There are still those who criticise the concept of a Job Guarantee. I have received a lot of E-mail’s lately about a claim that the introduction of a Job Guarantee would be de-stabilising in a growth phase unless there is some time limit put on the jobs or the wage is flexible. Apparently, in a growing economy, the stimulus provided in the form of Job Guarantee wages (relative to what occurs when unemployment buffer stocks are deployed) will drive the economy into an inflationary spiral, which will then necessitate harsher than otherwise fiscal and monetary policy contraction. Further, the Job Guarantee is claimed to limit the size of the private sector relative to a system of unemployed buffer stocks and this distorts resource allocation and would undermine our overall material standards of living. The criticisms have been dealt with before – there appears to be a cyclical sort of pattern where newcomers seize on past criticisms and recycle them, without bothering to read the original literature on employment buffer stocks, which includes my work and several other authors. That literature considered all these possible issues – 15-20 years ago.
As I understand the arguments presented in the E-mail torrents, the mechanism, whereby the Job Guarantee undermines the private sector is claimed to be something like this.
If there is strong demand for labour from the private sector, the Job Guarantee ‘demand for labour’ will drive overall labour demand into excess.
Excess is relative to the available supply of workers. The claim is that the Job Guarantee introduces an unnatural scarcity for labour, beyond which the private market would generate itself in a growing environment.
In any excess demand situation, the price has to rise as competition for the scarce labour intensifies. Private firms would then be involved in a bidding war which will either discourage new entries or generate accelerating inflation.
These claims seem to invent a new version of excess demand relative to the agreed terms by economists of all persuasions.
Excess demand is calibrated in terms of available supply and is associated with price bids at going prices. The Job Guarantee only employs workers at a fixed price which becomes the effective minimum wage in the economy.
It absorbs workers who have a zero market bid for their services. It therefore does not compete for labour at market prices and therefore cannot introduce an ‘excess demand’ for labour.
The fixed price bid is invariant in a cyclical sense, although the minimum wage would be increased over time in recognition of productivity growth and other considerations.
The non-Job Guarantee employers will always be able to bid the workers away from the Job Guarantee pool if they are prepared to offer more attractive conditions, which generated a satisfactory target rate of profit (or in the case of a public sector employer – a satisfactory social return).
Obviously, firms that cannot profitably produce anything that the ‘market’ desires at the minimum wage will be forced out of business.
No apologies there.
The minimum wage as a statement of how sophisticated you consider your nation to be or aspire to be. Minimum wages define the lowest material standard of wage income that you want to tolerate.
In any country it should be the lowest wage you consider acceptable for business to operate at. Capacity to pay considerations then have to be conditioned by these social objectives.
If small businesses or any businesses for that matter consider they do not have the ‘capacity to pay’ that wage, then a sophisticated society will say that these businesses are not suitable to operate in their economy.
Such firms would have to restructure by investment to raise their productivity levels sufficient to have the capacity to pay or disappear.
This approach establishes a dynamic efficiency whereby the economy is continually pushing productivity growth forward and in that context material standards of living rise.
I consider that no worker should be paid below what is considered the lowest tolerable material standard of living just because low wage-low productivity operator wants to produce in a country.
I don’t consider that the private ‘market’ is an arbiter of the values that a society should aspire to or maintain. That is where I differ significantly from my profession.
The employers always want the wages system to be totally deregulated so that the ‘market can work’ without fetters. This will apparently tell us what workers are ‘worth’.
So some small business operator that can spin a profit by selling some item using below poverty line labour is just acting in accordance with the market
But the problem is that the so-called ‘market” in its pure conceptual form is an amoral, ahistorical construct and cannot project the societal values that bind communities and peoples to higher order considerations.
The minimum wage is a values-based concept and should not be determined by a market.
All of that is in addition to the usual disclaimers that the pure ‘competitive market, cannot exist for labour given the imbalances between workers and employers and the fact that the use value of the labour power is derived within the transaction (that is, the worker has to be forced to work). This is unlike other exchanges where the parties make the deal and go their separate ways to enjoy the fruits of their trade.
The Job Guarantee thus would embody the social values that we aspire to and the ‘economy’ would be moulded to suit those values and private profit making would have to adjust accordingly, rather than set the agenda that the human and physical environment has to succumb to.
What about the expanding economy argument?
Suppose we characterize an economy with two labor markets: A (primary) and B (secondary) broadly corresponding to the dual labor market depictions.
Prices are set according to markups on unit costs in each sector.
Wage setting in A is contractual and responds in an inverse and lagged fashion to relative wage growth (A/B) and to the wait unemployment level (displaced Sector A workers who think they will be reemployed soon in Sector A).
A government stimulus to this economy increases output and employment in both sectors immediately.
Wages are relatively flexible upwards in Sector B and respond immediately. The compression of the A/B relativity stimulates wage growth in Sector A after a time. Wait unemployment falls due to the rising employment in A but also rises due to the increased probability of getting a job in A.
The net effect is unclear. The total unemployment rate falls after participation effects are absorbed.
The wage growth in both sectors may force firms to increase prices, although this will be attenuated somewhat by rising productivity as utilisation increases.
A combination of wage-wage (wage demands by one group of workers to restore their relativities viz another group), and wage-price (workers defending real wages and firms defending real profit margins) mechanisms in a bouyant product market (where goods and services are sold) can then drive inflation.
This is a classic Phillips curve world where unemployment is inversely related to price inflation and there is a trade-off between the two.
To stop inflation, the government has to repress demand. The higher unemployment brings the real income expectations of workers and firms into line with the available real income and the inflation stabilizes – a typical NAIRU story.
Please read my blog – The dreaded NAIRU is still about! – for more discussion on this point.
What would be the impact of the introduction of a Job Guarantee into this type of economy?
Introducing the Job Guarantee policy into the depressed economy puts pressure on Sector B employers to restructure their jobs in order to maintain a workforce.
The Job Guarantee wage sets a floor in the economy’s cost structure for given productivity levels. The dynamics of the economy certainly change significantly.
The elimination of all but Wait unemployment in Sector A and frictional unemployment does not distort the relative wage structure so that the wage-wage pressures that were prominent previously are now reduced.
There is no wage competition from Job Guarantee workers in an expansion – the fixed price anchor (their wage) remains unchanged.
But the rising spending (as Job Guarantee workers now have an income rather than the dole or worse) stimulates sales and the demand for labor rises in Sector A.
Importantly, there are no new problem faced by employers who wish to hire labor to meet the higher sales levels.
They must pay the going rate, which is still preferable, to appropriately skilled workers, than the Job Guarantee wage level.
The rising demand per se does not invoke inflationary pressures as firms increase capacity utilisation to meet the higher sales volumes and productivity rises (as the fixed labour resources such as administrative and overhead staff are spread over higher output levels).
What about the behaviour of workers in Sector A?
The allegation is that workers would also allegedly use the fact that the presence of a Job Guarantee as a bargaining weapon to push for higher wage demands.
This would drive the private sector wage levels up. Firms would have to pay well in excess of the the minimum wage would already be at a socially-acceptable level.
The suggestion then is that the non-inflationary space for expansion would be reduced.
One E-mail I received claimed that this would place a limit on the size of the private sector and thus suppress innovation because one the inflationary ceiling was reached, the government would deploy fiscal constraint to redistribute workers back into the fixed price Job Guarantee pool.
This would, in turn, so the story goes, inhibit new firms from entering because they would not want to be crushed by contractionary fiscal policy, once this alleged private ‘limit’ was reached.
Wendell Gordon (1997, Page 833) said:
If there is a job guarantee program, the employees can simply quit an obnoxious employer with assurance that they can find alternative employment.
[Reference: Gordon, W. (1997) ‘Job Assurance — The Job Guarantee Revisited’, Journal of Economic Issues, 21(3), September), 817-825].
It is true that with the Job Guarantee policy, wage bargaining is freed from the general threat of unemployment.
However, it is unclear whether this freedom will lead to higher wage demands than otherwise.
In professional occupational markets, it is likely that some Wait unemployment will remain. Skilled workers who are laid off are likely to receive payouts that forestall their need to get immediate work.
They have a disincentive to immediately take a Job Guarantee job, which is a low-wage and possibly stigmatised option.
Wait unemployment disciplines wage demands in Sector A.
However, the demand pressures may eventually exhaust this stock, and wage-price pressures may develop.
At first blush, it might appear that the Job Guarantee pool of workers would have to be greater than the unemployment pool for an equivalent amount of inflation control.
This is one of the classic arguments that were raised by economists in the 1990s when I gave presentations about the Job Guarantee proposal.
I recall one presentation I gave in New York in 1998 when this question was raised by an economist.
It is clear that the Job Guarantee workers will have higher incomes and so a switch to this policy would see demand levels higher than under an unemployed buffer stock world.
That is the nub of the claims by these critics about restricting the non-inflationary growth space.
But the reality is that the Job Guarantee would provide better inflation proofing than a unemployed buffer stock approach because the Job Guarantee workers represent a more credible threat to the current private sector employees
In other words, the Job Guarantee pool is a more effective excess supply of labour than the unemployment pool, given the varying duration categories (short- to long-term unemployment).
The buffer stock employees would be more attractive than when they were unemployed, not the least because they will have basic work skills, like punctuality, intact.
This reduces the hiring costs for firms in tight labor markets who previously would have lowered hiring standards and provided on-the-job training.
They can thus pay higher wages to attract workers or accept the lower costs that would ease the wage-price pressures.
The Job Guarantee policy thus reduces the ‘hysteretic inertia’ embodied in the long-term unemployed and allows for a smoother private sector expansion because growth bottlenecks are reduced.
That is, skill levels deteriorate less in a Job Guarantee economy than in an unemployment buffer stock economy.
The Job Guarantee wage provides a floor that prevents serious deflation from occurring and defines the private sector wage structure.
However, if the private labor market is tight, the non-buffer stock wage will rise relative to the Job Guarantee wage, and the buffer stock pool drains.
This is no different to a non-Job Guarantee economy. Wages rise as the excess supply of labour declines.
The smaller the Job Guarantee pool, the less influence the Job Guarantee wage will have on wage patterning.
Unless the government stifles demand, the economy will then enter an inflationary episode, depending on the behavior of labor and capital in the bargaining environment.
In the face of wage-price pressures, the Job Guarantee approach maintains inflation control by choking aggregate demand and inducing slack in the non-buffer stock sector. The slack does not reveal itself as unemployment, and in that sense the Job Guarantee may be referred to as a ‘loose’ full employment.
As the Job Guarantee pool rises, due to an increase in interest rates and/or a fiscal tightening, resources are transferred from the inflating non-buffer stock sector into the buffer stock sector at the fixed buffer stock wage.
This is the vehicle for inflation discipline.
The disciplinary role of the unemployed buffer stock system, which forces the inflation adjustment onto the unemployed, is replaced by the compositional shift in sectoral employment, with the major costs of unemployment being avoided.
That is a major advantage of the Job Guarantee approach. The only requirement is that the buffer stock wage be a floor and that the rate of growth in buffer stock wages be equal or less than the private sector wages growth.
Does that restrict the scope for expansion? The scope for private expansion is never unlimited.
When we talk about restricting the ‘size’ of the private sector, there is nothing particular about the Job Guarantee in this regard.
What are we talking about here? Number of firms? Size of firms? Total non-Job Guarantee spending?
Where is the role for productivity growth in this vision?
There is already a ‘limit’ in non-government spending without a Job Guarantee. Even an unemployment buffer stock approach to price stability imposes a spending limit for given productivity growth that the economy cannot go beyond before inflation becomes a problem.
Would a Job Guarantee make that limit lower?
It would actually expand the scope for private expansion because hiring costs are lower and the productivity boost would be higher.
Think about agricultural buffer stock systems, which motivated me in the late 1970s, while still a student, to write up the Job Guarantee idea.
The logic of the Job Guarantee policy came to me during a series of lectures in Agricultural Economics within the Honours program at the University of Melbourne.
The focus of the lectures was the Wool Floor Price Stabilisation 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. There was a lot of lobbying to get the floor price as high above the implied market price, given that the aim of the scheme was to stabilise farm incomes.
The price was maintained by the AWC purchasing stocks of wool in the auction markets. The financing of the purchases came from a Market Support Fund (MSF) accumulated by a small contribution from growers based on the value of its clip. Fund shortages were made up with Government-guaranteed loans.
The major controversy for economists of the day was that it interfered with the market price mechanism.
Note the similarity in the criticism of the Job Guarantee I have outlined above.
There was an issue as to whether it was price stabilisation or price maintenance. This was not unimportant in a time when prices were in sectoral decline and a minimum guaranteed floor price implied ever-increasing AWC stocks.
Other problems included the problems of substitutability from synthetic fibres and the maintenance of production levels, which would by themselves continue to depress prices.
By applying reverse logic one could utilise the concept without encountering the problems of price tinkering. In effect, the Wool Floor Price Scheme generated “full employment” for wool production.
Clearly, there was an issue in the wool situation of what constituted a reasonable level of output in a time of declining demand. The argument is not relevant when applied to available labour.
Full employment is the state where there was no involuntary unemployment and that is ensured by a sufficient number of jobs to be available in relation to the supply of labour at the current money wage rates.
This amounts to a rejection of the notion that all unemployment is voluntary and that full employment can be defined by market relations – the intersection of the labour demand and supply curves at some ‘equilibrium price’.
Accordingly, mass unemployment is construed as a macroeconomic problem related to deficient demand, which in turn reflects a deficient fiscal deficit.
The reverse logic implies that if there is a price guarantee below the ‘prevailing market price’ and a buffer stock of working hours constructed to absorb the excess supply at the current market price, then we can generate full employment without encountering the problems of price tinkering. That idea was the seed of the Job Guarantee model as I have expounded it over many years.
The work of Benjamin Graham (1937) is also instructive. He discusses the idea of stabilising prices and standards of living by surplus storage. He documents the ways in which the government might deal with surplus production in the economy.
[Reference: Graham, B. (1937) Storage and Stability, McGraw Hill, New York]
Graham (1937, Page 18) wrote:
The State may deal with actual or threatened surplus in one of four ways: (a) by preventing it; (b) by destroying it; (c) by ‘dumping’ it; or (d) by conserving it.
In the context of an excess supply of labour, governments had at this time and now adopted the “dumping” strategy via the use of unemployment buffer stocks. It made much better sense to use the conservation approach.
Graham (1937, Page 34) noted:
The first conclusion is that wherever surplus has been conserved primarily for future use the plan has been sensible and successful, unless marred by glaring errors of administration. The second conclusion is that when the surplus has been acquired and held primarily for future sale the plan has been vulnerable to adverse developments …
The distinction is important in the Job Guarantee model development. The Wool Floor Price Scheme was an example of storage for future sale and was not motivated to help the consumer of wool but the producer.
The Job Guarantee policy is an example of storage for use where the “reserve is established to meet a future need which experience has taught us is likely to develop” (Graham, 1937, Page 35).
Benjamin Graham also analysed and proposed a solution to the problem of interfering with the relative price structure when the government built up the surplus.
In the context of the Job Guarantee policy, this means setting a buffer stock wage below the private market wage structure, unless strategic policy in addition to the meagre elimination of the surplus was being pursued.
For example, the government may wish to combine the Job Guarantee policy with an industry policy designed to raise productivity.
In that sense, it may buy surplus labour at a wage above the current private market minimum.
In the first instance, the basic Job Guarantee model with a wage floor below the private wage structure shows how full employment and price stability can be attained. While this is an eminently better outcome in terms resource use and social equity, it is just the beginning of the matter.
Graham (1937, Page 42) considered that the surplus should “not be pressed for sale until an effective demand develops for it.”
In the context of the Job Guarantee policy, this translates into the provision of a government job for all labour, which is surplus to private demand until such time as private demand increases.
It is true that some workers might wish to remain in the Job Guarantee forever which would reduce the available resources for the private sector.
Is that a problem? Not at all. We should celebrate the fact that a worker is content with the wage and hours of work.
The private firms that would likely be impacted in this case would be those who offer inadequate hours of work and/or pay and conditions.
These ‘high’ cost firms would be forced to restructure or leave. That is a good thing for long-term material living standards.
When I get E-mails telling me that the Job Guarantee would replace the buffer stock of unemployed with a buffer stock of failed small businesses I wonder whether the sender has really understood the dynamics involved.
There is no logical evidence that small, high productivity businesses would not function profitably in a Job Guarantee world.
If we are saying that we need to suppress real wages growth below national productivity growth to ensure high cost firms survive then I disagree.
Prosperity is associated with a chase to the top not a race to the bottom.
But the Job Guarantee would introduce no new issues.
Governments have to tighten fiscal and monetary policy to curb an inflationary spiral that is accelerating out of control. The weaker firms always suffer in that case.
There is a dynamic that replaces these high-cost firms at the bottom of the cycle with newer, lower cost firms that deploy newer techniques and capital. That sort of attrition always happens over the economic cycle.
Small businesses have very high failure rates anyway. Usually this is because of a lack of capital and/or management skill. Small business always struggle to access bank finance. The introduction of a Job Guarantee would not change that.
Further, at the top of the cycle, the Job Guarantee pool would be very small if negligible. Only a small number of workers who were unable to get jobs in the private sector through discrimination would likely remain – those with disabilities, the very low skilled, etc.
It is hard then to claim that spending emanating from the Job Guarantee wage bill will be huge as the economy approaches full capacity.
Which means that the policy contraction required to stem the inflationary spiral at full capacity will be not significantly different to that which would be required if the alternative was that the displaced workers become unemployed.
If it turns out that a lot of workers wish to remain productively employed in the Job Guarantee then the real resource scope for private expansion is indeed reduced relative to what it might be if more workers were bid out of the pool.
But what is the problem with that? The aim is to advance societal well-being not create a whole lot of profit-making private firms who serve narrower interests.
If the ‘market’ is such – and the shrinkage of the Job Guarantee pool would be ‘market determined’ – that a lot of workers prefer to work in Job Guarantee jobs then the pattern of economic activity will reflect that.
Why would those who support ‘market’ outcomes be opposed to such an allocation pattern? Answer: only if they wanted the ‘market’ outcomes artificially biased towards private profit-making activities.
The society would judge the system each election and if the outputs of the economy were not deemed to be satisfying social needs then we would vote accordingly.
That is enough for today!
(c) Copyright 2015 William Mitchell. All Rights Reserved.