Unemployment

Much has been written about unemployment over the past few years and obviously the inability of some people to find work is tragic for the individuals seeking employment and their families.  Some news stories seem to try and put businesses in a bad light - portraying corporations as evil and unwilling to hire new employees.  Politicians seem to believe that if they just create enough legislation they can legislate unemployment away (of course this legislate first ask questions later mentality is not contained only to unemployment).

Of particular concern to me is the youth unemployment rate which was 18.4% as of January 1, 2010 according to the Bureau of Labor Statistics as retrieved by FRED (as of July 2011 the rate was 18.1%).  The gray bars in the chart below indicate periods of recession and it visually looking it seems clear the unemployment rate has historically seen a significant uptick during recessions and has remained high before gradually falling.  While not shown below the general population unemployment rate tracks fairly closely to the ups and downs shown in the chart below (but just from a lower base, for example the January 1, 2010 unemployment rate was 10.6%).

So why does "high" unemployment occur?  Can politicians create legislation to reduce unemployment?  Are businesses evil for not hiring more workers?

In periods of recession or depression unemployment tends to rise as malinvestments in the economy are shut down and reallocated elsewhere.  This reallocation process is painful for those involved but the reality is some portion of the economy was unsustainable - the correct question is not why is the malinvestment being cleared but why did this malinvestment occur in the first place?

If left unhindered labor markets will clear based on supply and demand just like every other market.  Price controls (minimum wage laws), red tape, and anything else that hinders this clearing process should be eliminated to allow this healthy supply and demand equilibrium point to be found.  The more people try and intervene and "help" the process the longer and more painful this adjustment process will be.

It is painful to watch people suffering from forces outside their control like a job loss due to a recession.  Hopefully we are all giving of our time and resources to help those in need (without government involvement which is worthy of its own post down the road...).  With that said it is imperative that government intervention stay out of this process to give markets the ability to clear and to allow members of society to be at their most productive.