The Pope strikes again!

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Pope Francis, like most of our friends on the left, has good intentions. Since he took over the reigns of the Catholic Church he has always argued in favor of the poor and unprivileged and renounced himself to several “luxuries” that use to come with the job. Among other things, he has repeatedly argued that workers should receive a compensation package that can allow him/her and their families to afford a decent life and cover their basic needs. He has publicly mentioned this preoccupation in many occasions and demanded of all Christians to work toward that goal. In fact, he just did it again today. And again, as in many occasions before, he made an important analytical mistake. Why can’t he hire a good economics advisor?

Today, he asked if employers who make important donations to the church but don’t pay “fair” salaries or hire workers in the informal markets (without reporting the contract and, therefore, without paying benefits, insurance, taxes etc.) can be considered good Christians. In fact, he went further and said that those employers are committing a horrible sin by “using God to cover injustices.” Hmm…let’s see…

Let’s say that Pope Francis gets his wish and starting tomorrow all employers in Argentina (his native country) report all the labor contracts and pay the full amount of benefits, insurance, taxes, etc. In other words, say that, by way of a miracle, all labor markets in Argentina become formal and completely legal. Seeing this miracle, Pope Francis declares those employers not sinners anymore but perhaps saints. Sounds good right? In fact, too good…

Let’s think carefully about the results. Would employers hire the same number of workers as they did before? Now that they have to pay benefits, insurance and taxes, hiring a worker will be a lot more expensive. So, while employers will comply with all the legal requirements, they will hire less. That is a simple economic law: price goes, other things equal, quantity demanded goes down. Think now about the incentives for workers. Now that they know that every job will pay all the benefits and insurance, a lot more people would want to work. People will stop collecting unemployment checks and join the labor force to look for a job. In fact, lots of people from the rural areas will move to the city attracted by these benefits and look for a job as well. Another simple economic law: price goes up, other things equal, quantity supplied goes up. And so, what have we created? We created a situation in which quantity supplied of labor is higher than quantity demanded of labor. That is, unintentionally, the miracle has created unemployment.

When you think about it, therefore,those employers hiring in the informal markets should be called “super heroes” instead of “sinners.” They risk their licenses to hire workers and generate a mutually profitable outcome for the employer and employee. Because of this hiring in the informal markets, workers can have a job that otherwise they wouldn’t be able to find. Yes, they would prefer to earn more (just like the employer would prefer to pay less) but a job in the informal market is better than none.

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