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.
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 (link deleted – was dead) 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.
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?
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.
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.
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.
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.
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.
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.
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.
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.
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.
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!
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.
The next billy blog Saturday Quiz is coming again tomorrow sometime – probably around late afternoon EAST.