Monday, 16 January 2012

Government as employer of last resort.

This is a summary of the arguments for allocating ELR people to EXISTING employers rather than to specially set up schemes or “employers” as was the case with the WPA in the 1930s.

The “factors of production” quandry.

If an ELR scheme employs little permanent skilled labour, capital equipment or materials, that will keep costs down, but it will tend to result in inefficiency. (See any basic introductory economics text book on the optimum combination of different factors of production.)

On the other hand, if an ELR scheme involves more normal ratios of the above factors of production, the scheme becomes indistinguishable from a normal or regular employer: in effect, ELR people are subsidised into work with regular employers.

So ELR employees might as well be subsidised into work with EXISTING regular employers (along the lines of CETA).

At NAIRU, ordering up other factors is inflationary.

The above argument is backed by another argument, as follows. If unemployment is above NAIRU (or the “natural level” or the “inflation barrier” level, or whatever you call it) the best cure for unemployment is a straight rise in demand. Therefor the niche for ELR is in dealing with “at or below NAIRU” unemployment. But in that scenario you cannot order up the above “other factors of production” to supply an ELR scheme because the regular economy is already at capacity – the result would be inflation. Thus allocating ELR people to specially set up schemes along the lines of the WPA is in a logical check mate. It’s caught between a rock and a hard place.

Anti-fraud measures.

But if ELR people ARE allocated to existing employers, as suggested above there is a problem, namely how to dissuade employers from using the subsidised labour to displace regular labour. The answer is to call the employer’s bluff: that is, place a time limit on how long a ELR person can stay with a given employer (as was done – not very well in my opinion – under CETA).

The time limit could be a SPECIFIC time limit, but even better would be to allow public employment agencies to remove ELR labour from any given employer randomly, or when such agencies think they’ve spotted an ELR vacancy with some other employer where the ELR employee would be more productive. That way, the employer is forced to claim the ELR subsidy only in respect of the employer’s LEAST productive employees: the employees which the employer does not mind losing. (No employer wants to lose PRODUCTIVE employees).

Employers could of course claim the subsidy in respect of a PRODUCTIVE employee and then on hearing that that the employee was about to be removed, cease claiming the subsidy. But that ruse is easily dealt with: either remove the employee anyway, or allow the employer to keep the employee, but make the employer repay the previous month or two’s worth of subsidy money.

The latter system WOULD result in a relatively fast turnover of ELR people, but that’s arguably quite beneficial. The unemployed are those who cannot find a suitable job. They are people who by definition in many cases are going to have to acquire new skills and find a new work environment. Thus giving them experience of a variety of new and different work environments would help them decide which to go for. Many millionaires started their careers with a series of dead end jobs.

The macroeconomics.

Does the macroeconomics of the above system stand inspection? I think so….

As unemployment falls, the marginal product of labour falls: that is the unemployed become increasingly unsuited to vacancies – until the point is reached where too many employers, rather than take labour from the dole queue, spend increasing amounts on advertising for staff. And that in effect means poaching staff from other firms, which bids up the price of labour, which equals inflation.

Thus the inflation / unemployment trade-off is improved if employers can be persuaded to take on relatively unsuitable employees. That’s employees who are not TOTALLY UNPRODUCITVE, but employees who employers would not take on but for the ELR subsidy.

“Existing employer ELR” = free market.

Note that the above system is similar to a totally free and unregulated labour market (a scenario which in theory involves zero unemployment). A totally free labour market involves no minimum wage laws, no state sponsored unemployment insurance, etc. And in this scenario, the unemployed – to a greater extent than is currently the case – would take temporary and relatively low paid unproductive jobs pending the appearance of something better.

In short, the above system (if it works) would gain the advantages of a totally free labour market without the social costs.

Private sector ELR more inflationary than public sector?

It is commonly assumed that public sector ELR requires no increase in demand, thus it must be less inflationary than private sector ELR. Not true.

If the idea set out above under the heading “The Macroeconomics” works to perfection, the only net effect of introducing “existing employer ELR” is to induce employers (public and private) to marginally expand their workforces by taking on a few more less skilled people, while NOT INDUCING employers to order up more capital equipment, materials, etc.

In that case, neither public sector ELR nor private sector ELR has any inflationary effect.

Alternatively, it could be that employers ARE INDUCED to order up some more capital equipment and materials, and the effect would certainly be inflationary. But let’s have a fair comparison between public and private sectors here: let’s compare a public and private sector employer where the RATIOS of different factors of production employed are the same. On that assumption, there is no reason to suppose the private sector employer will order up MORE CAPITAL EQUIPMENT etc. than the public sector employer.

Thus there is no difference between the two sectors, inflation-wise.

Bureaucratic costs.

But having said all that, as Cullen Roche and John Carney have correctly suggested recently, the bureaucratic costs of any ELR system could exceed the benefits.

P.S. The above system probably occurs to some extent anyway in that as unemployment rises, there is an increased tendency to work on the black market while continuing to claim unemployment benefit.


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