Thursday, 7 November 2013

Bill Mitchell and the Job Guarantee.

It’s good to see Bill considering the fact that the amount spent on capital equipment, materials and skilled labour (relative the costs of actual JG labour) is a variable. He appears to be considering three different scenarios where the ratio of the above JG labour costs to other costs is 75/25, 60/40 and 50/50. (Word search for e.g. “50/50” and you’ll find the relevant paragraph).
I’m not sure what the logic is behind the above seemingly random figures. A more relevant point which I made here is as follows.
If the amount spend on “other costs” relative to amount spending on JG labour is very small, that necessarily means a JG scheme which employs JG labour and practically nothing else. Such a scheme will be highly unproductive. On the other hand, if the ratio of other costs to JG labour costs are similar to the sort of ratios of other costs to “relatively unskilled labour costs” that one finds with a normal or regular employer, then the JG scheme in effect becomes a normal or regular employer.
Thus JG is caught between a rock and hard place. Or rather, the inevitable conclusion one is driven to is that SPECIALLY SET UP JG schemes do not make sense: that is, JG labour might as well be subsidised into work with regular employers.
And indeed that is exactly what the UK’s Work Programme and similar “temporary subsidised employment” schemes that have appeared and disappeared over the decades have consisted of.

Private and public sectors.
And note that while the Work Programme involved subsidised work with PRIVATE employers, the arguments for and against letting private employers “join in the fun” have little to do with the above “rock and hard place” point. I.e. if private employers are barred from taking on JG labour, then the above rock and hard place point still drives us to the conclusion that JG labour should be allocated to EXISTING public sector employers rather than to specially set up JG schemes.
To which astute readers will respond: “Oh but it’s plain impossible for e.g. the UK’s National Health Service, state schools, etc to absorb a million not too skilled temporary employees”.
To which my response is: “Dead right. And that’s one argument for letting private sector employers join in the fun.”
And as to those who think that supplying private sector employers boosts profits, they need to study an introductory economics text book. There they will find an explanation as to why subsidies expand the SIZE OF an industry or firm, but do not boost profits as a proportion of turnover in the LONG TERM. (Likewise, and incidentally, taxes are a mirror image of subsidies and have a mirror image effect: that is while taxing a firm or industry INITIALLY depresses profits, the LONG TERM effect is simply to reduce the size of the firm or industry.)


  1. This is a very important subject because some prominent MMT gurus seem to have have largely abandoned truly Keynesian remedies for general unemployment.
    Instead of Keynesian aggregate demand management, some MMT gurus say
    "we do not favor “pump priming”, old-style, Keynesian aggregate demand stimulus in most situations. We prefer targeted policy. A case in point is the job guarantee/employer of last resort program, which sets a fixed wage to COUNTER the fact that bottlenecks exist in many markets and as an alternative to traditional Keynesian pump priming precisely because of problems associated with bottlenecks." - L Randall Wray

    This argument seems to confuse general unemployment with structural problems in the economy.
    True, Keynesian demand stimulus is constrained by bottlenecks as full employment is approached.
    But JG does nothing to increase labour supply or capacity in bottleneck industries or areas.
    To the contrary, JG would tend to exacerbate structural problems. It would create largely unproductive or unprofitable JG jobs in areas with declining industries. This would tend to reduce the incentives to labour and capital to migrate to "bottleneck" areas and industries where they are needed.

    Superficially JG creates "full" employment.
    In reality JG = employment misallocated into unprofitable declining industries/areas
    = concealed unemployment = bottlenecks to economic growth.

    1. Hi King Kong,

      I’ll take your points in turn.

      You say “some prominent MMT gurus seem to have largely abandoned truly Keynesian remedies for general unemployment. Instead of Keynesian aggregate demand management, some MMT gurus say "we do not favor “pump priming”, old-style, Keynesian aggregate demand stimulus in most situations.”

      I agree that some prominent MMTers are confused as to when standard Keynsian AD increasing measures are appropriate, and when JG is appropriate. The basic principle here is extremely simple: when unemployment is above the “natural level” or NAIRU or whatever you want to call it, Keynsianism is the best measure for reducing unemployment (down to NAIRU).

      Having done that, JG has to potential to reduce unemployment even further (even, in principle, to near zero).

      Of course – statement of the bleed’n obvious coming up – it’s impossible to know exactly what level of unemployment corresponds to NAIRU. However, it’s important at least to get the THEORY right, even if putting a theory into practice is difficult in the real world.

      Put that another way, Randall Wray’s claim that JG is preferable to Keynsianism “in most situations” is wide of the mark. He should have said: JG is preferable to Keynsianism at NAIRU.

      Next, and re your claim that JG results in a DISINCENTIVE to move to more productive work, it certainly CAN DO if the pay and conditions on JG are attractive enough. And that needs to be avoided. In fact Lars Calmfors and me about 20 years ago tumbled to the fact that the latter point makes a workfare element in JG unavoidable (By workfare I mean “do this job else your benefit gets cut”).

      Reason is that if people are VOLUNTARILY attracted to JG, the attractions for them of productive REGULAR jobs are reduced, which has the undesirable effects you refer to. Calmfors called that his “iron law of ALMP”: a law which is beyond the comprehension of MMTers, far as I can see.

      Re your last paragraph, where you seem to argue that JG is beyond redemption, I don’t agree. As I pointed out above, it CAN BE worse than useless. But if it contains a workfare element (which is actually incorporated in the UK’s Work Programme and other similar programmes in the past), then I think JG has potential, at least in principle. Of course it’s always possible that IN PRACTICE, the administration costs exceed the output of JG employees, in which case the whole idea becomes very questionable.

  2. I prefer the concept of "bottlenecks" to NAIRU, but its essentially the same idea. So yes to all your points!


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