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A.: UNEMPLOYMENT - Ludwig von Mises, On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory 
On the Manipulation of Money and Credit: Three Treatises on Trade-Cycle Theory. Translated and with a Foreword by Bettina Bien Greaves,. Edited by Percy L. Greaves, Jr. (Indianapolis: Liberty Fund, 2011).
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The market Wage Rate Process
Wage rates are market phenomena, just as interest rates and commodity prices are. Wage rates are determined by the productivity of labor. At the wage rates toward which the market is tending, all those seeking work find employment and all entrepreneurs find the workers they are seeking. However, the interrelated phenomena of the market from which the “static” or “natural” wage rates evolve are always undergoing changes that generate shifts in wage rates among the various occupational groups. There is also always a definite time lag before those seeking work and those offering work have found one another. As a result, there are always sure to be a certain number of unemployed.
Just as there are always houses standing empty and persons looking for housing on the unhampered market, just as there are always unsold wares in markets and persons eager to purchase wares they have not yet found, so there are always persons who are looking for work. However, on the unhampered market, this unemployment cannot attain vast proportions. Those capable of work will not be looking for work over a considerable period—many months or even years—without finding it.
If a worker goes a long time without finding the employment he seeks in his former occupation, he must either reduce the wage rate he asks or turn to some other field where he hopes to obtain a higher wage than he can now get in his former occupation. For the entrepreneur, the employment of workers is a part of doing business. If the wage rate drops, the profitability of his enterprise rises and he can employ more workers. So by reducing the wage rates they seek, workers are in a position to raise the demand for labor.
This in no way means that the market would tend to push wage rates down indefinitely. Just as competition among workers has the tendency to lower wages, so does competition among employers tend to drive them up again. market wage rates thus develop from the interplay of demand and supply.
The force with which competition among employers affects workers may be seen very clearly by referring to the two mass migrations which characterized the nineteenth and early twentyth centuries. The oft-cited exodus from the land rested on the fact that agriculture had to release workers to industry. Agriculture could not pay the higher wage rates which industry could and which, in fact, industry had to offer in order to attract workers from housework, hand labor and agriculture. The migration of workers was continually out of regions where wages were held down by the inferiority of general conditions of production and into areas where the productivity made it possible to pay higher wages.
Out of every increase in productivity, the wage earner receives his share. For profitable enterprises seeking to expand, the only means available to attract more workers is to raise wage rates. The prodigious increase in the living standard of the masses that accompanied the development of capitalism is the result of the rise in real wages which kept abreast of the increase in industrial productivity.
This self-adjusting process of the market is severely disturbed now by the interference of unions whose effectiveness evolved under the protection and with the assistance of governmental power.
The Labor Union Wage Rate Concept
According to labor union doctrine, wages are determined by the balance of power. According to this view, if the unions succeed in intimidating the entrepreneurs, through force or threat of force, and holding non-union workers off with the use of brute force, then wage rates can be set at whatever height desired without the appearance of any undesirable side effects. Thus, the conflict between employers and workers seems to be a struggle in which justice and morality are entirely on the side of the workers. Interest on capital and entrepreneurial profit appear to be ill-gotten gains. They are alleged to come from the exploitation of the worker and should be set aside for unemployment relief. This task, according to union doctrine, should be accomplished not only by increased wage rates but also through taxes and welfare spending which, in a regime dominated by pro-labor union parties, is to be used indirectly for the benefit of the workers.
The labor unions use force to attain their goals. Only union members, who ask the established union wage rate and who work according to union-prescribed methods, are permitted to work in industrial undertakings. Should an employer refuse to accept union conditions, there are work stoppages. Workers who would like to work, in spite of the reproach heaped on such an undertaking by the union, are forced by acts of violence to give up any such plan. This tactic on the part of the labor unions presupposes, of course, that the government at least acquiesces in their behavior.
The Cause of Unemployment
If the government were to proceed against those who molest persons willing to work and those who destroy machines and industrial equipment in enterprises that want to hire strikebreakers, as it normally does against the other perpetrators of violence, the situation would be very different. However, the characteristic feature of modern governments is that they have capitulated to the labor unions.
The unions now  have the power to raise wage rates above what they would be on the unhampered market. However, interventions of this type evoke a reaction. At market wage rates, everyone looking for work can find work. Precisely this is the essence of market wages—they are established at the point at which demand and supply tend to coincide. If the wage rates are higher than this, the number of employed workers goes down. Unemployment then develops as a lasting phenomenon. At the wage rates established by the unions, a substantial portion of the workers cannot find any work at all. Wage increases for a portion of the workers are at the expense of an ever more sharply rising number of unemployed.
Those without work would probably tolerate this situation for a limited time only. Eventually they would say: “Better a lower wage than no wage at all.” Even the labor unions could not withstand an assault by hundreds of thousands, or millions, of would-be workers. The labor union policy of holding off those willing to work would collapse. market wage rates would prevail once again. It is here that unemployment relief is brought into play and its role [in keeping workers from competing on the labor market] needs no further explanation.
Thus, we see that unemployment, as a long-term mass phenomenon, is the consequence of the labor union policy of driving wage rates up. Without unemployment relief, this policy would have collapsed long ago. Thus, unemployment relief is not a means for alleviating the want caused by unemployment, as is assumed by misguided public opinion. It is, on the contrary, one link in the chain of causes which actually makes unemployment a long-term mass phenomenon.
The Remedy for mass Unemployment
Appreciation of this relationship has certainly become more widespread in recent years. With all due caution and with a thousand reservations, it is even generally admitted that labor union wage policy is responsible for the extent and duration of unemployment. All serious proposals for fighting unemployment depend on recognition of this theory. When proposals are made to reimburse entrepreneurs, directly or indirectly from public funds, for a part of their wage costs, if they seek to recruit the unemployed in their plants, then it is being recognized that entrepreneurs would employ more workers at a lower wage scale. If it is suggested that the national or municipal government undertake projects without considering their profitability, projects which private enterprise does not want to carry out because they are not profitable, this too simply means that wage rates are so high that they do not permit these undertakings to make profits. (Incidentally, it may be noted that this latter proposal entirely overlooks the fact that a government can build and invest only if it withdraws the necessary means from the private economy. So putting this proposal into effect must lead to just as much new unemployment on one side as it eliminates on the other.)
Then again, if a reduction in hours of work is considered, this too implies recognition of our thesis. For after all, this proposal seeks to shorten the working hours in such a way that all the unemployed will find work, and so that each individual worker, to the extent that he will have less work than he does today, will be entitled to receive less pay. Obviously this assumes that no more work is to be found at the present rate of pay than is currently being provided. The fact that wage rates are too high to give employment to everyone is also admitted by anyone who asks workers to increase production without raising wage rates. It goes without saying that, wherever hourly wages prevail, this means a reduction in the price of labor. If one assumes a cut in the piece rate, labor would also be cheaper where piece work prevails. Obviously then, the crucial factor is not the absolute height of hourly or daily wage rates, but the wage costs which yield a definite output.
However, the demand to reduce wage rates is now also being made openly. In fact, wage rates have already been substantially lowered in many enterprises. Workers are called upon by the press and government officials to relax some of their wage demands and to make a sacrifice for the sake of the general welfare. To make this bearable, the prospect of price cuts is held out to the workers, and the governments try to secure price reductions by putting pressure on the entrepreneurs.
However, it is not a question of reducing wage rates. This bears repeating with considerable emphasis. The problem is to reestablish freedom in the determination of wage rates. It is true that in the beginning this would lead to a reduction in money wage rates for many groups of workers. How far this drop in wage rates must go to eliminate unemployment as a lasting phenomenon can be shown only by the free determination of wage rates on the labor market. Negotiations between union leaders and business combinations, with or without the cooperation of officials, decisions by arbitrators or similar techniques of interventionism are no substitute. The determination of wage rates must become free once again. The formation of wage rates should be hampered neither by the clubs of striking pickets nor by government’s apparatus of force. Only if the determination of wage rates is free will they be able to fulfill their function of bringing demand and supply into balance on the labor market.
The Effects of Government Intervention
The demand that a reduction in prices be tied in with the reduction in wage rates ignores the fact that wage rates appear too high precisely because wage reductions have not accompanied the practically universal reduction in prices. Granted, the prices of many articles could not join the drop in prices as they would on an unhampered market, either because they were protected by special governmental interventions (tariffs, for instance) or because they contained substantial costs in the form of taxes and higher than unhampered market wage rates. The decline in the price of coal was held up in Germany because of the rigidity of wage rates which, in the mining of hard coal, come to 56% of the value of production.1 The domestic price of iron in Germany can remain above the world market price only because tariff policy permits the creation of a national iron cartel and international agreements among national cartels. Here too, one need ask only that those interferences which thwart the free market formation of prices be abolished. There is no need to call for a price reduction to be dictated by government, labor unions, public opinion or anyone else.
Against the assertion that unemployment is due to the extreme height of wages, it is entirely wrong to introduce the argument that wages are still higher elsewhere. If workers enjoyed complete freedom to move, there would be a tendency throughout the economic world for wage rates for similar work to be uniform. However, in recent years, the freedom of movement for workers has been considerably reduced, even almost completely abolished. The labor unions ask the government to forbid the migration of workers from abroad lest such immigrants frustrate union policy by underbidding the wage rates demanded by the unions.
If there had been no immigration restrictions, millions of workers would have migrated from Europe to the United States in recent decades. This migration would have reduced the differences between American and European wage rates. By stopping immigration into the United States, wage rates are raised there and lowered in Europe. It is not the hardheartedness of European capitalists but the labor policy of the United States (and of Australia and other foreign countries too) which is responsible for the size of the gap between wage rates here in Europe and overseas. After all, the workers in most European countries follow the same policy of keeping out foreign competitors. They, too, restrict or even prohibit foreign workers from coming into their countries so as to protect in this way the labor union policy of holding up wage rates.
The Process of Progress
A popular doctrine makes “rationalization” responsible for unemployment. As a result of “rationalization,” practically universal “rationalization,” it is held that those workers who cannot find employment anywhere become surplus.
“Rationalization” is a modern term which has been in use for only a short time. The concept, however, is by no means new. The capitalistic entrepreneur is continually striving to make production and marketing more efficient. There have been times when the course of “rationalization” has been relatively more turbulent than in recent years. “Rationalization” was taking place on a large scale when the blacksmith was replaced by the steel and rolling mills, handweaving and spinning by mechanical looms and spindles, the stagecoach by the steam engine— even though the word “rationalization” was not then known and even though there were then no officials, advisory boards and commissions with reports, programs and dogmas such as go along with the technical revolution today.
Industrial progress has always set workers free. There have always been shortsighted persons who, fearing that no employment would be found for the released workers, have tried to stop the progress. Workers have always resisted technical improvement and writers have always been found to justify this opposition. Every increase in the productivity of labor has been carried out in spite of the determined resistance of governments, “philanthropists,” “moralists” and workers. If the theory which attributes unemployment to “rationalization” were correct, then ninety-nine out of a hundred workers at the end of the nineteenth century would have been out of work.
Workers released by the introduction of industrial technology find employment in other positions. The ranks of newly developing branches of industry are filled with these workers. The additional commodities available for consumption, which come in the wake of “rationalization,” are produced with their labor. Today this process is hampered by the fact that those workers who are released receive unemployment relief and so do not consider it necessary to change their occupation and place of work in order to find employment again. It is not on account of “rationalization,” but because the unemployed are relieved of the necessity of looking around for new work, that unemployment has become a lasting phenomenon.
[1. ][This address to German industrialists was given in 1931.—Ed.]