The Causes of Unemployment: What’s Being Overlooked?
Wages Are Determined by Productivity, Not Employer Benevolence
Walter Edward Block, an American economist and anarcho-capitalist scholar, occupies the Harold E. Wirth Eminent Scholar Endowed Chair in Economics at the J. A. Butt School of Business at Loyola University New Orleans. He is also affiliated with the FEE Faculty Network.
Concern over unemployment has become nearly universal. Commentators, analysts, and economic observers are producing a steady stream of explanations in an effort to diagnose this persistent weakness in the economy.
Their theories are varied, imaginative, and often persuasive. One frequently cited factor is the sharp decline in the quit rate. Workers who might once have moved on to greener pastures are now remaining in their current positions. At first glance, this argument has merit: fewer resignations mean fewer vacancies and, consequently, fewer opportunities for new hires.
Yet the picture is more complex. Employees are likely staying put because they doubt better prospects await them elsewhere. In that sense, elevated unemployment may be helping to create this trend rather than merely resulting from it. Moreover, a workforce that is largely content with its existing positions can hardly be viewed as evidence of economic decay. If people are satisfied with their employment circumstances, that is generally a sign of stability, not distress.
Others attribute unemployment to a mismatch between the skills workers possess and the abilities employers are seeking. This explanation certainly points toward an important issue. As Wall Street Journal columnist Allysia Finley observed: “Government subsidies and public schools have funneled too many young people to credential mills, which churn out grads who lack the skills that employers demand. Many would be better off training in skilled trades, for which demand is enormous.”
Viewed through this lens, the challenge is not simply one of labor supply versus labor demand. Rather, it is a disconnect between the qualifications being produced by educational institutions and the practical capabilities businesses require.
However, the most significant imbalance between supply and demand may lie elsewhere—in minimum wage legislation. Strikingly, this factor is often absent from mainstream discussions of unemployment. Yet students in introductory economics learn a straightforward principle: when a legally imposed minimum wage exceeds the market-clearing rate, the quantity of labor supplied surpasses the quantity demanded. The result is unmistakable. The gap between those seeking work and the jobs available to them is unemployment.
Imagine that the market wage for a particular category of labor settles at $20 per hour. This figure reflects the approximate value that workers in that role contribute through their productivity. In economic terms, compensation tends to mirror the value employees add to a company’s revenue stream. While markets rarely achieve perfect precision, competitive forces continually push wages and productivity toward alignment. Whenever a significant discrepancy emerges, market pressures work to close it. Compensation is not primarily an act of generosity; it is a reflection of the worker’s contribution to the enterprise.
Now suppose legislation requires employers to pay $30 per hour for that same position. New York City Mayor Zohran Mamdani has proposed raising the minimum wage to that level by 2030, even promoting the memorable slogan “$30 in ’30.” It is difficult to imagine a catchier phrase.
But what becomes of a worker whose productivity generates only $20 per hour in value? An employer hiring that individual at the mandated rate would absorb a loss of $10 for every hour worked. Sustained over time, such losses would threaten the viability of the business itself. No enterprise can remain healthy under those conditions.
Supporters might respond that a more modest minimum wage increase would avoid such consequences. That is true—to a point. A wage floor of $5 per hour would not endanger the job of a worker capable of producing $20 worth of value each hour. Yet consider someone whose productivity amounts to only $2 per hour. Hiring that individual at $5 means losing $3 for every hour of employment, a proposition few businesses can afford.
One of the most persistent misconceptions is the belief that, without minimum wage laws, wages would collapse toward zero. History suggests otherwise. Minimum wage legislation did not emerge until the 1930s, yet labor markets functioned long before then. Wages rose and fell according to the familiar forces of supply and demand. During periods of labor scarcity—such as the years following the plague in Europe—workers gained greater bargaining power, and incomes climbed accordingly. Their labor was valuable because it was needed.
From this perspective, unemployment stems not from the free operation of markets but from distortions imposed upon them. Wage controls, central-bank manipulation of interest rates, and government efforts to sustain businesses that cannot survive on their own all interfere with the market’s natural balancing mechanisms. These interventions, it is argued, are among the primary forces that generate unemployment.
Sources:
Allysia Finley, “Why Unemployment Is Rising Among Young College Grads,” Wall Street Journal, February 8, 2026.
Thomas E. Woods, Jr., Meltdown: A Free-Market Look at Why the Stock Market Collapsed, the Economy Tanked, and the Government Bailout Will Make Things Worse (Washington, DC: Regnery Publishing, 2009).