Friday, 30 December 2011

Malcolm Sawyer and government as employer of last resort.

Internet discussion about having government act as employer of last resort (ELR) has flared up in the last week amongst advocates of Modern Monetary Theory. So I thought I’d set out a brief summary of a paper by an opponent of ELR: Malcolm Sawyer (Prof of economics at Leeds University in the UK).

His paper is 14,000 words, so some people might prefer something a bit shorter: the summary below is about a tenth as long. This summary is bound to be inaccurate in some respects. Don’t expect perfection on this blog.

The headings below are the actual headings used in Sawyer’s paper. After each point, I’ve put a brief comment of my own.

Functional Finance and ELR.

i) The value of output from ELR jobs is inherently low, because given full employment, a range of “normal” or regular jobs would exist which are regarded as being more worthwhile than ELR jobs. I.e. given full employment a proportion of (or all ELR) jobs are abandoned, and the relevant labour moves to regular employment.

My answer to that is: “OK, but ELR jobs are still arguably better than nothing.”

ii) Sawyer then divides unemployment up into the usual categories, frictional, structural and demand deficient. Plus he makes the conventional point that where demand deficient unemployment is at a minimum (or if you like, at “NAIRU”), frictional and structural factors are the obstacle to further unemployment reduction. That is, employers cannot find the skill mix they want.

This means that if ELR is used to deal with unemployment when unemployment is a NAIRU, then ELR has a skill mix problem.

My answer to that: “True. That’s one reason I advocate offering the unemployed temporary subsidised places with EXISTING employers, rather than ELR.” See here.

Finance and Money.

i) Sawyer sets out one of the basic ELR claims that used to be put by advocates of Modern Monetary Theory (though they’ve gone quite on this point in recent years.) This is that the costs of ELR can be funded essentially by printing money, and then controlling inflation by the sale of government bonds. But as Sawyer rightly points out, the money printing idea leads to a never ending expansion in the amount of “money plus bonds” relative to GDP, which is unsustainable.

ii) Sawyer’s next point, to quote, is “…why restrict the form of government expenditure in this way?” In other words if employment can be expanded simply by printing money, why not print money and use such money to create extra regular or normal jobs?

My answer: “Good point. In other words, the whole idea that money printing can fund ELR is nonsense, as advocates of Modern Monetary Theory now seem to have conceded.”

Costs of ELR proposals.

i) Under this heading Sawyer points out that some estimates of the cost of ELR include just the cost of labour! He claims that the costs of materials, capital equipment and permanent skilled labour are likely to double the costs.

My answer: “Good point.”

ii) Sawyer then gives another reason for costs being underestimated, namely that ELR would actually draw people into the labour force.

My answer: “What of it? This involves employing those who have given up looking for work, and are thus not classified as “unemployed”. There is nothing wrong with employing members of this “hidden unemployed” category.”

Are the Jobs Available?

i) Sawyer claims that ELR jobs need to be jobs which “do not require much skill or which use skills which are widely available in the population (e.g. literacy, ability to drive). Second, the job leads to the production of useful output, but the output is not necessary in that the output is only forthcoming when aggregate demand is low and the ELR jobs are required. Even work on capital projects (which has often been used to provide jobs at times of high unemployment) would not fit the ELR requirements. Apart from logistical problems of speeding up or slowing down capital projects depending on the state of aggregate demand, much of the work on capital projects is skilled work for which wages are usually significantly above the minimum wage. Jobs such as those in education, health service, personal social services, and care would not be good candidates for ELR jobs. Such jobs may well provide valuable public services and could be expanded as part of mainline public expenditure. But they do not provide examples of jobs which can be undertaken at the basic wage and only undertaken when there is a low level of demand in the economy, generating requirements for ELR jobs.”

My answer: “Good point.”

ii) Sawyers says, “ELR jobs have to be provided virtually instantaneously, for if they are not then someone requiring an ELR job would be unemployed (in reality if not in name). If the capital equipment, material inputs, and supervisory labour for a job are not immediately forthcoming (or standing idly by), then this job cannot be "switched on" to meet ELR job requirements.” And having capital equipment and skilled labour “standing idly by” is a waste of resources.

My answer: “Good point. That’s one reason temporary subsidised jobs with existing employers are better than ELR: the capital equipment (and skilled labour) is already there.”

iii) Next, Sawyer says “an ELR job which did draw on material inputs to a significant degree would generate demand (for those materials) in the non-ELR sector.”

My answer: “Quite right. And that’s one flaw in the claim that ELR is non-inflationary. Or put another way, to create ELR jobs with any sort of respectable output, materials and capital equipment have to be withdrawn from the regular economy. The advocates of ELR never quantify this destruction of regular employment when computing the output of ELR jobs: they just sweep this problem under the carpet.”

iv) Next, Sawyer points to the fact that unemployment can be particularly high in particular geographical areas, or suddenly rise in such areas because of the closure of a local large employer. As he points out, while there may be an argument for having a SMALL proportion of the population doing ELR type work over the country as a whole, having a LARGE proportion doing same in high unemployment areas would tend to result in pointless types of work.

My answer: “Valid point.”

ELR, Underemployment, and Unemployment.

i) Sawyer claims that if the wage on ELR type work exceeds the value of the output on such work, then the relevant employees are making a “net claim” on the rest of the economy.

My answer: “Not a good criticism. The alternative is to have the relevant people unemployed, in which case their “net claim” is probably LARGER!”

ii) Training. In the para starting “To illustrate the significance of these figures…” Sawyer gets the point (not appreciated by many ERL enthusiasts) that there is clash between on the one hand the relatively fast turnover of the unemployed and presumably equally fast turnover of ELR employees, and on the other hand, the requirement that any half decent training on ELR schemes has to last for a considerable or specific period. That is, money spent on a training course that pupils abandon half way thru, is money that is largely wasted.

This deficiency has been substantiated by empirical studies done around Europe over the last twenty years which shows that straightforward subsidised work produces better results than training on ELR schemes.

iii) Next, Sawyer points to the fact that ELR employees have to be available at a moment’s notice for mainstream jobs, which would lead to inefficiencies on ELR projects.

My answer: “True, but that is not a desperately strong criticism since peripheral or relatively unskilled employees in mainstream employment also tend to leave at a moment’s notice.”

ELR, the NAIRU, and Inflation.

i) Where ELR is voluntary, its attractions for those partaking must be superior to the attractions of unemployment. Ergo the RELATIVE attractions of regular employment are reduced. To this extent, NAIRU under ELR (sometimes called NAIBER) will be higher than in the absence of ELR.

My answer: “Correct. I tumbled to this point decades ago as did the Swedish labour market economist, Calmfors, who entitled the effect “Calmfor’s Iron Law of Active Labour Market Policy. The only way round this problem is to introduce what might be called a “workfare” element into ELR: i.e. “do this job else your unemployment benefit gets cut”.



  1. My wife did her degree under Sawyer at Leeds. She describes him as appalling.

  2. Now we know where Neil Wilson gets his inspired ideas on economics from :)

  3. One problem with any ELR scheme will be the relative level of wages. If set too low, then the public sector unions will be all over it claiming that it is undercutting existing wage levels. Similarly, if used to provide employment in existing companies, then it can be used to undercut the wages of existing staff, leading to a permanent subsidy to some employers (this is already an accusation of recent "work experience" schemes).

    On the other hand, if employment was created in other areas, say infrastructure that would not otherwise be done (and is now largely outsourced), then there is not so much of a problem. One could argue that a scheme somewhat like the old YTS and YOPS schemes - but set at a higher wage and with real training thrown in - might have a lot of value.

  4. George, Re unions, if ELR work is part-time with the HOURLY rate being up to the union rate, I don’t see unions kicking up too much of a fuss. Plus part time work leaves time during the week to search for regular or mainstream jobs.

  5. I really think a very important point is being missed.

    There are many tasks necessary for the smooth functioning of society, which no one wants to do...

    Planting trees, caring for the elderly, picking up trash, maintaining rights of way including plantings.

    Regarding the Unions, an ELR scheme increases demand and increased demand increases jobs.

    Personally, I'm in favor of a national service scheme, which provides room and board and ~$400 / month. Which qualifies the graduate for the pension scheme, tests participants with the top 15% sent to university on scholarship after 2 years service, the next 10% offered enlistment in one of the uniformed services, the next 20% offered apprentice ships.

    The gain from such a scheme or ELR out weighs the effort required to organize it. AND unemployed managers can perform the organizing.


  6. Indy, The advocates of JG / WPA etc have always been attracted to “tree planting” and similar activities cos the output is given away rather than sold. The apparent advantage being that demand needn’t be raised, which on the face of it means there is no inflationary effect. But the problem is that “give away” activities have to employ factors of production (FC) other than ex-unemployed labour, i.e. they have to employ permanent skilled labour, materials, capital equipment, etc if they are to involve any semblance of efficiency. And ordering up FC to get a JG / WPA scheme going is inflationary.

    So JG / WPA is in a bind. If it employs little FC it is condemned to inefficiency. But if it employs a lot of FC, it becomes almost indistinguishable from a normal or regular employer.

    The problem with national service is that those concerned are made PERMANENTLY unavailable to fill vacancies in the regular labour market. The effect of that is inflationary.

  7. Ralph,interesting post. I'm interested by your idea of subsidised temporary jobs with existing employers. Isn't this just a JG by another name?

    If you take the UK Labour Party's Future Jobs Fund as an example, (a very watered down JG for young people), the government wasn't actually the employer. Grants were awarded to local government and third sector orgs who then created employment opportunities. These were jobs with existing employers.

    There is huge latent potential in the third sector to provide meaningful employment opportunities. In most cases the supervisory structure already exists. The work would be of social benefit, not necessarily profit generating, which would reduce the risk of competition for resources with the private sector.

    I would be more skeptical about subsidising jobs in the private sector (as the current gvt is proposing to do in a very weak way) as I don't see how you could remove the incentive for firms to replace their existing demand for staff with subsidised workers (particularly in unskilled positions).

  8. Ben, I’ll take your paragraphs in turn.

    1. Re “Isn't this just a JG by another name?”, my answer is “no”, in that about 95% of JG advocates see it as being very similar to the WPA that operated in the US in the 1930s: that is, it involves SPECIALLY SET UP employers as distinct from using EXISTING employers.

    2 & 3. Having local authorities and other non-profits take on JG people (along the lines of the Future Jobs Fund) certainly broadens the range of employers involved. But remember that the unemployed tend to be relatively unskilled plus the private sector is better at employing the relatively unskilled than the public sector. So you discard an awful lot of potential jobs if you rule out the private sector.

    4. Re how to stop private sector employers displacing existing staff with subsidised staff, ALL employment subsidies involve SOME displacement. But the important question is whether the subsidy facilitates an AGGREGATE increase in employment and GDP. To take an over simple illustration, if you have X subsidised people, and the subsidy increases aggregate employment by X, then there is no displacement in the aggregate, i.e. at the macro-economic level.

    So what’s the macro-economic theory is behind JG / WPA or the multitude of variations on the idea? I set out very briefly the macro theory behind my preferred variation here:

    For a fuller explanation, see here:

    Also remember that public sector employers are under much the same cost cutting / output maximising pressures as private sector employers. The San Francisco city authorities recently awarded the contract to replace a large bridge to a Chinese firm employing Chinese labour. Those authorities are obviously not too concerned about creating jobs for Americans.

  9. Personally, after much thought, I believe the most inefficient use of labor and capital is the employment and support of neo-classical economists.

    All the great civilizations of history supported the arts and music. Employment of last resort should include funding for artists.

    Most economists fail to treat monetary functions as part of a larger social system. They specifically externalize social costs of widespread unemployment, for example.

    Their assertion that private enterprise makes the most efficient use of labor is bogus. I cannot think of a greater waste of labor than telemarketers selling bogus extended warranties, or a greater use of labor than supporting musicians, dancers, actors, and other artists.

    Our national forests need lots of attention. One use for labor is thinning those forests, vermin control, and planting trees.

    Our cities need community policing. One use for labor is walking beats and providing police services in neighborhoods.

    Our transportation system needs overhaul. One use for labor is re tracking 66,000 miles of mainline rail, double tracking same, and tracking 88,000 miles of secondary rail.

    These are but a few of the many uses to which the current labor pool can be engaged.

  10. Sawyer's assertions regarding ELR jobs is bogus.

    There is no reason ELR cannot offer a wide range of career opportunities. The major difference is ELR jobs offer a fraction of what the private sector offers.

    Several concrete examples:

    ELR physicians. Those in private practice get $150,000. Those in ELR public health service positions get $50,000. They can do free clinics, immunization programs, homeless outreach. Physicians who graduated from med school and cannot get residencies can take these jobs and after 2 years be considered as having completed a year in a GP residency, and eligible in 4 states for licensing. They also get the benefit of 20% forgiveness of their student debt for each year in the PHS.

    Teachers: Those made redundant by state layoffs can join the Domestic Teaching Corps. Regular teachers get $75,000. DTC members Get $25,000, plus payment of their mortgages. They work in GED programs, adult education and vocational training programs. Places normal teachers don't go.

    Police and Fire: Those made redundant by state layoffs can join the Gendemarie. They are posted to communities other than their own. They live in barracks, do community policing, investigate Police Riots, and other police violations of Civil Rights. Regular police get $60,000 Gendarmes get $20,000 plus room and board.

    Tradesmen: Those made redundant by layoffs in their trades have the option to join the Army Corps of Engineers. Depending upon skill level, they will be a Non-commissioned officer or a Warrant Officer. They get pay and allowances commensurate with those grades plus room and board. They construct public works on an emergency basis, ie flood control, disaster relief, things of an emergency nature, which must be responded to faster than the contracting process allows.

    I can go on and on.... the important thing is to realize that there are many social needs ELR employees can do that fill gaps in the existing system. Of course, once the economy improves these people will return to better paying jobs, for that is the way it should be.


  11. Ralph, I have had my fill of economists prattling about the inflationary effects of employing people.

    I agree with Bill Mitchell.... in an era of Debt Deflation, with nearly 25% of the work force idled... deflationary forces out weigh inflationary tendencies.

    The most important thing is to use the program to employ people and stop the very real social ills prolonged unemployment leads to: suicide, crime, divorce, homelessness. Your argument regarding increasing use of resources misses the point.. currently there is insufficient demand, increasing resource use is exactly what is needed. That means increased demand for goods from the private sector. In the case of a Civilian Conservation Corps this means drill sergeants from the army, lumber and fasteners, or tents for housing, food for meals, cooking gas, shovels, mattocks, tree seedlings, pruning saws, gloves, shoes, trousers, shirts, socks, hardhats, etc.

    Were we to reinstate a national service program and induct all citizens upon exit from school regardless of age, until the age of 24, the cost of the program covering 12.5 million people would be $100 billion. If we tested them at age 18, selected out the top 10% for full scholarship at university 500,000/yr the next 15% for induction into the 5 uniformed services 750,000/yr, the next 20% for apprentice/technician training programs 1million / year we'd still have 55% of them for factory work training and farm labor. If the program came with qualification for social security (40 quarters) with immediate guaranteed income at 33% of median household income, this replacing unemployment, disability, welfare, we could offer a social security/pension program for 11% of wages and this program could offer 50% of average household income to those with 80 quarters 67% of AHS for those with 120 quarters, and 75% of AHS for those with 160 quarters (40 years) of covered employment. We could get rid of most of the failing pension schemes, eliminate virtually all of the rent seeking associated with managing private pensions, and eliminate most of the social costs of the current system.

  12. If we rubbished the current private medical system in the US infavor of a single payer system ala France, we could halve medical costs. If we learned from the Chinese, and put "barefoot" doctors in every community, we could change the focus of medicine from fixing patients to preventing disease.

    If we outlawed chemicals in our food, smoking meat by chemical injection, adulturated dairy products, and most of the rest of the stuff the US consumer eats, in favor of traditionally prepared foods, we'd eliminate to a great extent adult onset diabetes, and other ills.

    It's time to incorporate the experience of Japan in dealing with a similar crisis, and the experience of Britain, Germany, and the USA in dealing with the Great Depression. Not a single economist to my knowledge, complained about the inflationary effects of building the M-1 Garand Rifle in sufficient quantities to equip an army of 12 million, nor to build 55,000 fighter aircraft, not to mention the tanks, half tracks, jeeps, gliders, uniforms and other sundry items necessary to conduct the war. But economists seem to forget that it was this employment which permitted the citizens of those countries to pay off their debts and reduce the private debt / GDP ratio to <50%, thus paving the way for the prolonged economic growth which followed.

    Similarly, economists seem to live in nirvana, regarding natural resources. I take them and the CPAs to task for valuing resources at the cost of extraction, period, and for assuming resources are limitless. It's about time you began to incorporate the costs of BAU oil dependence vs retooling to use renewables for energy. Please don't prattle on about the intermittency of renewables, the key there is storage, and storage means that electricity will cost more than that produced from a coal plant at the mouth of a mine. But if you incorporated the environmental and social costs of that coal into the cost of the power, and you eliminated the subsidies hydrocarbons currently get, the equation would be far different.


  13. Regarding your national service quip.

    The young people are currently in the streets, or haven't you noticed? They are there because they have huge student debts gained in the process of tertiary education, on which they cannot default. These are the nation's future. From my investigations, once unemployment in this age group exceeds 50% for a prolonged period, revolution follows.

    Haven't you noticed that labor's share of the economic pie shrank far below the 60% norm of the 60's, such that nominal wages lay stagnant for the past 30 years, while the Fed pursued inflationary policies which halved purchasing power over that period.

    So, you miss the point, national service is for the express purpose of pulling this normally disadvantaged group out of the labor pool, for the express purpose of giving them education and training to succeed, and providing social services otherwise not available, and for the express purpose of eliminating a labor surplus so labor can bargain and keep it's share of GDP.

    If this means CEOs go back to earning < 39 X the lowest paid worker at their company rather than 900 X, I'd guess the deflationary effect of reduced CEO income would be balanced by the inflationary effect of increased worker income.

    And, even if you are right, at least while all of us are busy hauling our dollar bills to the baker's for a loaf of bread, at least we'll have a place to hang out between 9-5, where the coffee is free, instead of having to live under a bridge, and if we're currently underwater on our mortgage, perhaps the price of the house might rise sufficiently for us to sell the damn thing and get out of debt.

    And if we're a city dependent upon property taxes to fund police, fire, and schools, those might rise sufficiently to enable us to pay our employees, even with script containing lots of zeroes.


  14. "the whole idea that money printing can fund ELR is nonsense, as advocates of Modern Monetary Theory now seem to have conceded.”

    Phew. That's good news :)

    Do you have a reference for that?

    "That’s one reason I advocate offering the unemployed temporary subsidised places with EXISTING employers, rather than ELR."

    That just amounts to corporate welfare.

    “do this job else your unemployment benefit gets cut”

    That should go without saying. Obviously.

    1. Re “Do you have any reference for that”, certainly around 15 years ago Randall Wray and others were advocating that ELR be funded by money printing, and certainly Sawyer did a good demolition of that idea. I’m pretty sure this is the paper of Sawyer’s I’m thinking of:

      But if you Google Sawyer and ELR you’ll find plenty of material from that period. In contrast, Wray’ latest offering on JG/ELR is as useless as he older offerings, but he doesn’t stress money printing any longer far as I can see (though admittedly I only skimmed thru it). See:

      Re “corporate welfare” frankly JG is not a big money spinner for private sector employers. A substantial proportion of employers in the UK cannot be bothered with the Employment Programme which is nearest we have to JG in the UK at present. What every employer really wants is skilled experienced labour. In contrast, unskilled people are two and six a dozen.


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