Wednesday, 28 March 2018

Muddled thinking on the Job Guarantee.

Job Guarantee (JG) is the idea that government can create a near limitless number of jobs for the unemployed. The idea goes back a very long way: Pericles in Ancient Greece implemented a JG scheme of a sort 2,600 years ago.

Two or three articles have appeared recently about JG which contain several errors. I.e. advocates of JG are full of enthusiasm, but less full of carefully thought out ideas as to how JG can best be orgainized. That helps explain why numerous JG type schemes have been set up in the past, and then abandoned within a few years when it became clear they were an expensive farce.

One of the above mentioned papers is entitled “Guaranteed Jobs through a public service employment program” and is published by the Levy Institute. The authors are mainly academics at the University of Missouri–Kansas City.

The first mistake is that the authors advocate (p.2) a wage for JG work of $15 an hour plus various fringe benefits like Medicare: about double the existing US minimum wage. But the minimum wage for the rest of the country is not raised by the same amount: in fact the authors say nothing about it being raised at all. And the big idea is that employees will quit regular jobs for JG jobs unless regular employers pay the new $15 minimum. As the authors say, “…this becomes the effective minimum wage across the country—a wage other employers will have to meet..”

Now it’s not very clever to induce people to quit regular and relatively productive jobs for JG jobs which are inevitably LESS productive! For each person doing that, GDP is reduced!

Incidentally the reason for thinking JG jobs are relatively unproductive is that those jobs would not exist but for the “special measure” or “special inducement” that is JG: that is, employers (both public and private) create the most productive jobs first, so to speak, and only create less productive jobs if special measures like JG or some sort of employment subsidy makes it worthwhile for them. For example the people of any country exploit its best agricultural land first, and only use poorer land if they absolutely have to.

To summarize, if one of the objectives is to raise the minimum wage for the country as a whole to $15 an hour, why not do just that: raise the minimum wage to $15 an hour for every employer!!

Public versus private sectors.

Next, on page 3, the authors advocate limiting JG jobs to the public sector, their reason being:  “…we would not allow for-profit firms to participate—as they might try to replace part of their workforce with federally paid or subsidized workers.”

Well the first problem there is that public sector employers are under much the same cost cutting and output maximising pressures as private sector employers. Thus the temptation to replace regular employees with subsidised JG employees exists in both sectors.

Another problem is that the public sector employs relatively skilled people compared to the private sector, and as the Levy authors rightly say, the unemployed tend to be unskilled. As George Johnson writing 40 years ago in a Brookings Institution work* put it in relation to the above two problems, “The problem with using state and local government for jobs programs is that….it is an extremely skill intensive sector. Even a significant relaxation of hiring standards would not make the jobs program based on grants to state and local government equivalent to a subsidy on low-wage labour. The incentive of the local government manager is to use the grants to hire persons he believes will be the most productive given his needs (and probably whom he would have hired anyway).”

Indeed, the latter “would have hired anyway” problem was a big problem with the Comprehensive Employment and Training Act set up in 1973, according to Helen Ginsburg**.

Moreover, the reality is that the above “replacement” problem occurs ten thousand times a day even without JG: men constantly “replace” women and vice-verse. Young people constantly ”replace” old people and vice versa (older workers actually did very well in the recent recession compared to young people).

A certain amount of “replacement” is inevitable. The basic justification for some sort of JG scheme is that the unemployed are made available to employers at a realistic price, i.e. very little, or even for nothing. That’s an improvement (at least in theory) on the existing situation, where if someone is worth less than the minimum wage / union wage etc they aren’t employed at all.

The price can never be tailored EXACTLY to the actual worth of each employee, thus there is bound to be some replacement. But JG is nevertheless a possible improvement on the existing system.

Also, if the time for which a JG employee stays with a given employer is strictly limited (perhaps to a couple of months or so), that will tend to induce the employer to claim the JG employment subsidy only in respect of people who are of peripheral use to the employer. Put another way, employers are bothered about losing VALUABLE employees, but they are not bothered about losing relatively unproductive employees, e.g. JG employees.

Temporary subsidized private sector jobs bring benefits.

And apart from that, there are further reasons for allowing private sector employers to make use of JG people: one is that the empirical evidence shows that those who have done temporary subsidized work of the JG type have a better post JG employment record than those who have done JG jobs in the public sector or with charities.

Undercutting existing employers.

Next, (p.3 top of 2nd column) the Levy authors say they envisage limiting the amount of construction work involved in JG because that might undercut existing private sector contractors. Well now, exactly the same applies to EVERY sector doesn’t it? If a JG scheme runs a cafĂ© or does tree planting (always a favorite with JG advocates) that is likely to undercut existing cafes and firms which plant trees.

The authors do however give a reason for limiting construction work on JG schemes: the Davis-Bacon Act. But that’s a specifically US problem and a very illogical one. That is, where’s the logic in stopping JG people undercutting CONSTRUCTION workers, but allowing them to undercut OTHER workers?

The “existing employer” versus “special scheme” question.

Next, there is an absolutely fundamental question relating to JG, which the authors fail to address, and already alluded to above,  namely should JG people be subsidised into work with existing employers (public and/or private), or should specially set up schemes be created to employ JG people (as was the case with the WPA, at least to some extent).

Well the big problem with specially set up schemes, is that it results in a high concentration of one type of labour (mainly unskilled labour). That is inevitably inefficient, for reasons set out in the introductory economics text books. Put another way, an unskilled person is much more productive working alongside SKILLED people and decent amounts of capital equipment, than working alongside other unskilled people.

Moreover, the latter “existing employer versus special scheme” point provides the answer to the above Davis-Bacon quandary. That is, if JG people are for the most part subsidised into work with existing employers, and classified as “apprentices in need of an employment subsidy” or something like that, employers and unions in the construction trade would probably not object. I.e. if employers and unions in the construction industry see that every other industry is being treated in exactly the same way, they ought to have little reason to complain.

Certainly that would be a very different set up to what happened under the WPA, where what were in effect entirely new contracting firms were set up, employing just WPA people (many of them fully skilled bricklayers, plumbers, etc) which were clearly in competition with normal  contractors. That gave rise to justifiable complaints from the latter contractors.

Another JG proposal.

Another lot of JG type proposals comes in a “Centre on Budget and Policy Priorities” article. Like the above Levy article, this lot advocate a wage, including non-wage benefits, well above the existing minimum wage.

They also claim that, “Workers would have the opportunity to advance within the program, rising from the minimum wage in the program to an estimated mean salary of $32,500.” Well the problem there is that JG people are supposed to be available at a moment’s notice for suitable regular vacancies when the latter appear. I.e. JG work is essentially TEMPORARY in nature. That rather clashes with “advancing within the program.”

Note that the nearer JG people are to becoming PERMANENT employees, the less the effect of JG: someone who is permanently wedded to a job is not available for other vacancies. That is, aggregate labor supply to the regular jobs market is reduced, which is inflationary, which means demand has to be reduced, which destroys regular jobs, assuming unemployment is already as low as it can go without exacerbating inflation.

That explains why there has been a HUGE increase in public sector employment over the last century, but no apparent effect on unemployment. That is, simply setting up public sector PERMANENT jobs (whether they’re called “JG jobs” or not) has no effect on unemployment.

Centre for American Progress.

A third article on JG appears in “The Nation.”  This article, in contrast to the above Levy article, advocates a fair amount of construction or infrastructure type work. It’s time for the advocates of JG to get that point sorted out, isn't it?

This article also advocates apprenticeships. Well more training and apprenticeships are fine, but (to repeat) they don’t have much to do with JG. To repeat, JG people are supposed to be available for regular vacancies as soon as the latter appear. If someone is in full time training or a full time apprenticeship, then they’re not available for the latter sort of vacancy.

The CAP article, like the Levy article, also advocates a $15 an hour wage. To repeat, DOUBLING the minimum wage is a big step to take and needs far more thinking about than the Levy or the CAP articles engage in.

Conclusion. There is too much poorly thought out material out there when it comes to JG.

** Helen Ginsburg, “Full Employment and Public Policy: The United States and Sweden”, Ch2, p.51.

* G.E.Johnson, ‘Structural Unemployment Consequences of Job Creation Policies’ , ‘Creating Jobs’, editor: J.L.Palmer, published by the Brookings Institution, 1978.

No comments:

Post a Comment

Post a comment.