Wednesday, 27 January 2010

Where is the logical niche for "make work"? Part III.

The conclusion at the end of Part II (see below) was that there is no very obvious logical niche for “make work”, because a better alternative would seem to be to subsidise those concerned into work with existing employers (public and private sectors).

The Jefes system in Argentina and the UK’s “New Deal” involve (amongst other things) something along the above lines, that is, temporary subsidised work for the unemployed with existing employers.

The UK’s New Deal is limited to people unemployed for about six months, while in contrast, a system in operation in Switzerland a few years ago had no such time limits.

So where is the economic logic in temporary subsidised work for the unemployed?

One argument is “hysteresis”, that is the idea that when people are unemployed for too long they lose skills and give up looking for work. This idea has an obvious “common sense” appeal, however various researchers have claimed that hysteresis is a non-existent or weak effect. (See here and here.) If there is anything in hysteresis one has to wonder how women who leave the workforce for a decade or more to bring up a family manage to re-enter the world of work at the end of this period.

There is actually a better argument for temporary subsidised work with existing employers, and it is thus.

Given falling unemployment, the worth or productivity of each succeeding person hired tends to fall. This is for reason mentioned in Part I: the increasing difficulty of matching available skills to vacancies as unemployment falls. Or in economics jargon, the marginal net revenue product (MNRP) of labour falls, given falling unemployment.

Note that this is a MACROECONOMIC phenomenon. I.e. this NOT to be confused with the well known MICRO ECONOMIC phenomenon whereby the MNRP of labour falls within a particular firm given an expanding workforce, while the volume of other factors of production employed are held constant.

Next, note that when MNRP falls far enough (approximately to the minimum wage, union wage, or whatever) employers will then tend to reject dole queue labour and will tend (wittingly or unwittingly) to poach labour from each other. And that spells inflation.

Next, note that the low productivity of EACH UNEMPLOYED PERSON on the dole queue given low unemployment is a TEMPORARY phenomenon. That is, sooner or later, a job turns up to which each person is suited, and at which they will be able to earn at least the minimum wage, or in some cases, several times the minimum wage.

So the solution to the problem is? . . . . . . A temporary employment subsidy, that is, a system that subsidises each unemployed person into a temporary job UNTILL a more suitable job appears.

Also, note that the latter solution to the problem is more or less what market forces will do automatically in a totally free labour market. And by “totally free labour market”, I mean a market with no artificial interference in the form of minimum wage laws, union wage rates, unemployment benefits, and so on.

This is NOT to argue that these “interferences” are unjustified. The point is simply that in a perfectly functioning free market (a very theoretical construct, of course) there is NO unemployment. Thus, at least on the face of it, any system which is similar to such a free market scenario (like the temporary employment subsidy advocated here) ought to reduce unemployment.

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