Cavemen had a more efficient labour market than we do.

Why was there no unemployment in caveman societies?

When cavemen had enough meat in their stomachs and enough bear skin coats to keep warm, they probably sat around doing nothing. The latter did not constitute unemployment because they were not looking for work.

In contrast, when they were hungry or needed a bear from which to make a bear skin coat, they went hunting. They didn’t bother waiting for a “hunting job” to appear in situations vacant columns: they just upped sticks, and went hunting.

As to the wage, that might have been several kilos of meat and a bear skin per hour’s work if they were lucky. Or it could be no meat and no bear skin at all, even after a day’s hunting. But at least they weren’t unemployed.

So . . . $64k question . . . why didn’t they experience unemployment? Well the reason was they were TOTALLY FLEXILBLE when it came to the wage they’d accept: even accepting a zero wage.

Now we could do the same, or similar. That is, if labour was allocated not by the market, but by the bureaucracy (i.e. the state), and employers paid nothing for such labour, there’d be almost no limit to the number of employees an employer would be prepared to take on. Well, “no limit” is perhaps an exaggeration, but certainly if something is free, you use it like water: i.e. the demand for labour would rise by more than enough to virtually wipe out unemployment.

The latter labour market would be highly inefficient, though it would have an important merit, of which more below. The inefficiency would arise from the fact that for the bureaucracy to judge who to allocate labour to, employers would have to apply for the types of labour they wanted, explain why they needed it. The bureaucracy would then have to decide which firms most merited particular types of labour and in what quantities.

The system would have similarities to Soviet style centrally planned economies: it would be inefficient. That is, much the best way to allocate any resource, particularly a valuable resource, is simply to let employers bid for it with the highest bidders getting the resource. That results in best use being made of the resoure.

However, 21^st century unemployed labour is clearly not a “valuable resource” in the eyes of employers. To be more exact, while it is easy to use the above mentioned “bidding” process to get about 90% of the workforce employed, problems arise if the bidding process  (i.e. raising aggregate demand) is used to get the final 5 or 10% employed: inflation tends to rear its ugly head. That is, given such additional demand, employers rather than take on the unemployed, tend to bid up the price of “already employed” labour (or give in more easily to wage demands.)

In short, unemployed labour is over-priced. Or put it another way, there wouldn’t be a problem if the unemployed behaved like cavemen and were prepared to work for nothing.

Now clearly we can’t ask the unemployed to work for nothing, but there is nothing to stop them being allocated to employers for free, with the state paying the “wage” or if you like, having the state make sure the unemployed don’t starve.

So . . .  about 90% of the workforce is allocated using demand, with most of the remainder being allocated via the bureaucracy. That just leaves one problem: how do we stop employers taking on free labour which is in fact reasonably productive? And that point is of particular relevance since the potential output obtainable from any given individual varies dramatically from month to month. Reason is that one month there might be no vacancies in a given individual’s local labour market for which they are particuarly suited, while a month later, a vacancy might appear for which they are IDEALLY suited.

Well the solution to the latter problem is not too difficult: just put a strict time limit on how long a subsidised individual can stay with a given employer. At the end of the time limit, and assuming the relevant employee is well suited to their vacancy, then the employer will retain the employee and fund the employee’s wage. If not, the employer will “let the employee go” as the saying goes. And the bureaucracy can allocate the individual to another subsidised job.

Out of the mouths of babes and sucklings . . and cavemen (to misquote Psalms 8:2)

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P.S. (3^rd Feb 2013).Coincidentally a post appeared on the Worthwhile Canadian Initiative blog three days after the above one and on the subject of baboon economies. Plus the author, Frances  Woolley says he might do a post on elephant economies. I look forward. We have much to learn from cavemen, baboons and elephants.