Friday, 17 April 2015

Make work and the WPA.

An idea which has been around for a VERY LONG TIME, is that it is in theory possible to abolish unemployment by simply having government pay the unemployed to do SOMETHING instead of nothing (well, “nothing” plus a bit of job searching).

Those refusing this sort of work, could be regarded as having turned down work, and could thus perhaps no longer be classified as unemployed. Hey Presto: unemployment vanishes. Well in theory it does!

That sort of idea was implemented big time in the 1930s, for example there was the “Work Project Administration” in the US which built vast numbers of roads, bridges, buildings, etc. And 2,600 years ago Pericles in Ancient Athens did the same: put the unemployed onto public construction projects (according to  “Unemployment in History” by John Garraty, Ch.2, p.13)

I’ll call this idea “Job Guarantee” (JG) because that’s currently a popular label. And one important question to sort out is whether JG should take the form of SPECAILLY SET UP PROJECTS, as was the case with the WPA in the 1930s, or whether such work should be merged with the EXISTING public sector: i.e. should JG employees be allocated to EXISTING public sector employers (schools, the armed services, etc)? I’ll consider whether JG employees should be allocated to existing PRIVATE SECTOR employers below.

In fact there’s a simple flaw with specially set up projects which is that (almost by definition) they involve a odd ratio of different inputs – permanent skilled labour, unskilled labour, materials, and capital equipment.

That is, a typical JG “specially set up” project consists of a relatively large number of recently unemployed people (who tend to be unskilled) working alongside a smaller than usual quantity of skilled labour, capital equipment, etc. And that means inefficiency.

Of course a JG specially set up project CAN INVOLVE a relatively large amount skilled labour, capital equipment etc as was the case with many 1930s WPA construction projects, but in that case, such schemes come to the same thing as a normal or regular employer! In short, specially set up JG schemes are in check mate: either they involve an odd ratio of inputs, or they don’t in which case they amount to a normal employer.

In the UK there is a JG scheme up and running at the moment called the “Work Programme” which allocates subsidised employees to existing employers public and private. So in that that scheme allocates JG people to existing employers, the Work Programme makes sense (not that I’m suggesting the Work Programme is anywhere near perfect.).

Incidentally, some readers may want to raise the objection at this point that public sector employers like schools and hospitals can find work for hoards of unskilled youths is plain unrealistic. That’s true, but private sector JG solves that problem. Speaking of which….

Private sector JG.

A second important question that needs answering in relation to JG is whether JG people should be allocated to PRIVATE SECTOR employers.

A plausible reason for limiting JG to the PUBLIC SECTOR is that no extra DEMAND is needed in order for the output to be produced and consumed: that is, the output is simply given away. Ergo (allegedly) there’s no inflationary threat. 

However, an obvious flaw in that idea is that we’ve seen a HUGE INCREASE in the proportion of GDP allocated to the public sector (aka the “give away” sector) over the last century or two, yet there’s been no corresponding decline in unemployment. So what’s the explanation? Well we need to look in a little detail at what causes inflation (demand pull inflation to be exact).


The cause of inflation.

Inflation rises when employers cannot find enough of the ultimate source of all supply, i.e. labour (skilled labour in particular). And when people get regular jobs they normally cease looking for alternative jobs: i.e. they cease being a source of skilled labour for labour shortage areas (skilled ones in particular).

Thus if employment is at the maximum feasible level (sometimes called NAIRU) and government creates new public sector jobs, that will be inflationary NOT JUST because of the extra spending, BUT ALSO because skilled labour shortages are exacerbated.

So if JG labour is to be allocated to private sector employers, a way must be found to increase demand which DOES NOT increase demand for skilled labour. And JG ought to do that since JG labour is supplied to employers at a subsidised rate (or for free), which in turn means employers will raise the number of unskilled employees they take on relative to the number of skilled employees.

Plus (to repeat) it’s important not to reduce the efforts by JG people to find regular or unsubsidised work when they get JG work. And that can probably be achieved by having pay for JG work about the same as the pay obtainable on unemployment benefit. Indeed the UK’s Work Programme pretty much fulfils that requirement: pay is not spectacular.

Another point in favour of private sector JG is that the “post JG” employment records of those who have done private sector JG is much better than those who do JG jobs in the public sector or charity sector, according to some Swiss research. See here and here.

And a further advantage of private sector JG is that the private sector is better at employing the relatively unskilled than the public sector.


Is JG worth it?

That is, does the output obtained from JG employees exceed the administration costs of JG schemes? The administration costs of the Work Programme have been so high that it’s questionable whether JG schemes are worthwhile. Or maybe it’s the Work Programme as such that is at fault.

One possibility which might have a better cost/benefit ratio is to make JG purely voluntary (as was the case with one Swiss JG scheme): that is not incorporate any sort of Workfare element. By “Workfare element” I mean “do this job else your benefit gets cut”.

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