When is a job guarantee a Job Guarantee?

In the current edition of the German weekly magazine Der Spiegel (“The Mirror”) there is an article about a “new idea to keep unemployment down” entitled Germany Mulls ‘Parking’ Unwanted Labor in New State-Funded Firms. The thrust of the proposal is that Germany is now examining a proposal to set up government-funded “transfer companies” for workers who lose their jobs as a means of keeping unemployment in check. A reader wrote to me saying that it sounds a bit like the Job Guarantee that I have been advocating for years! Closer examination suggests that while the Germans are starting to come to terms with how bad their economic situation is, they are still a long way off understanding how to get out of it. In that respect, they share the ignorance with most governments. However, being a Euro zone member, the German government has voluntarily lumbered itself with even more constraints that will make it harder to insulate its people from the ravages of the recession.

German plan

Der Spiegel was actually reporting on an article in the German newspaper Die Welt (“The World”) entitled Arbeitsmarkt: Tarifparteien fordern Staatsgeld gegen Jobkrise.

The discussion is in the context of further disastrous economic news from Germany. Total manufacturing turnover in the year to February 2009 slumped by 23.3 per cent. Car manufacturers and suppliers saw a 39.6 drop in sales over the same period; the metals industry slumped by 29.9 per cent and chemical manufacturers faced a 25.8 per cent decline. It is now thought that the total German economy will shrink by around 7 per cent before recovery ensues. In historical terms this is about what happened in the pre-Nazi days of 1931 and 1932.

In response to the continued bad news the German government has called for a crisis summit next Wednesday (April 22) to bring together business, unions and government to assess the current situation and consider a range of new proposals to combat the decline. There is talk in Germany that its macroeconomic plight warrants a “declaration of a state of emergency”.

Interestingly, Die Welt ran an on-line survey “Does Germany need a third short-term program?” referring to the fact that stimulus packages have already been announced in December 2008 and January 2009. The options were: Yes, because the existing measures are not sufficient; No, because the state is so irresponsible increasing debt, and Do not know, I’ve formed no opinion yet. When I checked it (14.15 EAST April 17, 2009) 764 votes had been cast with the following outcomes: 10 per cent Yes; 87 per cent No and 2 per cent Do not know (presumably rounding off makes it add to less than 100 per cent). So the Germans must be happy with a significant destruction of their employment base. Makes you wonder. Perhaps only foreign visitors to their on-line poll voted!

Anyway, back to the proposal. The meltdown is so rapid in Germany that a proposal from the business sector has emerged akin to the central banks buying the toxic debt from banks. Why not get the Government to buy the “toxic labour”

The proposal is that Germany would establish Government-funded companies which would temporarily absorb workers made redundant by troubled firms. As I noted in an earlier blog Shorter hours or layoffs Germany has a Government-funded shorter hours scheme which provides scope for firms to reduce working hours (avoiding layoffs) when their sales are low yet maintain the pay (mostly) of their workers. However, these schemes were temporary in nature and they expire in the coming months. Meanwhile the economic slump is worsening.

The car companies in particular are suffering such drastic declines in sales that they are now saying the shorter hours will not be enough. They will now start to lay off workers over the coming summer.

So the German Department of Employment is now considering this new plan – the so-called “transfer companies” in which companies can “park” employees. The plan is that these companies would continue to pay up to 67 per cent of the workers net salary for up to 24 months and meet all their social insurance contributions. One the private sector improved it is imagined that the workers would be taken on again by their previous employers. Meanwhile, the transfer companies would engage the workers in training programs.

While the unions and employer groups support the plan, the conservative side of politics is likely to scuttle it which will see the Government extend the shorter hours schemes for another two years.

The problem in Germany is that they have been very conservative in their stimulus plans to date (introduced in December and January). There is a call from unions and business to more than double the current injections but the government does not want to go further into deficit. Familiar ring?

But is this a true Job Guarantee scheme? Emphatically no! This scheme is little more than a “luxury dole” scheme.

Lord Layard calls for a job guarantee

Yesterday, I noted that Professor Richard Layard has called for a job guarantee to reduce the likelihood that the current crisis will create an entrenched pool of disadvantaged long-term unemployed. So is this another call for a Job Guarantee? No, this is a mean-spirited scheme designed to distract attention from the fact that Layard’s other policy ideas have not only inflicted significant damage on the most disadvantaged individuals right across the world but have also failed to achieve their stated purpose.

Layard, Nickell and Jackman’s (1991) book Unemployment, Macroeconomic Performance and the Labour Market was the theoretical bible used by the OECD to introduce its 1994 Jobs Study which set the labour market policy agenda until today. The OECD advocated extensive supply side reform with a particular focus on the labour market, because supply side rigidities were alleged to inhibit the capacity of economies to adjust, innovate and be creative. The proposed reform agenda was variously adopted by many governments. It was introduced as monetary authorities increasingly adopted inflation targeting (formal and informal) which their policy on price level targets and used unemployment as the instrument to achieve these targets. It also was accompanied by growing fiscal conservatism, which in Europe has been expressed in the Maastricht Criteria and the Stability and Growth Pact. In Australia there has also been a major fiscal retreat, resulting in 10 years of Federal surpluses and the introduction of the Job Network and WorkChoices among other supply-side policy changes. Joan and I cover all this extensively in our latest book – Full Employment Abandoned.

However, some 15 years after the OECD Jobs Study was released, the OECD economies still generated high unemployment rates and broader forms of labour underutilisation have increased. The trend to part-time and casualised employment which fails to provide enough hours of work to match the preferences of the workforce is widespread throughout OECD countries. Now we are back in recession, it is difficult to see what has been achieved by the supply-side labour market policies other than to punish the most disadvantaged workers in our communities.

While Australia was cited as evidence of the success of the OECD strategy. the reality is that Federal governments in Australia no longer work to ensure that employment growth matches labour force growth. The immediate past federal regime and the current government focus, instead, on making individuals “work ready”, should there be jobs available. Yet there is strong evidence that the Australian economy has been demand constrained since 1975 and has failed to generate sufficient employment. There is also strong evidence to show that active labour market programs of the type praised by the OECD have been largely ineffective in reducing unemployment and improving the outcomes of the most disadvantaged workers in the labour market. The situation will worsen in the current downturn.

Interestingly, in 1997, Layard started to express doubts on the supply-side labour market policies that he initially promoted and which were so zealously taken up by the OECD and governments around the world. Layard (1997: 202) concluded that:

If we seriously want a big cut in unemployment, we should focus sharply on those policies which stand a good chance of having a really big effect. It is not true that all polices which are good in general are good for unemployment. There are in fact very few policies where the evidence points to any large unambiguous effect on unemployment and some widely advocated policies for which there is little clear evidence.

For example, Layard (1997: 192) argues that further cuts in the duration of benefits would only increase employment at the costs of the creation of an underclass with an “ever-widening inequality of wages.” He now prefers government job creation, which would allow people to reacquire “work habits – to prove their working capacity … [and to restore] … them to the universe of employable people. This is an investment in Europe’s human capital.

Further, in 2001, another member of the LNJ team, Stephen Nickell wrote (Nickell and Quintini, 2001: 5) in relation to the United Kingdom that:

… simply because a change in the benefit system reduces equilibrium unemployment … [by making unemployment less attractive] … it does not necessarily imply that it is a good thing. It is arguable, for example, that the current benefit system is simply too mean. In fact, to have a system which operates well, it is not necessary to plunge households into poverty should the sole breadwinner lose his or her job.

At present, the UK economy is melting down fast but the conservatives (I count New Labor in that camp as well) are resisting abandoning their so-called “flexible labour market” and the former Trade Minister Digby Jones actually claims they will be “dead in the water” if they relent on it. The Government’s ability to stop the economy from freefalling is that they claim they are “cash-strapped” (duh: aren’t they sovereign in sterling?) and also believe large scale public works programs are wasteful and inefficient (duh: having millions of unemployed workers doing nothing is not wasteful and inefficient?).

And it is here that Lord Layard from LSE) comes in which his plan for a “job guarantee”. Accordingly, “fallback jobs would be provided for young people who have been unemployed for 12 months and adults unemployed for 18 months – jobs such as maintaining schools and hospitals or in social care.” Layard is quoted in The Qatar Peninsula as saying “Unless you do that, it is very difficult to maintain the whole welfare-to-work ethos. That in the end depends on being able to test a person’s willingness to work …”

So is this a true Job Guarantee scheme? Emphatically no!.

So what is?

What is the Job Guarantee?

The JG that I have advocated for many years now is based on a fundamental understanding of the way the modern monetary system operates. While it may be construed as a job creation scheme it is actually a macroeconomic policy device to ensure full employment and price stability is maintained over the private sector business cycle.

I will write more about employment guarantees in future blogs. However, to show why the German and Layard conceptions are not akin to my proposal, I will just provide the basic summary of the JG here.

Full Employment:

The Government operates a buffer stock of jobs to absorb workers who are unable to find employment in the private sector. The pool expands (declines) when private sector activity declines (expands). The JG fulfills this absorption function to minimise the costs associated with the flux of the economy. So the government continuously absorbs into employment, workers displaced from the private sector. The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector.

So the JG works on the “buffer stock” principle. I first thought of this idea during my fourth year as a student at the University of Melbourne (in the late 1970s). The basis of the policy came to me during a series of lectures on the Wool Floor Price Scheme introduced by the Commonwealth Government of Australia in November 1970. The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC). The Government then guaranteed that the price would not fall below that level by using the AWC to purchase stocks of wool in the auction markets if demand was low and selling it if demand was high. So by being prepared to hold “buffer wool stocks” in low demand and release it again in times of high demand the government was able to guarantee incomes for the farmers. However, with some lateral thinking you can easily see that what the Wool Floor Price Scheme generated was “full employment” for wool! If the Government fixed the price that it was prepared to pay and then was willing to buy all the wool up to that price then you have an equivalent scheme.

This works just the same for labour resources – just unconditionally offer to buy all labour at a stated fixed wage and you create full employment. What should that wage be?

JG Wage:

To avoid disturbing private sector wage structure and to ensure the JG is consistent with stable inflation, the JG wage rate is best set at the minimum wage level. The JG wage may be set higher to facilitate an industry policy function. The minimum wage should not be determined by the capacity to pay of the private sector. It should be an expression of the aspiration of the society of the lowest acceptable standard of living. Any private operators who cannot “afford” to pay the minimum should exit the economy.

Social Wage:

The Government would supplements the JG earnings with a wide range of social wage expenditures, including adequate levels of public education, health, child care, and access to legal aid. Further, the JG policy does not replace conventional use of fiscal policy to achieve social and economic outcomes. In general, the JG would be accompanied by higher levels of public sector spending on public goods and infrastructure.

Family Income Supplements:

The JG is not based on family-units. Anyone above the legal working age is entitled to receive the benefits of the scheme. We would supplement the JG wage with benefits reflecting family structure. In contrast to workfare there will not be pressure applied to single parents to seek employment.

Funding:

The JG would be funded by the sovereign government which faces no financial constraints in its own currency. In the context of the current outlays that are being thrown around in national economies, the investment that would be required to introduce a full blown would be rather trivial. I have already stated that a JG that increased employment by around 560,000 workers in Australia would require an annual outlay of around $A8.3 billion. Around 80 per cent of these jobs would be in the JG and the rest the result of the expansionary impact the JG would have on private employment.

Inflation control:

I have written extensively about this. But keeping it simple here I merely say that the JG maintains full employment with inflation control. When the level of private sector activity is such that wage-price pressures forms as the precursor to an inflationary episode, the government manipulates fiscal and monetary policy settings (preferably fiscal policy) to reduce the level of private sector demand. This would see labour being transferred from the inflating sector to the “fixed wage” sector and eventually this would resolve the inflation pressures. Clearly, when unemployment is high this situation will not arise.

But in general, there cannot be inflationary pressures arising from a policy that sees the Government offering a fixed wage to any labour that is unwanted by other employers. The JG involves the Government “buying labour off the bottom” rather than competing in the market for labour. By definition, the unemployed have no market price because there is no market demand for their services. So the JG just offers a wage to anyone who wants it.

NAIBER:

In contradistinction with the NAIRU approach to price control which uses unemployed buffer stocks to discipline wage demands by workers and hence maintain inflation stability, the JG approach uses the ratio of JG employment to total employment which is called the Buffer Employment Ratio (BER) to maintain price stability. The ratio that results in stable inflation via the redistribution of workers from the inflating private sector to the fixed price JG sector is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state JG level, which is dependent on a range of factors including the path of the economy. Its microeconomic foundations bear no resemblance to those underpinning the neoclassical NAIRU.

It also wouldn’t be worth estimating or targetting. It would be whatever was required to fully employ labour and maintain price stability.

Workfare or Work-for-the-Dole:

Many people think that the JG is just Work-for-the-Dole in another guise. The JG is, categorically, not a more elaborate form of Workfare. Workfare does not provide secure employment with conditions consistent with norms established in the community with respect to non-wage benefits and the like. Workfare does not ensure stable living incomes are provided to the workers. Workfare is a program, where the State extracts a contribution from the unemployed for their welfare payments. The State, however, takes no responsibility for the failure of the economy to generate enough jobs. In the JG, the state assumes this responsibility and pays workers award conditions for their work.

Under the JG workers could remain employed for as long as they wanted the work. There would be no compulsion on them to seek private work. They could also choose full-time hours or any fraction thereof.

Training

The JG would be integrated into a coherent training framework to allow workers (by their own volition) to choose a variety of training paths while still working in the JG. However, if they chose not to undertake further training no pressure would be placed upon them.

Unemployment benefits:

I would abandon the unemployment benefits scheme and free the associated administrative infrastructure for JG operations. The concept of mutual obligation from the workers’ side would become straightforward because the receipt of income by the unemployed worker would be conditional on taking a JG job. I would start paying a JG wage to anyone who turned up at some designated Government JG office even if the office had not organised work for that person yet.

Administration:

For financial reasons explained below, the JG would be financed federally with the operational focus being local. Local Government would be an important administrative sphere for the actual operation of the scheme. We would abandon the Jobs Network and restore the Commonwealth Employment Service (CES), which would play and important role in coordinating the JG demand and supply with local level managers. Local administration and coordination would ensure meaningful, value-adding work was a feature of the JG activities.

Type of Jobs:

Surveys of local governments that we have done reveal a myriad of community- and environmentally-based projects that could be completed if Federal funds were forthcoming. The JG workers would contribute in many socially useful activities including urban renewal projects and other environmental and construction schemes (reforestation, sand dune stabilisation, river valley erosion control, and the like), personal assistance to pensioners, and other community schemes. For example, creative artists could contribute to public education as peripatetic performers. The buffer stock of labour would however be a fluctuating work force (as private sector activity ebbed and flowed). The design of the jobs and functions would have to reflect this. Projects or functions requiring critical mass might face difficulties as the private sector expanded, and it would not be sensible to use only JG employees in functions considered essential. Thus in the creation of JG employment, it can be expected that the stock of standard public sector jobs, which is identified with conventional Keynesian fiscal policy, would expand, reflecting the political decision that these were essential activities.

Open Economy Impacts:

The JG requires a flexible exchange rate to be effective. A once-off increase in import spending is likely to occur as JG workers have higher disposable incomes. The impact would be modest. We would expect any modest depreciation in the exchange rate to improve the contribution of net exports to local employment, given estimates of import and export elasticities found in the literature.

Environmental benefits:

The JG proposal will assist in changing the composition of final output towards environmentally sustainable activities. These are unlikely to be produced by traditional private sector firms because they have heavy public good components. They are ideal targets for public sector initiative. Future labour market policy must consider the environmental risk-factors associated with economic growth. Possible threshold effects and imprecise data covering the life-cycle characteristics of natural capital suggest a risk-averse attitude is wise. Indiscriminate (Keynesian) expansion fails in this regard because it does not address the requirements for risk aversion. It is not increased demand per se that is necessary but increased demand in certain areas of activity.

Conclusion

You can see why the half-baked employment suggestions noted earlier do not constitute a properly conceived Job Guarantee which rests on the fact that the sovereign government is a monopoly issuer of its own currency and has the capacity to purchase all unwanted labour in the economy.

The final point is that in relation to the current way of dealing with the crisis, the JG has to be a better alternative. Standing by and witnessing the incredible wastage of potential labour that unemployment epitomises is surely never going to be a better strategy than putting that labour to work on public programs.

And … if it turned out to be a disaster after a year or so … you could scrap it and go back to the pitiful approaches that are being followed at present!

References

Mitchell, W.F. (1998) ‘The Buffer Stock Employment Model and the NAIRU: The Path to Full Employment’, Journal of Economic Issues, 32(2), June, 1-9.

Layard, R. (1997) ‘Preventing Long-Term Unemployment’, in Phillpott, John (ed.), Working for Full Employment, Routledge, London, 190-203.

Layard, R., Nickell, S. and Jackman, R. (1991) Unemployment, Macroeconomic Performance and the Labour Market, Oxford University Press, Oxford.

Nickell, S. and Quintini, G. (2001) ‘The Recent Performance of the UK Labour Market’, Paper presented to the Economics Section of the British Association for the Advancement of Science, Glasgow, September.

Saturday quiz

The next billy blog Saturday Quiz is coming again tomorrow sometime – probably around late afternoon EAST.

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6 Responses to When is a job guarantee a Job Guarantee?

  1. I’ve lots of comments on the above article, so I’ve numbered them.

    1. Thanks for drawing attention to Layard’s latest publication and to “Der Spiegel”. Layard is just re-presenting what he has said many times before, seems to me.

    2. Re “Spiegel”, there is too little detail to comment on, so I won’t.

    Now for JG.

    3. Clearly if we restrict or abolish unemployment benefit and offer public sector WPA or JG type work instead, then unemployment falls and employment rises. The only argument is over how to do it and how far to take it.

    4. Under the heading “Full employment”, you say “The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy.” Also “The Government would supplement the JG earnings with a wide range of social wage expenditures, including adequate levels of public education, health, child care, and access to legal aid.”

    A problem here is that those who are unlikely to earn much more than minimum wage in regular jobs have a reduced incentive to look for such jobs. This is not much of problem during recessions, but this point would need attention in more normal times. I.e. in normal times JG cannot be allowed to constrain normal regular job seeking.

    The latter is not a big problem if JG is on balance less attractive than the dole: in this circumstance JG people have an incentive to “get the hell out of JG” to put it bluntly. But if JG becomes attractive, then the above “job seeking” problem arises.
    Re the other assortment of goodies “health care, legal aid, etc”, if JG employees have these goodies, then every other employer would be forced to follow suit. This is big POLITICAL decision. This a decision for the electorate, not for professional economists. It is hard enough working out how JG ought to work without dragging the above goodies into the picture, so I suggest leave them out.

    5. Under the heading “Unemployment Benefits” you say “the receipt of income by the unemployed worker would be conditional on taking a JG job.” The knee jerk response of most people here will be “workfare”, and they are largely right. This rather contradicts the earlier claim that JG is nothing like workfare. I think it would be better to admit from the outset that JG is similar to workfare in that JG work is pretty well a condition for getting state money.

    6. Under the heading “Type of Jobs” you say “JG workers would contribute in many socially useful activities including urban renewal projects and other environmental and construction schemes..”

    Those of us interested in this area of economics have heard this sort of thing a hundred times before. Indeed a sentence or two of this sort appears in the above mentioned Layard publication .

    The reality on the ground is very different. The WPA in the US in the 1930s became known as “We Piddle Around”. Granted some WPA schemes were successful and efficient, but this is irrelevant for reasons I spell out in my blog (URL is below).
    Many of the “make work” public sector schemes in the UK in the 1970s, 80s, 90s etc became famous for the futile activities involved.

    The theoretical reasons why this “hopeless” form of employment arises are not difficult to fathom. Suppose one has one permanent skilled person in charge of ten JG employees. This ratio of “one permanent skilled person to ten temporary and not desperately skilled” is hopeless by the standards of existing public or private sector employers (hence the inefficiency). Of course one can “solve” this by improving this ratio. But that just means more skilled permanent employees withdrawn from the regular economy to run JG.

    And this isn’t a good start: you’re taking skilled people AWAY from relatively productive work in the regular economy and allocating them to less productive work on JG. Net result at worst: a reduced GNP.

    And finally, if the above ratio is made exactly the same as that obtaining in the regular economy, then JG becomes pretty well indistinguishable from existing public sector employers. Which raises the question: why make distinction between the two?
    For the way out of this logical impasse, see my seminal (???) blog: http://employerlastresort.blogspot.com/2009/03/employer-of-last-resort.html

    7. The relevance of a country producing its own currency.

    You claim this is of relevance to JG, for example you say “….. Job Guarantee which rests on the fact that the sovereign government is a monopoly issuer of its own currency and has the capacity to purchase all unwanted labour in the economy…”
    You also say “The JG would be funded by the sovereign government which faces no financial constraints in its own currency…”
    I realise that a country that issues its own currency has options not available to other countries, plus I think that most countries with these options have failed to fully exploit them during the credit crunch. However, issuing one’s own currency is not particularly relevant to JG.

    To illustrate, there is nothing to stop Germany (which doesn’t produce its own currency) restricting unemployment benefits and offering JG type work instead. Indeed, there have been dozens of JG type schemes in the Eurozone in the last decade.
    And for a second illustration, while a country with its own currency could chose to print money to finance an expansion in JG in a recession, it could equally well use such money to finance an expansion of its regular public or private sectors.

    Third, Keynsians would argue (though I have doubts about this argument) that not issuing one’s own currency is no constraint at all because one can go for Keynsian borrow and spend.

    8. Under the heading “NAIBER” you refer to “…the redistribution of workers from the inflating private sector to the fixed price JG sector…”

    The suggestion here seems to be that the private sector is the source of inflation and the public sector and/or JG sector are not. I suggest the distinction between these sectors is not that clear. Consider the two sectors, 1, private, and 2, the “whole” public sector (i.e. regular public sector plus JG sector).

    Obviously expanding demand can be inflationary, and this inflation stems from the private sector. However, expanding the public sector is just as likely to exacerbate inflation. First, expanding the public sector results in increased orders for goods and services from the private sector. And both the regular and JG parts of the public sector contribute to this effect.

    Second, and much more important, is that expanding the public sector involves attracting and tying down skilled labour (i.e. making such labour far less available for vacancies than when it was unemployed). And inflation does not result from demand alone: it results from a level of demand which employers cannot meet because of a lack of the right kind of labour at the right place at the right time (usually skilled labour). In short: reduce the availability of skilled labour for the private sector, and the result is likely to be inflation even given a constant level of demand.

    In short, where JG or WPA type schemes raise employment without inflationary consequences, this does NOT result (contrary to popular belief) just from the fact that such schemes are in the public sector. It results (at least in part) from the fact that jobs have been created where (unlike normal jobs) those concerned are looking for work with much the same effort as when unemployed.

    It is partially for this reason that I argue in the above mentioned blog that we don’t need to make a big distinction between public and private sectors when it comes to JG. That is JG type labour can be allocated to the private as well as public sectors. If this point is valid, this is a BIG bonus for JG type schemes, because the private sector is MUCH better at employing unskilled labour than the public sector.

    9. You might answer the above claim that the private sector will take up JG employees with a point you make somewhere in your blogs to the effect that the market price of the unemployed is zero. I don’t agree.

    The fact that something does not sell in a particular week or month does not prove its market price is zero (whether it’s a house or someone looking for work). The private sector is not allowed to pay less than the minimum wage. Offer the private sector labour at half the minimum wage or less, and the private sector will come up a variety of uses for such labour.

  2. An afterthought. I think my point in “4” above about “getting the hell out of JG” is pretty much a re-statement of Calmfors’s “iron law” of ALMP (Active Labour Market Policy).

  3. Alan Dunn says:

    Ralph said:

    “A problem here is that those who are unlikely to earn much more than minimum wage in regular jobs have a reduced incentive to look for such jobs. This is not much of problem during recessions, but this point would need attention in more normal times. I.e. in normal times JG cannot be allowed to constrain normal regular job seeking. ”

    Answer. The employers could simply offer a better wage / conditions to workers as an incentive.

    But that’s not what it’s about for your lot is it?

  4. Punchy says:

    As part of JG what about subsidising employment directly with the private sector in exchange for the private sector training the JGers. Say 3 days work and 2 days training. The employer should pay for the training and the JG person should be contracted to work for the employer for say 3 years after a 2 year training period.
    Retention contracts work in the Armed Forces and are overdue in small business. Small business would love to train more workers. The way things work now in Australia is small business trains the new unskilled staff and once trained the staff move up to bigger businesses who pay more for skilled staff. This is a dissinsentive for small business to train staff and it inpacts on business expansion.
    It wouldnt bother me if someone answered Ralph’s questions below so that we can help develope JG into a simple form that can be supported by uneducated politicians and media. (these are the real policy changers)
    Ralph Musgrave says:
    Tuesday, October 20, 2009 at 18:41
    Now for JG.

    3. Clearly if we restrict or abolish unemployment benefit and offer public sector WPA or JG type work instead, then unemployment falls and employment rises. The only argument is over how to do it and how far to take it.

    4. Under the heading “Full employment”, you say “The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy.” Also “The Government would supplement the JG earnings with a wide range of social wage expenditures, including adequate levels of public education, health, child care, and access to legal aid.”

    A problem here is that those who are unlikely to earn much more than minimum wage in regular jobs have a reduced incentive to look for such jobs. This is not much of problem during recessions, but this point would need attention in more normal times. I.e. in normal times JG cannot be allowed to constrain normal regular job seeking.

    The latter is not a big problem if JG is on balance less attractive than the dole: in this circumstance JG people have an incentive to “get the hell out of JG” to put it bluntly. But if JG becomes attractive, then the above “job seeking” problem arises.
    Re the other assortment of goodies “health care, legal aid, etc”, if JG employees have these goodies, then every other employer would be forced to follow suit. This is big POLITICAL decision. This a decision for the electorate, not for professional economists. It is hard enough working out how JG ought to work without dragging the above goodies into the picture, so I suggest leave them out.

    5. Under the heading “Unemployment Benefits” you say “the receipt of income by the unemployed worker would be conditional on taking a JG job.” The knee jerk response of most people here will be “workfare”, and they are largely right. This rather contradicts the earlier claim that JG is nothing like workfare. I think it would be better to admit from the outset that JG is similar to workfare in that JG work is pretty well a condition for getting state money.

    6. Under the heading “Type of Jobs” you say “JG workers would contribute in many socially useful activities including urban renewal projects and other environmental and construction schemes..”

    Those of us interested in this area of economics have heard this sort of thing a hundred times before. Indeed a sentence or two of this sort appears in the above mentioned Layard publication .

    The reality on the ground is very different. The WPA in the US in the 1930s became known as “We Piddle Around”. Granted some WPA schemes were successful and efficient, but this is irrelevant for reasons I spell out in my blog (URL is below).
    Many of the “make work” public sector schemes in the UK in the 1970s, 80s, 90s etc became famous for the futile activities involved.

    The theoretical reasons why this “hopeless” form of employment arises are not difficult to fathom. Suppose one has one permanent skilled person in charge of ten JG employees. This ratio of “one permanent skilled person to ten temporary and not desperately skilled” is hopeless by the standards of existing public or private sector employers (hence the inefficiency). Of course one can “solve” this by improving this ratio. But that just means more skilled permanent employees withdrawn from the regular economy to run JG.

    And this isn’t a good start: you’re taking skilled people AWAY from relatively productive work in the regular economy and allocating them to less productive work on JG. Net result at worst: a reduced GNP.

    And finally, if the above ratio is made exactly the same as that obtaining in the regular economy, then JG becomes pretty well indistinguishable from existing public sector employers. Which raises the question: why make distinction between the two?
    For the way out of this logical impasse, see my seminal (???) blog: http://employerlastresort.blogspot.com/2009/03/employer-of-last-resort.html

  5. Punchy says:

    Sorry the link is gone. Ralph?

  6. ab0032 says:

    Dear Bill,
    wouldnt a negative income tax also be a solution to unemployment?

    As far as I can tell, the labor market is functional in the middle and top tier in Germany. The problem is at the bottom end, where productivity is less than what an employer has to pay to get someone to work. In Germany welfare is equivalent to 1250 Euro before taxes and other deductions for health care, unemployment insurance and pension payments.

    If the employer has to pay more for an hour of work, than he gets back in productivity the job cannot exist. So if the employer has to pay 10 Euro an hour and he hires someone with a productivity of two or three Euros, the employer would constantly be loosing money. Such work is hence exported to China or India. Or in the case of services or other nontransferable work, less of these services and simple work are demanded because people cannot afford them.

    The problem is that the cost of living are high in Germany, and the welfare system gives everyone the minimum to survive, even if his productivity is too low. A negative income tax could bridge this gap between productivity and the cost of living. This way the government would not be burdened with creating millions of jobs and leave this to the market. The ingenuity of the market would find many different ways to extract the productivity from the people now unemployed and put them to a useful work.

    The point is that instead of paying people 100% for not working or contributing to society they would get 70% from redistribution and become a productive part of society. The government would get a simple control on unemployment, if full employment is reached the negative income tax could be reduced, and if unemployment partially remains then the rate of negative income tax could be increased.

    Currently the costs to society of unemployment are grave and go beyond the cost of the welfare system. There is a huge black market for labor, there are many precarious jobs, many people live in fear of loosing their jobs and may become victim to bad treatment, many children unmotivated to learn in school, because they see that their parents do well without working etc.

    I dont know the details of the labor market in the US or Australia, (or France or Great Britain for that matter) but I assume the situation to be somewhat similar in many western countries. And I assume that the current system is especially hard on young people without job experience.

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