Job
Guarantee (JG) is a term often used to refer to an idea that has been around
for centuries: the idea that instead of paying the unemployed to do nothing,
they could be paid to do something useful. The idea has of course been put into
effect in a hundred different guises over the centuries: the Work Project
Administration in the US in the 1930s, various post WWII workfare or “job
creation” schemes, and the “Work Programme” currently in operation in the UK.
Indeed, it
doesn’t take a genius to work out that JG could, at least in theory, abolish
unemployment. That is, and taking a very crude illustration, the unemployed
could simply be told that their benefits are conditional on their walking up
and down their street keeping it free of litter. Anyone refusing that work
would be deemed to have turned down a job, and hence would not be counted as
unemployed. Hey presto: unemployment vanishes.
A recent and
largely useless addition to the thinking behind JG is the idea that JG
employees can be regarded as a buffer stock. The buffer stock idea is set out
in around 4,000 words here and here by Bill Mitchell. While I favour JG in some
shape or form, the whole buffer stock notion strikes me as irrelevant. It’s hot
air, and the paragraphs below demolish the idea in vastly less than 4,000
words.
What is
a buffer stock?
A buffer
stock, just to be clear, is a stock of commodity X, some of which can be sold
into the market, given excess demand for X, and so as to stop the price of X
rising, or rising too fast. And conversely, if the market price falls too far,
then the operator of the buffer stock (normally government) can buy up X and
add it to the stock. That of course stops the price of X falling below some
level or other.
So in the
case of JG, the big idea is that if the JG wage is $X/hr, that will allegedly
stop wages in the regular economy falling below $X/hr. And if aggregate demand
rises, then the stock of JG employees will supply the regular labour market
with labour, which will tend to stop regular wage rates rising, and ameliorate
inflation.
Now the
first problem with the “JG buffer stock” idea is that JG labour is no more a
buffer stock than are the unemployed in an economy where there is no JG. That
is, if unemployment benefit is $Y a week, that puts a floor to the weekly wage:
about $Y a week. So introducing JG to a typical developed economy adds very
little “buffer stocking” because a buffer stocking effect is already provided
by unemployment benefits.
And not only
that, but most developed economies have minimum wage laws: another factor that
ensures a minimum hourly wage for employees.
That makes the JG buffer stock idea even more irrelevant.
JG
controls inflation?
As distinct
from stopping the price of labour falling below some minimum, does the buffer
stocking characteristic of JG stop the price of labour rising too fast, given a
rise in aggregate demand?
Well hardly,
and for the following reason. Assume there is no JG system, and assume
increased demand by regular employers for a particular type of labour. What
happens? Well, labour flows from the ranks of the unemployed into the vacancies
that have recently appeared.
Now assume
all the unemployed are doing JG work. And assume the same scenario: a rise in demand
by regular employers for a particular type of labour. What happens? Well labour
flows from JG employment into the vacancies that have recently appeared.
Spotted the similarity?
Conclusion:
when it comes to inflation control, there is no difference between the buffer
stocking characteristics of the unemployed and the buffer stocking
characteristics of JG. So given that the whole point of discussing JG is to see
what benefits it might have as against unemployment, why mention buffer stocks?
The buffer stock notion is plain irrelevant. (Incidentally, I’m fairly sure
Warren Mosler, who advocates JG, has conceded the latter point about JG being
no more of a constraint on inflation than unemployment, but I can’t find the
relevant link.)
Having said
that there is “no difference” as between the buffer stock characteristics of JG
and of the unemployed, there are a number of differences that MIGHT ARISE. For
example, if the JG wage is much more generous than benefits, that would
dissuade people from moving from JG to regular work. And clearly that would
thwart the buffer stocking characteristics of JG. But all else equal, in
particular if unemployment and JG are equally attractive, then there is no
difference as between the buffer stocking characteristics of JG and
unemployment.
Also, it’s
possible that the QUALITY of labour while doing JG work might improve: e.g. JG
might incorporate training. But then training can also be made available to the
unemployed. So the training point is irrelevant.
Another
possibility is that JG maintains work habits, and makes JG people more
employable than those who have been unemployed for extended periods. But
IMPROVING THE QUALITY of the commodity stocked is not a normal characteristic
of buffer stocks. If anything, stocks of physical commodities actually
DETERIORATE when stored for too long.
Put another
way, if JG helps maintain work habits, why not just say “JG helps maintain work
habits”? The buffer stock notion is simply irrelevant.
Let’s
assume no benefits or minimum wages.
As distinct
from the above assumption namely that JG is introduced to an economy which
already has unemployment benefits and/or minimum wage rules, let’s assume
neither of the latter two are in operation.
In that
scenario, there’d be a tendency for the unemployed with no savings to take very
low paid jobs pending the appearance of something better. And the introduction
of JG to such an economy would certainly act as a buffer stock in that it would
ensure a minimum price for labour (though it still wouldn’t bring about the “price
rise ameliorating” effect that is inherent to the definition of the phrase “buffer
stock”).
However, the
fact that JG works as a buffer stock in the above scenario, i.e. maintains a
minimum price for something, does not explain why JG works: i.e. why it raises
aggregate employment.
So why
does JG work?
Having hopefully
established that buffer stocking has next to nothing to do with why JG raises
employment, the next and obvious question is: why DOES JG raise aggregate
employment?
Well the
answer is simple enough – at least the answer SEEMS TO BE simple. It’s that no
demand is required to create JG jobs. That is, and to illustrate, if someone on
benefits of $Z/wk is told to pick up litter in the local park for $Z/wk, then
aggregate employment rises, meanwhile aggregate demand remains unchanged, so
there is no possible inflationary effect deriving from the “park tidying” job.
But there is
a problem with that idea, and as follows.
It’s not
just relatively low paid park tidying jobs which don’t require an increase in
aggregate demand: the same point applies to ANY PUBLIC SECTOR JOB!!!! That is,
for example, the output of the British National Health Service is GIVEN AWAY,
rather than sold. So no extra demand is needed to expand jobs in the public
sector as a whole.
But strange
to relate, the typical Western country has brought about an ASTRONOMIC
EXPANSION in the total number of “no extra aggregate demand” or public sector
jobs over the last 150 years. Yet there has been no corresponding fall in long
term average unemployment levels.
So it would
seem that expanding the number of “no extra aggregate demand” jobs is not the
explanation as to why JG raises aggregate employment.
The ACTUAL
REASON why JG raises aggregate employment will appear here in a day or two.
Ralph, can I have a stab at this? I feel that JG would raise aggregate employment for a couple of reasons. First, workers would retain working skills and not have to endure long periods of useless searching for non-existent jobs. The improvement in morale and confidence would be tangible. Employers would be able to choose from workers whose skills are not eroded when openings arise. Job training should be an essential part of the JG.
ReplyDeleteJG could easily maintain skills (depending on how good JG is at allocating employees to jobs that actually use their skills). But if JG does have that effect, that doesn’t contradict my basic point above which was that the buffer stock notion is irrelevant to this whole argument.
DeleteIncidentally, the above skill point is one of the arguments for extending JG to the private sector: doing so gives you a much bigger range of skilled or semi-skilled jobs to which to allocate JG employees.