issue, this means, quite clearly, that the Australian government, through its issuing of dollars, controls the unemployment rate. If the Australian government controls the unemployment rate, then it is the only entity in Australia that can also eliminate unemployment, which it achieves through deficit spending.

In order to add more dollars necessary in a stable manner, over and above the net savings desires of the domestic private sector to increase consumer spending, so that sufficient demand pressure is applied to business to increase production and hire more workers, thus reducing the unemployment rate, the Australian government must run deficits. A deficit is defined as when the Australian government’s spending (G) is greater than that which it is taxing dollars out of the economy (T), thus:

(G – T > 0) or (G > T)

For the sake of familiarity of laypersons, we will use the term “private sector”. Since the Australian government is the sole source of Australian dollars that business, labour and all consumers use, then whatever it deficit spends, that exact amount will be deposited into the private sector. For instance, let us assume that the government spends $100 billion and taxes away $50 billion. The government now runs a deficit of $50 billion, which will be deposited as added dollars above that which the private sector already has. Since somebody’s spending is somebody’s income, then whatever the government deficit spends is income for the private sector. As there is now an extra $50 billion in the private sector, that extra $50 billion can be used to increase spending, thus increasing production, thus decreasing the unemployment rate. On the other hand, should the Australian government deliberately reduce spending and run a surplus, dollars will be removed from the private sector.

A surplus is defined as when the Australian government’s spending (G) is less than that which it is taxing dollars out of the economy (T), thus:

(G – T < 0) or (G < T)

Again, Since the Australian government is the sole source of Australian dollars that business, labour and all consumers use, then whatever it taxes, that exact amount will be withdrawn from the private sector. For instance, let us assume that the government spends $100 billion and taxes away $200 billion. The government now runs a surplus of $100 billion, which means that the government taxed away the $100 billion that it spent, then proceeded to tax away a further $100 billion of the private sector’s net savings as well. Since somebody’s spending is somebody’s income, then whatever the government taxes over and above what it spends is a loss of income for the private sector. As there is now $100 billion less in the private sector, the private sector now has $100 billion less that can be spent. Spending will then contract, thus decreasing production, thus increasing the unemployment rate, resulting in a recession.

So it is, that the Australian government always controls the unemployment rate. The same applies for other sovereign currency-issuing governments such as, the US, UK, Canada, Japan and New Zealand. A government which issues its own free-floating, non-convertible fiat currency always determines the unemployment rate and is the only entity that can eliminate unemployment within its domestic economy.