Winner of the New Statesman SPERI Prize in Political Economy 2016

Saturday, 18 November 2017

Some thoughts about the Job Guarantee

Mainly for economists

The idea of the state stepping in during a recession to offer some group of the unemployed a job was selectively adopted by the UK Labour government in 2009: see here by Paul Gregg. Richard Layard has proposed it for the long term unemployed. We can think of both schemes as providing a partial insurance policy against the failure of countercyclical stabilisation policy to completely do its job in a downturn/recession. But MMT (Modern Monetary Theory) economists go beyond that to suggest that it could be a permanent feature, which would eliminate involuntary unemployment (IU) without creating inflation.

Given our recent experience, the use of a Job Guarantee as an insurance policy for all unemployed people during a recession seems like a good idea. Unwanted leisure is replaced by labour producing useful output, and paying a wage greater than unemployment benefits would add to automatic stabilisers. The devil is of course in the detail: JG jobs need to be setup to allow job search (many jobs are created even in a recession) or (if necessary) retraining and the JG jobs would need to involve an output that was socially useful [1]. The main problem that Gregg discusses in his paper is the ‘Lock-in’ effect, where those in a JG job reduce their search activity. To combat that and for other reasons it also seems helpful to provide detailed individual advice along the lines of the Swedish scheme described here.

MMT economists have suggested extending such a scheme so that it operates at all times. As I understand it any worker without a job would be offered a JG job. It can be refused with no consequences in terms of unemployment benefit, so it that sense it is not workfare. Many people who were confident of getting another job quickly might want to focus all their spare time on job search, and so might decline a JG job. Anyone who wanted a job could receive one, so the scheme would largely eliminate involuntary unemployment (IU). [2] In the rest of this post I’m going to focus on this idea of JG as being a permanent feature of an economy, rather than just something put in place during an economic downturn.

A key issue is what the JG wage would be. In most MMT literature I have seen, the JG wage would be the minimum wage or better: see Mitchell here for example. There seems to be an obvious consequence of this. Unfortunately many private and public sector jobs are paid the minimum wage. These jobs are risky whereas JG jobs are by definition permanent. Minimum wage non-JG jobs may have compensating advantages like a career structure, but still it would seem probable that the existence of JG jobs paying the minimum wage would attract some workers from private sector minimum wage jobs.

The obvious response would be for private and public sector employers paying minimum wages to increase their pay sufficiently to stop this happening, which in turn would often lead private sector firms to raise prices. How far this ripples through the economy is not certain [3], but it is quite possible that the overall price level rises by a noticeable amount. This higher aggregate price level would reduce the real value of the JG wage. If this reduced wage differentials in the economy as a whole this process might be regarded by some as beneficial, but it is an implication that JG advocates need to acknowledge.

A perhaps more serious concern is the impact of the JG on inflation. What is conventionally believed to prevent policy makers expanding demand sufficiently to eliminate all IU is that to do so would embolden workers to ask for greater pay increases, generating an inflationary spiral. The existence of IU, and the possibility of joining their number. becomes a threat that keeps inflation stable. In a JG economy that threat is greatly reduced, both because an alternative job is always available and it will pay more than unemployment benefit. (JG and the lock-in effect will also reduce geographic mobility, although the other side of that coin is that joblessness would not be a feature of deindustrialisation.)

Suppose we start with an economy with stable inflation, implying unemployment was at the NAIRU, and introduce JG.. As this puts upward pressure on inflation because the costs of losing a job are reduced. the only way of keeping inflation stable is to deflate demand, which of course would reduce output, labour demand and therefore increase the number of people on JG jobs. So if we were to compare two economies where inflation was stable, one with IU and one with JG, the number of JG jobs would exceed IU in the other economy.

That does not mean that output would necessarily be lower in the JG economy, because JG workers are producing some kind of socially useful output while the IU workers are not. In welfare terms you have also eliminated any non-pecuniary costs associated with spells of unemployment, and the distribution of income in the JG economy is more equal than in the IU economy. However in practice the productivity of JG workers will be pretty low, as they need to be allowed time for intensive job search and the turnover in JG jobs is likely to be high. We have a trade-off, and if anyone can point me to any analysis of this particular trade-off I would be very grateful.

Can I end with a personal plea. When I write things like this it is often assumed by MMTers that I am being critical for the sake of it. In other words they think all I want to do is attack the JG or MMT. I don’t. I have far better things to do with my time. I actually find the idea of JG appealing at an intuitive level. More generally I agree with MMT on many things, although not all. But I am also fed up with policy makers implementing bad policies just because they sound good to those policy makers, so I want to subject any policy I intuitively like to rigorous analysis.

[1] JG jobs could be as assistants in police stations, schools and other public sector institutions. Or they could be jobs in social enterprises.

[2] Keynes defined involuntary unemployment as those seeking a job at the going real wage. As JG jobs would be at the minimum wage it would not eliminate all involuntary unemployment defined in this way: as I noted those looking for a higher than minimum wage job who chose to stay unemployed would still technically be classed as involuntarily unemployed. But this is being a little pedantic.

[3] Mosler and Silipo (section 7) talk about the JG wage as a nominal anchor. This captures the idea that movements in the JG wage would influence other wages. However nominal anchors, like the money supply or the exchange rate, are often talked about as being able to control the aggregate price level in the longer term on their own. The JG wage would not be able to do this. As the authors note, active stabilisation policy would still be required to do this, although the number of JG jobs could be a useful indicator of what action was required, just as the unemployment rate is now. Another way of saying the same thing is that the JG does not supplant the need for active macroeconomic stabilisation.



26 comments:

  1. Good post. I also find JG appealing at an intuitive level. Especially if it is money-financed, because it acts as a lovely automatic stabiliser to anchor nominal wages and full-employment. (I like to compare it to Brad deLong's thought-experiment, where there is a gold mine in every town where the unemployed can always pan for gold, except it is paper gold.)

    If labour and jobs were homogenous it would be very easy to set up a JG. The devil is in the details, when some workers and some jobs are better than others. Do they all pay the same wage? Can the government turn away workers who are unable or unwilling to do the work? And if labour and jobs were homogenous, maybe we wouldn't have the same problem of IU, and managing AD would be a lot easier even without JG. Just target the wage, or the wage divided by the unemployment rate.

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    1. Why does the structure of the JG have to be of a capitalist enterprise? Why would one have a boss at all calling the shots rather than a democratic arrangement in which the workers has out the details of hiring, firing and wages?

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  2. Congratulations to SW-L for spotting the main flaw in JG, a flaw which JG’s many naïve advocates do not understand. That’s the fact that the higher the pay for JG work, the more JG reduces labour supply to the normal or regular jobs market, hence the more the inflationary effect of JG. Indeed that problem may arise even if the minimum wage is offered as SW-L rightly says.

    Lars Calmfors, the Swedish labour market economist stressed that flaw about thirty years ago and invented what he called the “Iron Law of Active Labour Market Policy”. That law states that for JG to bring about a net increase in employment there absolutely has to be a workfare element: that’s “workfare” as in saying to the unemployed “do this temporary JG job else your benefit gets cut”. The alternative, i.e. getting people to do JG work by offering them generous pay just won’t work: or to be more accurate, well paid JG work WILL RAISE numbers employed, but that will come about partly by creating JG work AT THE EXPENSE OF regular jobs – hardly the object of the exercise.

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  3. One of my – ahem – seminal works on this subject is here:

    http://kspjournals.org/index.php/JEPE/article/view/1237

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  4. Interesting points but note that the mmt Macroeconomic framework rejects the NAIRU and the Phillips Curve trade off. You have not addressed that.

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  5. Thank you for discussing the Job Guarantee. I think you are right that a JG will entail some trade-offs. At least one of these is mentioned in the Mitchell piece you linked to in your discussion- some low wage employers may go out of business. Another trade-off could be distributional- lower wage employees, as a group, gaining an increased share of income, maybe at the expense of other groups, but also possibly in response to increased output and income in general. Many would accept that trade-off in my opinion.

    One question- you consider that a JG might be introduced during a period of stable inflation. Why assume an economy is at the NAIRU just because it has stable inflation? The US has had fairly stable inflation for the last 8 or 9 years but the unemployment rate has gone from near 10% to near 4% during that time. I cant see how it could be said we were at NAIRU that entire time. Could it be that a Job Guarantee introduced during a time of low unemployment might have an initial undesired inflationary effect while one started during a recession might not?

    Either way, it seems to me that MMT pretty much assumes an initial increase in some prices would occur with a JG where wages were at a living level. But it also assumes that will not turn into an inflationary spiral because the economy will adjust from relying on a pool of desperate unemployed workers to discipline wage growth towards a pool of already employed workers in the job program.

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  6. You ask good questions, Simon.

    My thoughts (and I am not an MMTer, largely because of their cult-like devotion to their JG)

    -- if you look at other government job programs like the New Deal CCC or the Argentine Jefe, they paid less than minimum wage. The wage is determined by politicians (who in turn kowtow to corporations), not by ivory tower economists.

    -- only the politicians know what the JG terms of employment would be. In the real world, there would be many strings attached. Only heads of households were eligible for the Jefe and for most of the New Deal programs. There would be zero political support for allowing immigrants in the JG. And so on.

    -- most inflation in my lifetime has been caused by oil. In recent history we have experienced inflation due to "rent-seeking," i.e. housing and health care in the U.S.. You'd have to go back to the 40's and 50's to find inflation caused by wages and even then it was modest and the economy was healthy overall.

    -- you raise a good point about how the private sector would not welcome competition from a JG. For that reason alone a JG is a political non-starter in a capitalist society.

    -- one of my big complaints about the JG is that there is no realistic plan to create suitable jobs for everyone. If I am an unemployed machinist, for example, I'm not going to be interested in a JG job picking up litter. Ditto for numerous other skilled jobs.

    -- as others have asked, if the JG tasks are really things that need to be done, then who will do them when the economy is good? Most worthwhile tasks need to be performed on an ongoing basis. I.e. if society really needs to pick up litter, then create permanent jobs picking up litter.

    In sum, I support government job creation during downturns, but there are many ways to go about that. It makes more sense to me to achieve full employment through Functional Finance budgeting rather than relying on a JG. You could either reduce taxes during recessions, or increase government spending during recessions. In addition to the traditional automatic stabilizers, functional finance could be automated by indexing tax rates and Federal grants to the employment rate.

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    1. People will continue doing them when times are good if the JG is organized as a series of worker-operated co-operatives giving them freedom from capitalist production arrangements. No one in their right mind would want to go back to having a boss telling them what time they can urinate.

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  7. A guaranteed job wage would have to be significantly higher than unemployment benefit, otherwise many people wouldn't bother to take the role, but significantly lower than the minimum wage, so that workers are coaxed back into private sector roles when the economy picks up. This has two implications.

    First, the difference between unemployment benefit and the minimum wage must be kept wide enough to allow a JG job to be both attractive to the unemployed and sufficiently unattractive to encourage a preference for private sector roles when available. This could be achieved by pushing up the minimum wage, but the most likley outcome - given political realities - is downward pressure on unemployment benefit.

    Second, it means creating a pool of public sector jobs that are episodic and so of limited social value. During a business cycle upturn, it would not be unrealistic to expect almost all JG roles to disappear outside of regional pockets of persistent unemployment. This means that JG roles will be clearly differentiated in terms of public esteem from both permanent public sector and private sector jobs.

    The problem with job guarantees is that they tend towards the labour battalion at best and a helot class at worst.

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  8. For detailed analysis of trade-offs and operational plan see - Creating effective local labour markets: a new framework for regional employment policy -http://e1.newcastle.edu.au/coffee/pubs/reports/2008/CofFEE_JA/CofFEE_JA_final_report_November_2008.pdf

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  9. because JG workers are producing some kind of socially useful output while the IU workers are not. [bold added]

    So an "unemployed" mother is producing no "socially useful output"? So retired people produce no "socially useful output" either?



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  10. all logical in terms of relative IU/JG populations

    but setting the relationship between the minimum wage and the JG wage seems tricky

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  11. If there's no coercion then it is effectively a Job Offer not a Job Guarantee
    http://www.progressivepulse.org/economics/basic-income-and-a-job-offer-rather-than-a-guarantee

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  12. Paying for Economic Solutions to Unemployment and Accompanying Social Problems. I'm just responding to various economic posts here and elsewhere. We should all be tired of the hand wringing. 80% of our social and economic problems would disappear in a few months with a:

    • Federal Job Guarantee, as part of a
    • Full Employment Fiscal Policy

    Here's how:

    Step One: Rename your Political Party: "The No Excuses - Get to Work Party". "We want YOU to get to work!" (Not technically, just a new tag line) (No handouts will be involved.)

    2) Make the first plank: Full Employment: A Job Guaranty: "You want a job, we'll give you a job, come hell or high water. No Excuses"

    3) Revise Federal Reserve Act so Federal Reserve Bank reports to the Treasury.

    4) Execute on national "To-Do List" (infrastructure; alternative energy; high speed rail; rehire every teacher, fire fighter, cop laid off in last 8 years; quintuple trade school and community college staff - free tuition.) Fund through securities purchased by the Fed - either a loan or just have Fed "gift" it to the Treasury. Hiring people directly or through contractors. Minimum guaranteed wage: $10/hr w benefits. (40 hours or 20 hours per week.) Eliminate private sector minimum wage.

    Added spending by newly employed workers producing public sector goods and services induces business people to hire MORE workers to produce private sector goods and services.

    5) Track wage inflation monthly, If it starts getting out of hand (say, approaches 5%), take action:

    • Fed sells securities,
    • Fed increases interest paid on reserve deposits at the Fed,
    • Congress increases tax rates across the board, and/or
    • Congress slows spending. But everyone is still guarantied a job at $10/hr full time or part time, plus benefits.

    Inflation should not be an issue since newly issued money is offset by both public sector and private sector goods and services produced.

    6) Result: Everyone's working and income inequality will diminish. Expenditures for unemployment insurance: zero; food stamps: zero; Medicaid: virtually zero; all sorts of welfare for this or that: zero. If we really want to be punitive, cut welfare benefits for able bodied folk not taking guarantied job.

    7) What's for dessert? "Now let's get to work!"

    8) Talk to Stephanie Kelton on the nuts and bolts. She was appointed to the Senate Budget Committee in 2014 and is now at the Economics Department at Stony Brook University. Also Pavlina Tcherneva, Head of the Economics Department at Levy Institute, Bard College. They know the drill.

    Not that hard kids!!

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  13. I don't see that the rise in wages resulting from a generous JG will necessarily cause large price increases. Surely it very much depends upon the industry concerned. In industries where there is a large economic rent component to profits, it seems quite likely that it would reduce profits instead. And economically speaking, the reduction of rental-based profits is not a bad thing for the economy as a whole.

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  14. Proffessor thanks for this blog post it made me think.

    Inflation is a complex issue. NAIRU is an over simplification and shouldn't be used to guide public policy. How to control a wage prices spiral? Import most of your consumer goods from low wage countries.

    In the UK unemployment is used as a method of social control. There are other means of social control. Countries have varying degrees of social solidarity in the UK its low. At the scary end there is China where control is ultimatey by naked force. It's time in the UK to decide we don't need to disipline the workforce and especially we don't need to use unemployment to do it.

    Could public policy based on a JG be made to work? Yes. Would there be problems? Yes, but no worse than any other system. A JG is an employer of last resort. In other times the UK has had employers of last resort, it's hard to see a direct correlation between an employer of last resort and inflation. Very often in low unemployment times or countries there is an employer of last resort.

    To contol a complex system you need to identify the bottlenecks or constraints and exploit them. Choosing employment as a contraint is incorrect.

    What is stopping policy makers expanding demand sufficiently?
    Fear.

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  15. Some fatal flaws of MMT
    Comment on Simon Wren-Lewis on ‘Some thoughts about the Job Guarantee’

    Simon Wren-Lewis summarizes: “But I am also fed up with policy makers implementing bad policies just because they sound good to those policy makers, so I want to subject any policy I intuitively like to rigorous analysis.”

    Rigorous analysis of MMT shows the following
    • MMT is based on Keynesian macro which is provably false since 80+ years,#1
    • MMT profit theory is false,#2
    • MMT employment theory is false.#3

    False theory leads to false policy guidance.#4 MMT policy guidance has no sound scientific foundations. MMT policy proposals are social on the surface but in essence a wellness program for the one-percenters.#5, #6

    Egmont Kakarot-Handtke

    #1 How Keynes got macro wrong and Allais got it right
    https://axecorg.blogspot.de/2016/09/how-keynes-got-macro-wrong-and-allais.html

    #2 Rectification of MMT macro accounting
    https://axecorg.blogspot.de/2017/09/rectification-of-mmt-macro-accounting.html

    #3 Full employment through the price mechanism
    https://axecorg.blogspot.de/2017/11/full-employment-through-price-mechanism.html

    #4 MMT: The one deadly error/fraud of Warren Mosler
    https://axecorg.blogspot.de/2017/11/mmt-one-deadly-errorfraud-of-warren.html

    #5 MMT and the promotion of Wall Street socialism
    http://axecorg.blogspot.de/2017/11/mmt-and-promotion-of-wall-street.html

    #6 For details of the big picture see cross-references MMT
    http://axecorg.blogspot.de/2015/08/employmentphillips-curve-cross.html

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  16. So what happens to those who are currently servicing the wants that will be served by JG employees? Unemployment?

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  17. Stumbled across this:-
    https://pbs.twimg.com/media/DPE1UpnX4AE7l4Q.jpg
    It seems to describe many situations in life (business, politics, architecture, religion...) where a 'top down' solution is applied to a situation.

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  18. Curious. My thinking is that one of the main practical difficulties of such a program is that it creates organization hurdles during economic downturns, as it requires the government to allocate money to finding work for a large increase in newly-unemployed for people who will likely seek other jobs once the economy recovers.

    It's certainly possible for a government which is enthusiastic for the program to implement it well. But it sounds like it would be all too easy for an unsympathetic government to sabotage the program when it is needed the most. As a practical matter, I think we could do better. I would much rather have a policy which depends as little as possible upon how much a future government likes the program.

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  19. I see another problem: If unemployment declines the number of "JGers" will decline along with it. Assuming that the work done in JG jobs is socially useful: Is it ok to not do it just because the economy is hot?

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    1. If the work done by JG jobs is useful, why isn't it already being done?

      Delete
    2. Albrecht Zumbrunn you ask a good question- "Assuming that the work done in JG jobs is socially useful: Is it ok to not do it just because the economy is hot?"
      That is a good question but I would put that question a little differently as a Job Guarantee advocate- if the work was socially useful isn't it better it gets done at least occasionally rather than never? And when the economy is struggling, the JG would help to keep people in the labor force at the same time helping them economically and also doing some socially useful things while giving future employers a track record of sorts to consider when they are hiring when the economy improves.

      Stuart P, why if it is useful is it not already being done? There are lots of useful things that can be done that do not turn a profit. Maybe they cannot be profitable in private business terms. Maybe the people receiving the benefits of the work just don't have the resources to pay for it. Or so many benefit, but in a small way, that they can't be billed for it. Those things mostly won't get done by purely private business, but that does not mean they are not useful. A job program could help to see that some of these things got done at least occasionally (which is better than never) and at the same time provide a powerful economic benefit in the form of an automatic stabilizer for the economy.

      Delete
  20. As Bill Mitchell has joined the conversation, I'd just like to expand on my earlier point and address his fundamental assumption that the JG wage would be the minimum wage in a system where JG roles are a flexible buffer stock and the public sector is the employer of last resort.

    By their nature, JG roles have two important characteristics that distinguish them from private sector roles in the eyes of the worker: they are reliable (you can't be laid-off), and the associated income is predictable (i.e. not dependent on variable hours, piece-rates or commission). This will encourage a degree of inertia in terms of employment churn. If stability matters more to you than "prospects", you might prefer to stay in a JG job rather than take a risk with a private sector role, even if the latter had a marginally higher wage.

    In theory, this will lead to the private sector offering higher wages than the minimum (i.e. paying a premium to attract JG workers) and/or increasing investment to raise productivity. While both of these are beneficial outcomes, there's a sting in the tail. The de facto minimum wage in the private sector will now be higher than the de jure minimum wage in the public sector. What are the likely political consequences of this?

    I suggest that the consensus demand would be that the de jure minimum wage be kept low in order to a) prevent the de facto private sector minimum being further inflated, b) encourage JG workers into the private sector, and c) restrain public spending. The end result would be a wage gap and a cultural denigration of the JG "class".

    Bill does address the issue of churn in the paper he links to: "If the relative attraction of the JG work was its greater security, a sufficiently streamlined entry /exit design (that enabled immediate re-entry to the JG) will lower resistance to accepting offers of private sector employment by eliminating risk attached to the job not working out" (pg 232).

    Given the structural hostility of the state to the payment of benefits these last 35 years (consider the current Univeral Credit 6-week waiting time), I suspect many people would be sceptical of this and would therefore err on the side of caution. JG jobs would be "sticky".

    The suggestion that a better bureaucracy would fix this also indicates that the JG is a case of fighting the last war, being more appropriate as a response to the cyclical depressions of the 20th century than the structural unemployment, precarity and episodic self-employment of the 21st.

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  21. David Timoney

    There are TWO issues here: the microeconomic = operational details of a Job Guarantee and the macroeconomic effects of MMT policy in general.

    So, given one has revisited employment theory#1 and decided the operational nitty-gritty, the remaining question is how to finance the program: taxes or deficit spending with central bank money?

    Rigorous analysis shows that budget deficits of the government sector end up one-to-one as profit in the cash box of the business sector. It holds Public Deficit = Private Profit.#2

    So, in the final analysis a tax financed JG program is advantageous for the household sector = ninety-nine percenters and a central bank financed program is advantageous for the business sector = one-percenters.

    Why MMT obscures#3 the profit effect of their policy and why the representative economist so eagerly gets lost in the wood of operational details of fake social programs is at anybody’s guess.

    Egmont Kakarot-Handtke

    #1 Full employment through the price mechanism
    https://axecorg.blogspot.de/2017/11/full-employment-through-price-mechanism.html

    #2 The profit effect of a Job Guarantee
    https://axecorg.blogspot.de/2017/09/the-profit-effect-of-job-guarantee.html

    #3 MMT and the magical profit disappearance
    https://axecorg.blogspot.de/2017/08/mmt-and-magical-profit-disappearance.html

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  22. if we are always at full employment which this program would essentially guarantee

    then it is a question of moving resources around to guarantee maximum efficiency

    efficiency in maximizing utility to all citizens

    but in this task we don't ever seem to treat utility for everyone equally

    some are "more equal than others"


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