Tuesday 3 January 2012

Employer of Last Resort, buffer stocks and price anchors.




The folk who advocate having government as employer of last resort (ELR) often claim that ELR employees form a “buffer stock”, which works in the same way as the physical buffer stocks that governments sometimes maintain to iron out fluctuations in the price of physical commodities.

The alternative to ELR is unemployment, and of course both the unemployed and ELR employees act as a buffer stock – in that the buffer stock analogy has any substance, which I don’t think it does.

As regards preventing sudden FALLS in the price of labour, does the above so called buffer stock achieve this? The answer is “no”, because it’s very difficult to get the price of labour to fall: as Keynes rightly pointed out, “wages are sticky downwards”.

As regards INCREASES in the price of labour, does the alleged buffer stock prevent an excess rise in wages given excess aggregate demand? Nope.

In fact wages and prices can rise much faster than is acceptable long before the so called buffer stock runs out. Which makes the so called buffer stock very different from conventional buffer stocks. That is, as long as government has a finite stock of some commodity in its buffer stock, it can sell that stock and ameliorating price increases. The same does not apply to the ELR or unemployed so called buffer stock.

Thus the whole buffer stock analogy is flawed.


Are ELR employees a better buffer stock than the unemployed?

Well there is bound to be a FINITE difference between the two, but I doubt the difference is significant.

For example it can be argued that ELR employees are more employable than the unemployed because the former have their work habits maintained, plus they may learn or at least maintain skills while doing ELR work. But there are flaws in that idea.

First, as regards the idea that the unemployed lose or partially lose the ability to turn up to work on time because of a year or two’s absence from formal employment, one has to wonder how teenagers manage to enter the labour market, given that they have never in their lives had to turn up day after day, 50 weeks a year at some place of work. Same goes for women who take fifteen years off work to raise kids, and then re-enter the labour market.

However, the evidence is mixed here. Webster claims the unemployed are not “scarred” by their period in unemployment. Others claim there is a scarring effect.

Second, it is questionable on the face of it whether the sorts of activities that ELR typically involves are a good preparation for regular jobs. At worst, ELR consists of street sweeping and leaf raking, which are clearly not a good preparation for regular work. And indeed, this “on the face of it” conclusion is backed by some evidence.

A study of Swiss temporary subsidised work found that temporary subsidised jobs with EXISTING private sector employers DID improve subsequent employment histories for those involved. In contrast, the subsequent employment histories of those doing the above typical ELR jobs was ACTUALLY IMPAIRED by such employment. (Note, incidentally, that I’ve advocated temporary subsidised jobs with EXISTING employers, public and private, on this blog over the last few days.)

Third, the chance of skills being maintained while doing ELR work is not good. This is because people are unemployed PRECISLY BECAUSE there is a surplus of their particular type of labour or their skill in their neighbourhood.

I.e. if there is an excess supply of plumbers in town X, an ELR scheme will be hard pressed to find large amounts of plumbing work in the town that really needs doing.

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4 comments:

  1. "As regards preventing sudden FALLS in the price of labour, does the above so called buffer stock achieve this? The answer is “no”, because it’s very difficult to get the price of labour to fall: as Keynes rightly pointed out, “wages are sticky downwards”."

    - Could you expand on this; I'm a little confused by it. If the govt pays a set wage, how can wages fall below that? And when a group of people loss employment. don't their wages fall to zero and the average wage across employed/unemployed fall even though those who remain employed keep their wages?

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  2. Also, I'm wondering about this -

    "This is because people are unemployed PRECISLY BECAUSE there is a surplus of their particular type of labour or their skill in their neighbourhood."
    - are you suggesting that the no longer needed labor/skills are a result that production technology has moved on and made them obsolete? I was under the impression that there is a generalized lost of demand due to a few decades of stagnant wages temporarily relieved by ill-fated debt accumulation that has now made the situation much worst. Perhaps if we had more employed plumbers with demands for more goods and services, those providing said services would be in more demand of plumbers?
    I do think you are the right track for implementation through existing employers - I can think of many skill sets of various laid-off labor (waitresses to prison guards) that would be highly useful to teachers in currently over-crowded, if not dangerous, classrooms. Perhaps a little more imagination would open many more possibilities particularly if one moves away from a centralized administration model to a much more decentralized one of block grants to school boards and other local decision making as to what is most needed in a community? For example, I’m sure millions of elderly and disabled and their stressed families in thousands of communities would greatly appreciate a wide array of ‘currently-surplus’ skill sets applied to be a supporting companion to help them get through just one more day. Imagine that?

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  3. Bob,

    Re “sticky downwards” etc, what I was trying to say was that wages (in money terms) normally only move one way: upwards. E.g. an attempt was made to cut coal miners’ wages in Britain in the 1920s and the result was a year long strike. And in the Euro periphery at the moment, they are trying to cut wages, but it tends to lead to riots, strikes, etc. So the so called “buffer stocks” are pretty irrelevant here.

    Re plumbers in town X, I wasn’t trying to suggest surpluses and shortages of particular skills in particular locations are down to any particular factors. But since you ask, I’d guess there are normally several factors involved: e.g. random movements of people round the country which are unrelated to work (e.g. family reasons, changes in technology, the expansion or contraction of a large employer in a small town, etc etc.

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  4. Ralph,

    The stocks in these "buffers" I believe typically build up until they spoil or are given away.

    Reagan famously did this with Cheese and Butter back in the 80's.

    Resp,

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