Saturday, 28 April 2018

Job Guarantee buffer stock nonsense.

A buffer stock is a stock of some commodity, e.g. crude oil or wheat, which is held with a view to ironing out fluctuations in the price of the commodity. For example when the market price rises too fast, some of the stock is sold into the market so as to temper the price rise.

One of the central ideas behind JG, at least as claimed by Bill Mitchell and others, is that the unemployed and those doing JG jobs act as a buffer stock, and that allegedly explains why JG works. E.g. see Bill Mitchell’s series of articles “Buffer stocks and price stability” parts 1-5.

OK let’s examine the “buffer stock” idea, and we’ll start with rising rather than falling prices.

When aggregate demand rises, demand for labour also rises and that clearly might result in the price of labour rising, and hence in general inflation. However, given a “buffer stock” of unemployed individuals, clearly some of those people will be able to fill vacancies as they arise, which of course prevents the price of labour rising. So far so good: the buffer stock analogy seems to work.

But what happens when the stock of people who are unemployed shrinks too far? Well inflation often takes off when there is still an extremely large buffer stock or stock of unemployed individuals. To be more exact inflation can take off when that stock equates to roughly 5% of the workforce. I.e. even though there may be a million or more people in the much vaunted “unemployment buffer stock” in a country with the population of the UK, they do not necessarily temper wage or price rises.

And the reason for that is  not too difficult: it’s that as unemployment falls, the chances of an employer finding the sort of labour required (particularly skilled labour) on each local labour market shrinks. But that’s in stark contrast to a buffer stock of wheat or crude oil: in the case of the latter, as long as is SOME stock left, it can be sold to temper price rises.

So the buffer stock analogy would seem to be rather a long way from  being a perfect analogy. But let’s move on to falling prices and wages.

Falling prices and wages.

If there is a gross excess supply of labour, i.e. a larger than normal number of people who are unemployed, then given a perfectly functioning free market, the price of labour would fall. But the price of labour just doesn’t fall to any great extent: indeed as Keynes famously said, “Wages are sticky downwards.” So why is that?

Well according to the buffer stock theory, it’s because government buys up surplus labour. In the case of the unemployment buffer stock, government offers unemployment benefit to the unemployed. And in the case of JG, government offers temporary subsidised jobs.

Only problem there is that while clearly the availability of unemployment benefit PARTIALLY explains the failure of wages to fall in recessions, the pay offered via unemployment benefit is pretty miserable in most countries. So that “benefit” explanation is a bit feeble. And in fact research by Truman Bewley indicates that the main reason wages do not fall in recessions is the extreme bad will created between employer and employee if an employer DOES cut wages: it is simply not worthwhile for an employer to try to cut wages in a significant proportion of cases. Churchill’s attempt to cut coal miners’ wages in the 1920s is an example: it resulted in a year long strike.

So once again, the buffer stock idea is a bit of an irrelevance.

So if the buffer stock idea doesn’t explain why JG might work, what is the explanation? Or to put it more precisely, how can JG cut unemployment even when unemployment is as low as it is supposed to be able to go before inflation kicks in in a serious way? (And incidentally, JG is not the best solution for unemployment when unemployment is ABOVE the latter level: a straight rise in demand is the best solution, though clearly JG can help.)

Well one reason inflation rises if demand is boosted when unemployment is at the “inflation tipping point” is the reduced aggregate labour  supply that occurs as a result: that is, if unemployment is at the tipping point and demand rises, then the number of individuals looking for work declines. That is, the supply of labour to firms who still have vacancies declines, which in turn obviously induces employers to raise wages (or give in more easily to union demand) with a view to attracting more labour. Inflation is exacerbated.

Of course that’s not to say that some of those IN WORK are not seeking work in the sense of looking out for better jobs. But certainly, when demand rises and unemployment falls, the number of those who are what might be called “desperate for work” declines.

However, if JG jobs are created where the pay is not too generous, and as a result, those concerned seek regular jobs with the same effort as when unemployed, then JG jobs will not exacerbate inflation  - at least not as a result of the above labour supply point.

So that’s one explanation as to why JG can work. There are others,  which I’ve set out elsewhere, but that’ll do for now.

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