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A Job Guarantee would require $A26.5 billion net to reduce the unemployment rate by 6 percentage points

When Kevin Rudd was faced with the threat posed by the unfolding GFC in late 2008 his government became very pragmatic and immediately ditched the narrative they had been pushing out throughout that year about inflation being a threat and the need for tighter fiscal policy and surpluses. They introduced, in two rounds, a fairly significant fiscal stimulus (around 4.2 per cent of GDP) which effectively saved the Australian economy from entering a recession. A significant part of that intervention was that it had various temporal properties – a cash handout in December 2008 designed to get spending power into the hands of consumers just before Xmas (the famous ‘flat screen’ payment – there were a lot of TVs purchased), which obviously was an immediate focus, and, a longer term component, which included their plan to put insulation into every home. This was aimed at job creation clearly, to address the cyclical needs, but, it was also intended to address the longer term climate crisis, that were beyond the GFC cycle. When appraising what government’s should be doing now – to deal with the socio-economic consequences of the medical crisis – that style of thinking is essential. The questions that need to be asked are: 1. What can be done now to avert an economic collapse? 2. What do we want to change about the pre-structure of the economy into the future? 3. How can we use the stimulus intervention to make those changes, while addressing Question 1. In this blog post, I go through some of that style of thinking. I also provide some specific estimates of the investment needed to introduce a Job Guarantee in Australia.

Recall that on November 19, 2008, the recently-appointed chief of staff for the Obama Administration (Rahm Emanuel) spoke at at “Wall Street Journal conference of top corporate chief executives” and said (Source):

You never want a serious crisis to go to waste. Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.

As this New York Times article – On Language A Terrible Thing to Waste (July 31, 2009) – notes, Emanuel used an earlier quote by Paul Romer, who had varied an earlier quote from some marketing agency, who ….!

While Emamuel is not someone we should revere, his sentiments are not without some sense and relate to the second question I posed in the introduction.

The problem is that the way in which governments ‘take advantage’ of crises is usually to fast track the existing agenda.

So, the Australian government, for example, is making noises that they want to ensure there are significant structural changes that come out of this crisis – including wage cuts, work protection, reduction in consumer protection laws, reduction in regulations relating to urban planning and development processes, and more.

In other words, they want to take advantage of the fragility of the economy – the massive rise in unemployment and lost businesses – to create an even more undesirable future than was in place at the onset of the coronavirus.

They are already on the way to doing that. Without much of a whimper, the trade unions and the Australian Labor Party seem to have accepted their wage cutting plans already by agreeing to the JobKeeper.

You can trace back through my blog posts under the – Coronavirus – category, to see what I have written about the wage subsidy program. It is too small in terms of outlays, invoves wage cuts for most, excludes at least a million of the most vulnerable workers in the nation (casuals with less than 12 months continuous employment with the same employer), and, by the Treasury’s own estimates, still leaves at least 680 thousand workers jobless.

There is no virtue in workers accepting wage cuts and thinking they are doing the ‘right thing’ in the crisis. All progressive groups should be demanding the government pay the entire wage bill of workers who they have forced into idleness to protect the community.

But, the principle that we use the massive government intervention at present, not just to shore up the short-term economic spending needs, but, also, to create new investments and structures that we will need to fight that other crisis, which has fallen into the background at present – climate change.

Only a month or so ago, progressives were all talking about green transitions and decarbonising the economy amidst the rather dire projections that we have about a decade to get it right.

Act now was the message before it is too late!

I am not sure we even have time to prevent irreversibility in our climate. But I am no climatologist so I read the research literature and glean an understanding that we can do some things to change our future in this regard for the better.

And, I was driving home the other afternoon and was listening to the radio where an expert was talking about the dramatic improvements in our natural environment after just a short period of lockdown.

So in thinking about what the Government has already done and what it needs to do, these are some of the considerations that I think are important.

What the crisis and the official intervention has demonstrated so far is that the ‘how to pay for the interventions’, ‘where is the money coming from’, and all the rest of the ridiculous barriers that typically prevent progressive policy making from being implemented can no longer be seen to be credible.

The important questions then relate to what we want the nation to look like if and when we get through this medical crisis?

Latest labour market data

On April 8, 2020, the Australian Senate established “a Select Committee on COVID-19 to inquire into the Australian Government’s response to the COVID-19 pandemic”.

You can follow the Committee’s activities and hearings – HERE.

Today (April 30, 2020), the Committee heard from the Department of Social Services and two documents were tendered, which you can read by accessing the site linked in the last paragraph.

The documents show that:

1. Unemployment (JobSeeker) benefit payments are now being made to 1,346,172 Australian workers.

2. A further 497,665 claims for benefits have not yet been assessed and finalised, inclusing 374,087 relating to either the adult JobKeeper or the Youth Allowance (for unemployment).

3. In the period March 16-April 27, 1,456,065 claims were made for welfare support, including 1,151,658 by those seeking unemployment benefits (mostly adult JobSeeker).

4. At the end of last year, there were 728,000 receiving unemployment benefits (which was called Newstart).

As I indicated the other day in this blog post – Policy failure – Australian unemployment rate probably already around 10.9 per cent (April 23, 2020) – my estimates based on the payroll data the Australian Tax Office is now making available suggests that the unemployment rate is now around 10.9 per cent notwithstanding the wage subsidy program.

This estimate was based on ATO data up to April 4, 2020.

We started the crisis with an unemployment rate of 5.2 per cent – excessive by any estimate.

The extra unemployment benefit recipients understate the extra unemployment because many people who lose their jobs are ineligible for benefits.

But if we take those who are now on benefits (Point 1) and those who have applications in waiting to be assessed (Point 2), then the unemployment rate would be around 12.5 per cent.

That means that in over the last two weeks of March and then up to April 27, the unemployment rate has risen 7.5 percentage points.

Which suggests that employment has slumped by 8 per cent over that time.

This is much worse than even in the Great Depression.

Conclusions:

1. The unemployment rate is currently around 12.5 per cent.

2. Underemployment has risen.

3. The fiscal intervention is far too modest and needs to be considerably re-thought.

Rethinking the fiscal intervention

In relation to rethinking the current fiscal intervention of the Australian government, over the next few blog posts, I will finalise a consistent plan that brings together the temporal elements I described above and also the principles I outlined in my blog post – The European Commission non-stimulus is a waiting game before new austerity is imposed (April 27, 2020).

I will bring those thoughts together next week.

It is clear, given this latest data, that the stimulus package so far announced is grossly inadequate.

No responsible government should allow unemployment to go from 5.2 per cent to 12.5 per cent in a few weeks.

Which means two things in my view:

1. Instead of offering a wage subsidy to a select proportion of the employed labour force, which is just above the minimum wage and is paid to employers as long as they keep the workers on their books, the government should just pay the wages of the workers directly to the workers independent of what the employer chooses to do.

I outlined that idea in this blog post – The government should pay the workers 100 per cent, not rely on wage subsidies (March 31, 2020).

This would, in effect, make those workers public employees for the duration of the health crisis, and obviate all the secondary negative problems that are occurring in the form of rent defaults, mortgage default and other contractual payments defaults (energy bills, etc).

Workers would be instructed to stay at home unless they were able to continue working with compromising the health policies in place.

If the employer chose to keep trading and utilise these workers, then they would have to pay the wage bill.

But if the government temporarily took responsibility for the wages bill of the workers that are flocking into the welfare system, then it would be a superior outcome to just putting them onto the unemployment benefit, which is inadequate by any estimate, notwithstanding the Coronavirus supplement they are paying unemployed workers for the period of the crisis.

2. Large-scale public sector job creation programs are also necessary.

Prior to the crisis (March 2020 Labour Force data), the unemployment rate was already 5.2 per cent or 718.6 thousand. So we entered this downturn already in poor shape.

There were also 1,205.3 thousand underemployed workers who desired, on average, 15 extra hours a week of work but were being denied access to those hours by the suppressed spending growth, driven, in no insignificant part, by the obsessive pursuit of a fiscal surplus by the federal government.

In total there were 1,924 thouand workers (14 per cent of available labour) either unemployed or underemployed.

Even with the $A133 billion JobKeeper wage subsidy program, the Treasury estimated that the unemployment rate would reach 10 per cent by June 2020. They claimed the wage subsidy would keep the unemployment rate from rising to 15 per cent.

I considered that situation in this blog post – Policy failure – Australian unemployment rate probably already around 10.9 per cent (April 23, 2020).

In the past, to support our advocacy of a Job Guarantee, Martin Watts and I have developed a modelling framework for estimating the investment needed for the Australian government to introduce an unconditional job offer at a socially inclusive minimum wage to anyone who wanted to work.

In the last week, we have undertaken the tedious and quite exacting (because attention to detail is crucial) process of updating our databases and reconstructing our model parameters and equations to take into account the current coronavirus crisis.

I can provide the following results and information, which we completed this morning. A full report documenting our approach will be released through the – Centre of Full Employment and Equity (CofFEE) – in due course.

But here is what is relevant from this work:

1. Assume that the unemployment rate was to rise to 10 per cent, with the JobKeeper wage subsidy in place (as is being assumed by the Treasury).

2. The pre-GFC low-point unemployment rate (February 2008) was 4 per cent. So, we entered this crisis in a worse position that just before the GFC.

3. If the unemployment rate was 10 per cent and we wanted it to be 4 per cent, the government would have to create:

(a) 824.2 thousand jobs in total (assuming the participation rate doesn’t change)

(b) 773 thousand full-time jobs (assuming the full-time/part-time mix doesn’t change)

(c) 244.4 thousand part-time jobs.

4. Based upon the current national minimum wage in Australia ($A740.62 per week), an average full-time working week of 38 hours, 30 per cent on-costs (hiring costs), plus additional capital costs per worker (plant, equipment) of 35 per cent, the total annual full-time Job Guarantee job outlay would be $A77,024.48 and the annual wage received by the worker would be $A38,512.24

The capital costs etc were estimated from a survey CofFEE undertook of Local Governments to assess supervision, plant and other costs that would be required to supplement each Job Guarantee job.

The 35 per cent assumption is based on a labour intensive suite of jobs.

The outlays for part-time workers are proportional to the ratio of average part-time to full-time working hours.

You can read about that survey and all the details of our research work in this report – Creating effective local labour markets: a new framework for regional employment policy.

5. We took into account:

(a) Labour productivity – and created a ‘composite’ job.

(b) Multiplier effects of each new Job Guarantee job – so how much does GDP and consumption expenditure increase.

(c) In turn, how this impacts on corporate profits and non-government sector employment.

(d) The extra tax revenue the government receives as a result of the higher employment levels both in the public and private sector.

(e) The reduced outlays on unemployment benefits under the assumption that the 842.2 thousand workers would no longer receive income support payments. This was calibrated according to estimates of different income support payments by family structure and marital (now called partnership) status.

The results

To reduce the unemployment rate by 6 percentage points (say from 10 per cent to 4 per cent – in fact, it doesn’t matter where you begin the simulation), then the following results are relevant.

Increase in employment

1. Total rise in employment = 842.2 thousand, which is made up of:

2. Job Guarantee employment = 712.6 thousand

3. New private sector jobs = 129.6 thousand.

Why does the private sector also expand?

Because the income stimulus to unemployed workers at the start (which is the difference between their Job Guarantee wage and the unemployment benefit) provides stimulus for increased consumption spending, which induces further income growth and via the multiplier effects a much larger final increase in national income and that stimulates the growth in private sector employment and corporate profits.

So introducing the Job Guarantee dramatically improves the material circumstances of the most disadvantaged.

But it also improves the situation for employers and profit recipients (which, of course, is the driving motivation but a positive derivative impact).

Government investment

To accomplish that increase in employment, the Federal government would outlay:

1. Gross $A48.4 billion over a 12 month time period.

2. Net $26.5 billion over the same period.

What explains the difference?

The Government receives extra personal tax revenue ($A3.9 billion), extra corporate tax revenue ($A3.4 billion), reduced unemployment benefit outlays ($A11.6 billion) and increased indirect taxes ($A6.2 billion) at current policy parameters.

To implement a Job Guarantee and reduce the unemployment rate by 6 percentage points:

1. The Federal government would outlay $A48.4 billion in gross terms over a 12 month time period.

2. The Federal government would outlay $26.5 billion in net terms over the same period once the extra personal tax revenue ($A3.9 billion), extra corporate tax revenue ($A3.4 billion), reduced unemployment benefit outlays ($A11.6 billion) and increased indirect taxes ($A6.2 billion) at current policy parameters are taken into account.

3. The wage subsidy Job Keeper program involved gross outlays of $A133 billion to reduce the unemployment rate by 5 percentage points.

Conclusion

The Job Guarantee satisfies most of the that I outlined in this blog post – The European Commission non-stimulus is a waiting game before new austerity is imposed (April 27, 2020).

It can be quickly implemented.

It will likely be labour intensive – so lots of employment created per dollar outlaid.

It has strong multiplier effects, such that the private sector gains substantially in employment and profits.

It is spatially perfect – taking jobs to where people live.

It is totally consistent with longer-term objectives to reduce carbon use and only promote ‘green’ activities.

It can be corrupted but it would be hard.

It doesn’t specifically address supply-chain constraints that are important in this particular crisis. But given that most of the workers employed would be low-wage workers anyway, it is likely that a significant proportion of the wage would be spent on food, housing, transport and energy costs all of which are not particular constrained in supply at present.

It is not perfect in equity terms because the jobs would be designed to be accessible to the most disadvantaged workers. So they do not attempt to solve the skills-based underemployment problem.

Our estimates also do not explicitly model a reduction in underemployment. We will do that next.

Our definition of full employment includes zero underemployment.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.

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    This Post Has 18 Comments
    1. I suspect we are still underestimating the economic impact and consequences of this outbreak – as much as the virus pathogenicity. News this morning that Shell has cut their dividend for the first time since 1945 may well be good news for the environment – but the impact on global pension funds and other investments may well be a catalyst for other companies to do the same. Pensioner poverty was a common feature in most countries before the New Year – I suspect this who do survive, may well be looking for a pension-guarantee soon too.

      Are we near the point where the only solution is to make everyone an employee or student of the state – regardless of their previous status? It would be more simple to administer, responsive and cheaper too….

    2. Great insights here into the multifarious factors involved in setting up a JG. I can see why it might be both ‘tedious and demanding!’ But quite a mental tour de force looking at localised detail whilst keeping the wider ramifications in mind at the same time.

      ‘All progressive groups should be demanding the government pay the entire wage bill of workers who they have forced into idleness to protect the community.’

      In the UK this seems to have created a situation where self employed with very variable earnings are falling through the net. Taking average earnings over the previous year seems to be one way they are doing it but in a bad year that could dip below the socially inclusive wage (musicians and actors, for example).

      On the other hand would the system pay someone (say a ‘successful’ car salesperson) their full wage if it was , say £80,000? Would there be a cap or just a statuary 100%?

    3. Wouldn’t we get even more bang for our buck and set ourselves up for future long-term productivity growth if we paid 200,000-300,000 unemployed/underemployed people the ($A740.62 per week) while also paying for their up-skilling at colleges or vocational training schools?

      This would fill the void from our losing international students, these new students could start immediately with little on-boarding time/expense, it would be much more efficient than waiting for the creation and execution of a new government work program. (The government has already shown they struggle when attempting to creating and executing new programs, i.e. JobKeeper)

      An educational up-skill program would increase human capital while also supporting long-term economic/ productivity growth.

    4. Perhaps some typos Bill,
      ‘stay at home unless they were able to continue working with [out?] compromising the health policies in place.
      ‘…(which, of course, is [not?] the driving motivation but a positive derivative impact)….’

    5. “In the UK this seems to have created a situation where self employed with very variable earnings are falling through the net.”

      Yup. Should have just been a PAYE scheme run by the BoE, which pays any NI number that has received a payment from a PAYE system in the last year, or paid NI, and which hasn’t received sufficient from any other PAYE scheme in the month.. Then you add Class 2 NI payers on top of that, by getting them to suspend their class 2 registration – thereby making themselves available for the default job,

      Instead we just get reams of complexity, and casual staff failing to get furlough pay at the whim of their employer.

    6. Bill, do you assume something about savings preferences when calculating multiplier effects? In other words, do have a preferred theory or do you exogenously impose this at no change or some other factor?

    7. Once this pandemic no longer has the masses immobilized by fear, and peer-reviewed science has begun to assess whether governments under-reacted, overreacted, or appropriately responded to the corona virus, THEN AND ONLY THEN will the pressing issue shift to whether these governments have adequately dealt with the devastating economic and social impacts of the pandemic, whether they have merely protected the plutocratic elite, as usual, or have also taken the necessary steps to protect all of us. At that point, still a little ways down the road, an unprecedented evolutionary/revolutionary opening will occur both to implement a JG and also to compel, through massive protest and civil disobedience, the adoption of policies and programs that couple MMT with progressive values, and to topple and reinvent governments that refuse to do so. In each country, these policies, programs, and the course of the struggle will differ due to particular history and culture, but the issue itself will be global and will thus constitute a turning point for human civilization, comparable to the emergence of ancient slave empires, their decline into ossified feudalism, the awakenings of the Renaissance and Enlightenment, the deconstruction of monarchy, the partial implementation of democracy, and the subsequent dominance of capitalism culminating in plutocracy. I continue to harp on this bigger picture because when we CAN make our move, whether we make it at all and, if so, make it in a wise, humane, and inclusive direction will require us to have already seen things and seen through things, to have anticipated the impending opening, and to have grasped at least some of the initial steps that will cry out to be taken; i.e. MMT’s JG in conjunction with some genuine version of a Green New Deal, universal health care in countries still lacking it (like the U.S.), demilitarization in favor of more constructive uses of the public sector, etc. In other words, NOW is the time both for people like Bill to be working on concrete and detailed proposals (like he is doing) and for people like us, who have learned to see more clearly and independently through the MMT lens, to gather our strength, courage, confidence, and resolve for the “apocalyptic” battle we will soon have the opening to initiate–the crucial fight, as Edward Bellamy put it during the first Gilded Age, to overthrow, once and for all, the oppressive and ecocidal “rule of the rich” and assist in the birth, for the first time in recorded history, of “government of, by, and for the people.” Will neoliberalism have brought us the end of history or a new beginning? We’ll soon see. And the answer will be up to us.

    8. Newton,

      Your passion is palpable and admirable.

      However, how many times in history have similar opportunities presented themselves only to be turned into opportunities for the plutocrats, reinforcing the plutocrat’s hegemony.

      It seems the plutocrats have more to lose, money and power, than the rest have to gain or are willing to risk.

      I can only hope your enthusiasm trounces my cynicism.

    9. The Jobkeeper Programme.

      I know of one retired business person who had a careers business. He still has one contractor on his books who still earns him a small commission. The contractor’s time has been cutback to some extent so he is eligible for the Jobseeker $1500 payment. The careers “business” has received, out of the blue, a government $10,000 Jobkeeper payment and is due to receive another $10,000 Jobkeeper payment in the near future, all unsolicited.

      Amazing.

    10. Henry, thanks for your words, and don’t think for a moment that I also don’t have that cynicism inside me, relentlessly reinforced as it has been during this past half-century of neoliberalism. Albert Schweitzer said that the most difficult thing that Jesus asked of his followers was to believe that the Kingdom of God could come on earth. William James picked up on this and fleshed it out in secular terms as summoning “the will to believe.” What it boils down to, as I understand it, is that whether enthusiasm trounces or yields to cynicism inside us is essentially a matter of the will and the values we choose to live by, not the result of our calculations of the odds, our objective assessments of the likelihood of success or failure. In this latter regard, we’re probably in about the same place.

    11. I think we are approaching a critical juncture, prompted by this pandemic. I remain pessimistic that the MMT lens will oust neoliberalism. I think that awareness of the capacity of currency issuing governments to intervene to support every person according to need is growing but most unquestioningly accept the warnings by ignorant and/or status quo supporters that the bill will be presented to us once some degree of normality returns. These people have a huge megaphone which all but drown out the efforts of those of us who understand that we live in an MMT world.

      Most people do not realise or accept that national governments spend by keystrokes and that it makes no sense to “cover” spending more than taxation by borrowing and that the “burden” of the accumulated debt will force some unsalable but “unavoidable” measures, eg tax base widening/increases, government service cuts, privatisations etc.

      I have tried to explain MMT to family and friends. All but a few still do not get it, such is the dominance of the dominant paradigm. MMT is completely counter intuitive to it.

    12. Re Barri Mundee:
      My current opinion on explaining MMT, at least the part that governments don’t have financial constraints, is not so much explaining it but rather getting people to believe it. The idea is actually quite simple. But as John Kenneth Galbraith once said the mind is repelled by the simplicity of money creation by the banks. It is extremely difficult for people to believe that the very thing they struggle all their life to acquire can be created out of nothing by the government. Even if they do accept that they find it very difficult to believe said government will allow private interests to ration all kinds of goods and services for profit instead of the government providing them as public goods.

    13. Re MMT and explanation – I am having great success keeping it simple. Currency Issuing governments do not face insolvency – they issue the currency. Highlight the crisis and demonstrate it show currency issuing governments spend by decree – limit is inflationary and that is dependent on whether a currency issuing government have stuff to buy (including labour) The budget figures are a record of spending and taxing and irrelevant without the above context. Usually questions about hyperinflation and Zimbabwe and Venezuela but as long as I emphasis supply side collapses most people in the room seem to grasp that understanding.

    14. xenji: Good advice. I’m about to send something out to a number of people so I’ll be sure to keep it in mind.

    15. I just watched a video about Japan. About how so called salary-men and women work 100 hours a week, and may get 10 hours of sleep a week.

      So, Japanese comp. need workers so bad they work the ones they have to death or drive them to suicide.
      There is even a new word in the Japanese language for committing suicide because of over work. Men and women do it.

      I, therefore, predict that the powers that be in Japan will not *ever* let the Gov. start an MMT Job Guarantee program.

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