Wednesday, September 28, 2011


The Soviet Union suffered from totalitarianism, low living standards, and economic inefficiency. But it had one redeeming feature: there was no unemployment. As we flail around trying to reduce unemployment, we should study how the Soviets eliminated it. But we need to look at what they did, not what they said.

Communist explanations of unemployment were nonsense. They claimed unemployment was due to selfish capitalists, who wanted an “army” of surplus workers they could threaten to substitute for current employees demanding raises. The Party line was that the U.S.S.R., having destroyed capitalism, therefore had no unemployment.

But when the price of something is less than the “market-clearing” price, the price at which demand for it equals supply, a shortage occurs. If capitalists really underpaid workers—as Communists claimed--- there would be a labor shortage, not an army of surplus workers.

The actual reason for Soviet full employment was that the state monopolized the right to employ labor and to set wage levels. Although claiming to represent workers, the Soviet state lacked free elections where its claims could be tested, and it set wages far below the market-clearing level. People joked “We pretend to work, and they pretend to pay us.” But the upside was that a fired worker could always find another job, since –thanks to the low wages---there was a labor shortage.

Meanwhile American and European economies have multiple obstacles, legal and social, to reducing wages, and pressures, legal and social, to raise wages: minimum wage laws, labor unions, a climate of opinion where low wages are considered a sign of inferiority and paying them a sign of unscrupulousness. No wonder we had 5% unemployment even in the good old days!

Unemployment would disappear if all wages fell to the level at which the supply of labor is equal to the demand for it. There is no need to go below this point like the Soviets did. But wages in general will have to be somewhat lower than they are now.

Reduced wages would be resented by workers. But since one person’s wage is another’s cost of getting something done, as average wages fall so will the cost of living. And the security each worker feels, knowing that if a current job disappears another will not be hard to find, will be invaluable. Today even people with jobs hesitate to spend money, let alone borrow, since they don’t know whether they will be employed tomorrow. This would not be a problem in a full-employment economy.

Best of all, with market-clearing wages unemployment will go away without any need for expensive “stimulus” programs or for “growth.”

Economically, then, ending unemployment would be easy. The Soviet Union proved that it can be done. Politically, however, it may be impossible in democracies whose electorates have limited understanding of economics and whose leaders must cater to public opinion or lose their offices. If it is necessary to eliminate minimum wage laws, critics will correctly argue that lower paying jobs will not support a decent standard of living while ignoring the fact that being unemployed won’t support any standard of living at all. We need to remember that it is better to be employed, even for low wages, than to be unemployed.

If funds currently spent to “stimulate” the economy could be redirected to subsidizing people working for low wages, eliminating minimum wage laws might become politically possible.

Full employment requires wage flexibility, wages that can fall when necessary as well as rise. It remains to be seen if this is possible in a democratic society.


This article has run in the Daily Telegram, Adrian, Michigan, and in the Democrat-Herald (Albany-Corvallis, Oregon).