Friday, 3 February 2012

Why sack people before there’s an alternative job for them?

The British government is currently reducing the size of the public sector which involves sacking public sector employees.

But there is a huge nonsense here: where those employees become unemployed they STILL GET PAID BY GOVERNMENT! That is, they are paid unemployment benefit. I.e. the net effect is (roughly speaking) that the employees pay is halved, but far from doing half the amount of work, they do NO WORK AT ALL!

Er – there is something wrong there (to put it mildly).

There is an obvious solution to the above anomaly: leave the relevant employees in their jobs, but halve their pay and halve the hours they do. Let’s call these people “half time workers” (HTWs). (It would probably not be worth catering for those ALREADY doing part time work, under the system advocated here.)

Since HTWs are after full time jobs they’d still have an inducement to seek alternative jobs. Thus aggregate labour supply is not reduced. Meanwhile more of the people who claim to want work are actually employed, and we all benefit from the increased GDP.

The “aggregate labour supply” point is important. The purpose of unemployment (to use the word “purpose” in a somewhat unusual sense) is to counter inflation by maintaining an adequate level of aggregate labour supply. This level of labour supply is hopefully maintained under the HTW scheme advocated here.

The private sector.

Now if that all works in the case of PUBLIC sector redundancies, would it work for PRIVATE sector redundancies: i.e. could we have a system under which NO ONE quits a job till there is an alternative? Well the idea that an economy can guarantee 100% full employment 100% of the time is unrealistic, unless you are prepared to create totally senseless jobs. But would AN ATTEMPT to delay redundancies in the private sector as in the above public sector redundancy delaying system bring benefits?

Suppose a private sector employer wants to make an employee redundant. As an alternative, the employer (or employee) could apply to government for a subsidy to keep the employee on, and working fewer hours, till alternative work is found. Or at the very least, the redundancy could be delayed for a month or two.

But there is a problem, as follows. The HTW subsidy would be an inducement for employers to claim the subsidy in respect of those they knew were going to be on part time only temporarily. (This problem actually occurred with one of the employment subsidies implemented in Britain about 30 years ago – the Small Firms Employment Subsidy, I think.)

Well there is an easy solution to the above potential abuse, namely to incorporate the sort of anti-abuse measures I set out under the heading “Anti-fraud measures” here.

Now there should be alarm bells ringing in the brains of anyone reading this who is also at least half acquainted with the posts I’ve written over the last three weeks on the subject of Job Guarantee. The alarm bells should be saying “this redundancy delaying subsidy comes to the same thing as offering Job Guarantee jobs with existing employers to those who already have jobs but are threatened with redundancy.”

Congratulations to anyone experiencing such alarm bell. Those alarm bells “ring true” (forgive the pun).

Finding work for the long term unemployed is probably more urgent from the social point of view (whatever the word “social” means) than delaying redundancies. On the other hand, redundancy delaying subsidy probably brings bigger strictly economic benefits in that those who have been in an unsubsidised job for some time will tend to be well suited to such jobs.

Hundreds of millions have been spent in Britain over the last fifty years trying to delay redundancies in declining industries: shipbuilding, coal mining, British Leyland, and so on. Those subsidies came about because of political expediency – i.e. so as to buy votes. If we are going to have any sort of redundancy delaying subsidy, it should be based on economics, not politics.

P.S. (same day). A possibly relevant statistic . . . according to J.P.Mattila in an article in the American Economic Review entitled “Job Quitting and Frictional Unemployment” (1974), 50 to 60% of those changing jobs in the US do so with no intervening unemployment.



  1. " If we are going to have any sort of redundancy delaying subsidy, it should be based on economics, not politics.

    My, albeit primitive, simulations suggest that once you get to private sector employment subsidies you really have to go the whole hog and pay a fixed amount to everybody per hour worked - otherwise you get distortions somewhere up the tree.

  2. Neil,

    Far from JG with existing employers introducing a distortion, the whole purpose is to get rid of a distortion.

    Unemployment occurs, amongst other reasons, because employers cannot pay free market price for labour because of min wage rules, union imposed wage rates, the attraction of unemployment benefit, etc etc.

    Thus if potential employees which employers regard as not being quite worthwhile employing are subsidised, employers are more likely to take them on.

    E.g. if an employer wants two fully qualified plumbers and can only find one qualified one and one part-qualified one, the employer will take the former and may reject the latter. Plus the employer will continue advertising for qualified plumbers, which bumps up the wage of plumbers which is inflationary. But if the part qualified plumber is available at a subsidised rate, the employer is more likely to consider the part-qualified one. Hence the unemployment / inflation trade off improves.

    And there is no need to offer an equivalent subsidy for the qualified plumber because the latter is a viable proposition without any subsidy.


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