Jewish World Review Feb. 4, 2005 / 25 Shevat, 5765

Thomas Sowell

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Bedroom economics | Now that unemployment in Germany has hit 11.4 percent, it was perhaps inevitable that some politicians there would come up with various quick-fix "solutions" to the huge drain of unemployment compensation on the government's budget.

A young waitress discovered one of these "solutions" recently when she turned down a job as a prostitute and was threatened with the loss of her unemployment benefits because prostitution   —   "sex workers" is the politically correct term   —   is a legal occupation in Germany, so a job offer from a brothel cannot be declined.

This is one of the many areas in which we Americans are lagging behind the more advanced thinking in Europe that our intelligentsia want us to imitate. However, in one sense the general pattern of political decision-making is very similar on both sides of the Atlantic: When political solutions create new problems, the answer is never to go back and stop doing what started a string of disasters in the first place.

Instead, there are an endless series of solutions to problems caused by the previous solutions. How did Germany get into its high unemployment mess in the first place?

It was the old political illusion of something for nothing. The distinguished British magazine The Economist calls Germany's job security laws the strongest in Europe. It is hard to fire anybody for anything in Germany.

You might think that this would lead to low unemployment but in fact it has led to high unemployment. Why? Because workers that are hard to fire mean higher labor costs.

Employers facing higher labor costs can adjust by substituting capital for labor. If workers are hard to fire, then employers are reluctant to hire, preferring to work existing workers overtime if necessary to increase production in the face of rising demand, rather than taking on new workers whom they can have a hard time getting rid of when demand slackens off.

This is great for workers who already have jobs. They are on the inside looking out. But what about those who are on the outside looking in?

The passage of time means that those on the inside will eventually pass into retirement while younger workers looking for jobs have a hard time finding them. An economist might advise a politician to admit that "job security" was a bad idea and just repeal such laws. But economists don't have to face the voters.

The last thing any politician wants to do is admit to having been wrong, especially when the idea of job security was sold to the public as a benefit to workers and a sign of compassion, social justice, or whatever other buzz words were used.

On the other hand, the mounting costs of unemployment benefits cannot be ignored   —   and there is only so much that you can raise taxes to pay for these benefits without risking being voted out of office. The latest quick fix: Girl, take off your clothes and hop into bed, so that the government can save some money by not paying you unemployment benefits! Yet, in the eyes of much of the intelligentsia, it is America that is lacking in compassion because we don't have the kind of job security laws and generous unemployment benefits that Germany and other European countries have.

It apparently never occurs to right-thinking people   —   which is to say, left-thinking people   —   that such laws may have something to do with the fact that unemployment rates in Europe are not only consistently higher than those in the United States, but are especially higher when it comes to people who are unemployed for a year or longer.

Job security laws do not secure jobs. Their net effect is to redistribute the insecurity. The rate of job creation in the United States has been consistently higher than in European countries with job security laws. Americans have also consistently had higher economic growth rates.

None of this is rocket science. When you make something artificially more expensive, do not be surprised if less of it is bought. When that something is labor, do not be surprised to see higher rates of unemployment.

But also do not be surprised to see politicians looking for quick-fix solutions, on either side of the Atlantic.

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JWR contributor Thomas Sowell, a fellow at the Hoover Institution, is author of several books, including his latest, "Applied Economics: Thinking Beyond Stage One." (Click HERE to purchase. Sales help fund JWR.) To comment please click here.


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