With the unemployment rate at historically high levels, many commentators have taken the time to theorize upon it. The Austrian School have – with justification – blamed the issue on the folly of central planning in the monetary sphere. As far as it goes, I have no bone to pick with this notion. However, we should not be blinded by our own circumstances and should consider that there is certainly more behind this issue. The protagonists of these theories occasionally skip the simple stuff: the influences of the “money illusion” and herding.

 

The Employment Contract & Unemployment:

 

In order for an employment contract to take shape, an employer and an employee have to find a mutually beneficial deal. Such ‘deal-finding’ is enabled by inverse preferences; the employee thinks he’s getting a good deal by selling his services for money (at the agreed price) and the employer thinks he’s getting a good deal by buying those services with money (at the agreed price).

 

The essence of unemployment is that employers and employees cannot find deals with one another. That is, people’s preferences aren’t aligned such that they can enter employment contracts. The people who want to be employed can’t find employers that will pay them ‘enough’, and the people who want to employ can’t find employees that will take what they want to give. In short, employers and employees can’t find people to take the other sides of their proposed contracts.

 

Commentators focus on the Employer-side:

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An update of the daily treasury statement charts:

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