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.
