Should JG people be allocated to existing employers?

JG is short for “Job Guarantee”: that’s the idea that government can create an almost infinite number of relatively simple jobs for the unemployed to do pending the appearance of suitable regular jobs.

I said here that I’d examine the question as to whether JG employee should be allocated to EXISTING employers or to SPECIALLY SET UP employers as per the WPA in the US in the 1930s or as per the “Job Creation Scheme” in the UK about 30 years ago.

There is actually a very simple reason for favouring existing employers. And although the reason is simple, it seems to be beyond the comprehension of 95% of those discussing JG. Anyway, the reason is as follows.

If a JG scheme consists entirely of the recently unemployed, i.e. no other factors of production (OFP) like capital equipment, materials or permanent skilled labour are employed, then the scheme will be disastrously inefficient. On the other hand, the more OFP is employed, the more JG scheme becomes the same thing as a regular employer. Indeed, some WPA construction projects in the US in the 1930s were near indistinguishable from regular building firms or contractors: so much so that many objections came from regular contractors to the effect that they faced unfair competition.

So…. why not just abandon the whole “specially set up employer” idea: i.e. subsidise the unemployed into work with existing employers? In that case, the OFP to relatively unskilled employee ratio will be about normal, thus output from the unskilled will be about normal.

Now that wasn’t difficult was it? But the bizarre thing is no one seems to understand the argument set out in the above two or three paragraphs. (Incidentally I’m planning to do a post in a day or two about several phenomenally simple ideas which half the economics profession don’t understand.) But that’s by the buy. Let’s continue…..

The above argument is of course an argument for allocating JG people to existing PUBLIC SECTOR employers because JG schemes like the WPA involved GIVING AWAY output, rather than selling output, which is what the private sector normally does. An example of the latter is the Work Programme currently in operation in the UK – a programme which is badly designed and involves far too much bureaucracy.

So, what are the arguments for JG schemes where output is sold (much the same as asking “what are the arguments for private sector JG?”).

Private employers.

On the face of it there is an obvious argument against involving the private sector, which is that private sector output is SOLD, thus an increase in private sector output requires an increase in demand. And assuming unemployment is at NAIRU when JG is implemented, then an increase in demand is not permissible, else excess inflation will ensue. (Incidentally I’m using the acronym “NAIRU” as per most dictionaries of economics, that is to refer to the idea that there is a relationship between inflation and unemployment and that at some level of employment (absent unconventional types of employment like JG) inflation goes thru the roof. That is, I am not using the term NAIRU in the bizarre sense as used by Bill Mitchell which is something like “a wicked plot by neo-cons to trample on the working classes”).

Now JG (in both public and private sectors) has NAIRU reducing characteristics, which to a greater or lesser extent make the latter increase in demand permissible. First, there is the workfare element. That is, if the unemployed are told, “do this subsidised job else you lose your benefits”, that reduces NAIRU. Second, there is the hysteresis reducing effect. And a third effect as follows.

Given rising demand and falling unemployment, the unemployed become progressively less suited for vacancies: that’s amongst other reasons because employers inevitably hire the best labour first, and leave the less talented to stew on the dole queue. And when the quality of dole queue labour falls too far, employers tend to resort to bidding up the price of “already employed” labour, and inflation ensues. However, if that low quality dole queue labour is subsidised into work, employers will tend to hire that labour, rather than bid up the price of already employed labour, which will further reduce NAIRU.

Preventing abuse of the system.

There is an obvious problem involved in subsidising unemployed labour into work with existing employers (public or private), namely that any employer welcomes an artificially cheap product. That is: how do we prevent employers using the JG subsidy to employ VIABLE employees, rather than employees who are genuinely not well too well suited to their subsidised jobs?

Well it’s not too difficult: just call the employer’s bluff after any given JG employee has been with a given employer for a month or two or three. That is, say to the employer: “you’ve had this employee long enough – you’ve now got to decide whether the employee is viable without the subsidy, else the employee leaves”. Faced with that choice, the employer will either keep the employee WITHOUT the subsidy if the employer thinks the employee is viable or the employer will let the employee go.

Of course the latter idea would lead to relatively quick turnover of JG employees. But that’s not wholly undesirable: where someone cannot find a job that is well suited to their skills and experience, it’s a positively GOOD IDEA for them to try out various new forms of employment with a view to seeing what suits them.

The Free Market.

And a final clinching argument for the latter sort of system is that it mimicks the free market. That is, unemployment benefit is not a free market phenomenon, and absent UB, the unemployed to a greater extent than is currently the case would take temporary, low paid and relatively UNSUITABLE jobs pending the appearance of something better.

Encouraging low output.

A possible criticism of the above system is that it encourages unproductive work. That is, shouldn’t employers be forced (e.g. via minimum wage laws) to extract some minimum level of output from employees?

My answer to that is basically “yes”. That is, I favour minimum wage laws for about 95% of employees. However, what we’re dealing with here is people who TEMPORARILY cannot find suitable work. Their output (in both public and private sectors) will inevitably be pretty low. That is, it’s a mathematical certainty that in any labour market there will always be people for whom there just aren’t any productive jobs available. Either those people remain unemployed or they do a relatively unproductive job.

There is perhaps a good argument for their remaining unemployed for the first month or two of unemployment so that they can look for a new and SUITABLE job. But thereafter, there are good arguments for their doing a temporary and relatively unproductive “work experience” type job.