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Full Employment via a Job Guarantee

As part of my academic work, stretching back to my days as a fourth-year student at the University of Melbourne, I sought to develop a sustainable path to full employment, which is now known as the Job Guarantee. A major focus of this work over the years has been to articulate this approach - explaining how it works, the urgency of it, and the reasons why it is the only way to achieve full employment with price stability, a combination that has evaded most economies in the last 35 years.

You can learn about the basics of the Job Guarantee here. Further, detailed analysis is to be found via my Publication Archive.

What is the Job Guarantee?

Under the Job Guarantee policy, the government continuously absorbs workers displaced. from private sector employment. The Job Guarantee employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector. The approach generates full employment and price stability. The Job Guarantee wage provides a floor that prevents serious deflation from occurring and defines the private sector wage structure.

Reference:

W.F. Mitchell (1998). “The Buffer Stock Employment Model - Full Employment without a NAIRU”, Journal of Economic Issues, 32(2), pp.547-55.

Does the private sector create enough jobs?

In 1967, the unemployment rate was a low 1.93 per cent. In the first quarter of 2000, the unemployment rate now hovers between 6.5 and 7 per cent. What has happened in between? What has been the growth in the labour force? What has been the growth in employment? What has been the growth in the constituent parts of employment (Private and Public)? The following discussion examines these trends and sources the reason why the unemployment rate has trebled.

According the Australian Bureau of Statistics data, private business employment went from 3,721.7 thousand in June 1967 to 7,431.3 (growth rate thousand by September 1999. In the same time, the civilian labour force grew from 4,887.4 to 9561.4 thousand. The ratio of private employment to the labour force (the private employment rate) fell from 78.5 per cent to 77.1 per cent.

Overall government employment over the same period has failed to keep pace with the rising labour force. Following the mass privatisations since 1990, employment in public enterprises has plummetted from to 442 thousand to 198.6 thousand (a large part of that is privatised employment). So the private business figures include jobs that were formerly in the private sector. However, the growth in private employment has not been sufficient to offset the public sector losses. Over the period, General Government employment went from 631.2 thousand to 1248.9 thousand, roughly proportional with labour force growth. Unemployment rose from 92.5 thousand (1.93 per cent) to 682.6 thousand (7.2 per cent).

The following Table summarises the data for this period. The evidence is that despite the claims that the private sector would absorb workers released from the public sector after the severe cutbacks the reality is different.

The private sector has always only been able to employ around 77 per cent of the labour force. Unless the public sector provides jobs for the remaining workers seeking employment unemployment will remain high. The Job Guarantee is designed to ensure that the public sector meets the slack that the private sector generates.

An additional warning in interpreting the data in the Table. While the private sector has maintained employment growth in proportion to the labour force growth the ratio of full-time to part-time employment has changed dramatically. In 1978, full-time jobs accounted for around 85 per cent of the total, whereas by November 1999, the ratio was down to 74 per cent. It is true that some of this change reflects the preferences of the workforce for casual arrangements. But ABS data shows that over that time, the percentage of part-time workers who wanted to work more hours had doubled (now at around 29 per cent).

  Private PSE GG Total UN LF
1967 3721.7 442 631.2 4794.9 92.5 4887.4
1999 7431.3 198.6 1248.9 8878.8 682.6 9561.4
Change 3709.6 -243.4 617.7 4083.9 590.1 4674.0
% pa growth 2.18 -2.47 2.16 1.94 6.45 2.12
Private is private employment, PSE is Public Sector Enterprise employment and GG is General Government employment. UN is total unemployment and LF is the labour force.

How do we pay for the Job Guarantee?

The fiscal deficit is too small if there is mass unemployment. What would the expansion in the budget deficit cost to implement a Job Guarantee policy? Three recent studies estimate the costs of such schemes in the United Kingdom, the United States, and Australia, respectively [Gordon (1997) for the United States; Kitson et al. (1997) for the UK; and Mitchell and Watts (1997) for Australia]. All three studies produced estimates that lie in the range of 0.06 percent (United States) to 3.5 percent (Australia) of current GDP. The costs are overstated because they ignore the multiplier effects from the rising incomes of Job Guarantee workers. More detailed cost analysis can be found in the above references.

The conclusion from all studies is that the Job Guarantee proposal is a very cheap option compared to the Okun gap losses that are incurred daily due to unemployment. High unemployment also places increased costs on the health system and is associated with increased family breakdown and higher crime rates.

Gordon (1997: 831) concludes that "beyond this, there is an important sense in which the job guarantee program would not cost anything. The goods or services produced by the labor of the beneficiary of the job guarantee increase the gross national product and the national welfare by as much as the worker is paid as reliably as does any 'free market' labor. The laborer is 'earning' the wage or salary received. Also, and importantly, the worker under the job guarantee program has a job of which the worker can be as proud as are other citizens with their jobs."

The true cost of the Job Guarantee policy would be the extra real resources that are consumed as a result of the policy approach. For a currency-issuing government these are the extra fiscal costs.

References:

Kitson, M., J. Michie, J., and H. Sutherland (1997). "A Price Well Worth Paying? The Benefits of a Full-Employment Strategy." in Jonathan Michie and John Grieve Smith (eds.), Employment and Economic Performance: Jobs, Inflation and Growth,, (Oxford: Oxford University Press), pp.234-253.

Gordon, Wendell (1997). "Job Assurance -- The Job Guarantee Revisited." Journal of Economic Issues 21, no. 3 (September), pp.817-825.

Mitchell, William and Martin Watts (1997). "The Path to Full Employment." Australian Economic Review, 4th Quarter.

Is the Job Guarantee green?

The Job Guarantee approach also challenges the conventional Post Keynesian approach to restoring full employment. Post Keynesian economists reject the orthodox emphasis on microeconomic factors when considering unemployment. Following Keynes, they argue that large-scale unemployment is due to insufficient demand and can be cured if the public sector stimulates spending using traditional fiscal and monetary instruments. While not denying the thrust of this approach, we argue that deficient demand can only be a proximate cause of the unemployment. The reason there has been a long-term deficiency in aggregate demand lies in the deliberate decline in government involvement in economic life. This reflects the individualism that has replaced the sense of collective responsibility that characterised economies following WWII.

The problem is not in the mechanics although some might say that with path-dependence in investment, the slow down in the 1970s has now created a disparity between the labour supply growth and capacity growth which renders it difficult to restore full employment using existing technologies. The real problem is that the types of growth rates required are likely to cause irreparable damage to the natural environment. There is a difference between growth and development.

Macroeconomics has never focused on the scale of activity - which is the size of the economy relative to the ecosystem. Any discussion about full employment must be put into the economic growth versus sustainable development debate. Independent of whether cutting real wages or stimulating demand directly is the way to increase employment, it still remains that to increase employment we need higher levels of output. So the issue of what the higher levels of output implies is relevant.

However, the standard Post Keynesian view also fails to take into account issues of environmental sustainability. Even if it was possible to expand demand enough to promote growth sufficient to keep pace with labour force growth and productivity growth and mop up the huge stocks of long-term unemployment, how could the natural ecosystems, already under great strain, cope?

The Job Guarantee proposal acknowledges the environmental problem. There is a need to change the composition of final output towards environmentally sustainable activities. These are unlikely to be produced by the private sector because they have heavy public good components. They are ideal targets for public sector initiative. If the unemployed workers are deployed in these areas of activity, the individuals gain a restored personal dignity and the society gains from the increased provision of environmental sensitive goods and services. It is not increased demand per se that is necessary but increased demand in certain areas of activity.

The required jobs are unlikely to be produced by the private sector because they have heavy public good components. They are ideal targets for public sector initiative. Numerous service jobs could provide immediate benefits to the society, when filled by Job Guarantee workers. These include urban renewal projects and other environmental and construction schemes (reforestation, sand dune stabilisation, river valley erosion control and the like), personal assistance to pensioners, assistance in community sports schemes, and many more.

Would it be inflationary?

The Job Guarantee wage provides a floor that prevents serious deflation from occurring and defines the private sector wage structure. However, if the private labor market is tight, the non-Job Guarantee wage will rise relative to the Job Guarantee wage, and the Job Guarantee pool drains. The smaller this pool, the less influence the Job Guarantee wage has on wage patterning. Unless the government stifles demand, the economy will then enter an inflationary episode, depending on the behaviour of labor and capital in the bargaining environment.

In the face of wage-price pressures, the Job Guarantee maintains inflation control with the assistance of traditional aggregate demand management policies, which will choke aggregate demand and induce slack in the private sector. The difference between this approach and the NAIRU approach is that the slack does not reveal itself as unemployment, and in that sense the Job Guarantee may be referred to as a "loose" full employment.

The Job Guarantee policy generates inflation stability because the suppression of private demand asserts the numeraire price -- the Job Guarantee wage. This leads to the definition of a new concept, the Non-Accelerating Inflation Buffer Employment Ratio (NAIBER), which, in the Job Guarantee economy, replaces the NAIRU as an inflation control mechanism. The Buffer Employment Ratio (BER) is the ratio of Job Guarantee employment to total employment. The reference to the buffer employment is that the Job Guarantee functions as a buffer stock to absorb the workers who are currently not demanded by the private sector.

As the BER rises, due to an increase in interest rates and/or a fiscal tightening, resources are transferred from the inflating private sector into the Job Guarantee at a price set by the government; this price provides the inflation discipline. The disciplinary role of the NAIRU, which forces the inflation adjustment onto the unemployed, is replaced by the compositional shift in sectoral employment, with the major costs of unemployment being avoided. That is a major advantage of the Job Guarantee approach.

Reference:

W.F. Mitchell (1998). “The Buffer Stock Employment Model - Full Employment without a NAIRU”, Journal of Economic Issues, 32(2), pp.547-55.

How does mass unemployment arise?

Unemployment arises because the fiscal deficit is too small relative to the desires of the private sector to meet its tax obligations and to save and to hold money for transactions purposes. Mass unemployment is a macroeconomic phenomenon and can never be a "real wage" problem.

William Vickrey argued that "the 'deficit' is not an economic sin but an economic necessity. Its most important function is to be the means whereby purchasing power not spent on consumption, nor recycled into income by the private creation of net capital, is recycled into purchasing power by government borrowing and spending. Purchasing power not so recycled becomes non-purchase, non-sales, non-production, and unemployment."

Why does the Job Guarantee advance human rights?

Since the mid-1970s Australia’s has experienced its longest period of persistently high unemployment in its history. The best outcome either political party has been able to postulate with supporting policies is a 5 per cent rate achieved over a drawn out period. The persistent of mass unemployment is a direct consequence of inadequate and misplaced government policy. The costs of unemployment extend beyond the narrow concerns usually considered by orthodox economists. The rise and sustenance of mass unemployment since the early 1970s has acted as a form of social exclusion perpetrated against particular sections of the community, in general the young, the old, the poor and those lacking skills and education. The burden of unemployment is not shared evenly across the community.

An empirically based, experiential notion of human rights suggests that governments are violating the right to work by refusing to eliminate unemployment via appropriate use of budget deficits. We show that unemployment is not compatible with fundamental human rights in that unemployment denies those affected access to income and hence participation in markets, it reduces the opportunity for advancement and stigmatises those affected, and violates basic concepts of membership and citizenship. Without the right to work, afflicted individuals are denied citizenship rights as surely as they were denied the right of free speech or the right to vote. As long as employment is not considered to be a human right, a portion of the community will be excluded from the effective economic participation in the community

The Job Guarantee underpins the following propositions:

  • There should be a right to work
  • This right should be a statutory right
  • The State should bear the responsibility for implementing this right
  • Access to work should not be conditional
  • The right to work and a full employment policy are inexorably linked
  • A full employment program, encompassing the right to work, can be implemented which also guarantees price stability.

Why should work be regarded as a right? As a starting point, labour income constitutes the major income source for the majority of individuals and households. Without income, ability to participate in a market economy is curtailed. This exclusion has long been recognised through the provision of safety net protection for those who are unable to participate in the labour market by virtue of age, infirmity and caring responsibilities. It was also the case for those who were without labour income by virtue of unemployment. Access to income also governs access to other rights, including minimum requirements of clothing, food and housing. Paid employment shares a direct relationship with food and water as a requisite for subsistence in many societies. Unemployment and underemployment, together with a lack of access to fertile agricultural land, means inadequate income, misery and early death for millions across the globe. Paid work provides the employed with choice in the market economy and the opportunity for advancement. The unemployed have limited access to credit and limited access over the range of goods and services they can purchase. They are not in a position to save for education, holidays and housing improvements. Their choices are constrained by their lack of income. Without social transfers they have to depend upon savings, family transfers or black economy activities in order to sustain minimum living standards. Their exclusion goes beyond this. They are not accorded the status attached to employment and they make no contribution to market activity; the barometer of worth in a market economy.

What do we mean by the right to work? Those who wish to do so should be able to obtain paid full-time (or fractional) employment. This guarantee should be made by the State and it should be legally enforceable in much the same way as other rights. Should it be any work as designated by the State? No, those exercising their right to work should be given options as to the type of employment they wish to take up. What wage rates should they be paid? They should be paid minimum adult rates of pay and be accorded to same rights and conditions associated with full-time market employment (or pro rata) - holiday and sickness benefits, a safe workplace, protection against unfair dismissal. For how long should they be employed? For as long as they wish while satisfying the standard conditions of employment. Those exercising this right could regard guaranteed jobs as a temporary step towards higher paid employment in the market sector.

The neglect of either national or international consideration of the right to work enables unemployment to flourish across the globe. The ILO recently reported that global unemployment and underemployment was around one billion people with nothing short of a renewed international commitment to full employment required to reverse the poverty, unemployment and underemployment now prevailing in so many parts of the globe. In a similar vein, the OECD launched its Jobs Study in 1994 to address the problem of mass unemployment across the industrially advanced economies, however, its recommendations excluded any consideration of a right to work, instead relying on a mix of conventional market based solutions to restore higher rates of employment growth and to by degrees eventually reduce unemployment to acceptable levels.

A right to work is the precondition for eliminating unemployment and its enormous costs and consequences. This is an imperative that is country specific. It is clear that such a right will not (beyond platitudes) be accorded the status of an internationally enforceable obligation. However, if the right is enshrined in Australian law it will mean that governments will be legislatively forced to pay more than lip service to unemployment. It will also mean that the Federal government would be responsible for developing and implementing an effective full employment policy.

Full employment was regarded as a standard objective of economic policy in the post war period. In the "golden age" between 1945 and 1970 full employment was for many Capitalist and Socialistic economies regarded as a reality (Arndt, 1994). There was only disagreement over how it was defined and how it was best achieved. From the early 1970s and the first oil price shock, unemployment has edged upwards and full employment has either been either redefined or ignored. Indeed, unemployment became an important tool for reducing inflation and stabilising inflation expectations. The right to work and full employment are inexorably linked. If there were a legislated right to work then governments would have to contemplate, as they did in the post 1945 period, how they could satisfy this right, and in the process realise full employment and eradicate unemployment. One consequence of a right to work would be a full employment economy and a full employment policy.

The implications of a full employment policy are considerable. First, it would mean greater use of labour and capital resources, as mentioned the single most significant efficiency reform that could be implemented in Australia is the elimination of unemployment. The direct financial benefits to the economy would be enormous; as indicated, of the order of 10 per cent additional GDP every year. Second, it would mean fewer fluctuations in aggregate economic activity. By legislation the government would be forced to generate jobs for those who are made redundant by the private sector. Such a situation would offer greater certainty for investors in the private sector since investment decisions would be undertaken in an ongoing full employment economy. Third, the extent of exclusion, poverty and costs associated with unemployment will be significantly reduced. It would be a policy that facilitated social inclusion rather than social exclusion. Fourth, governments would have to approach other economic goals from a full employment context, not, as currently, assume a given rate of unemployment and attempt to stabilise prices or reduce the current account deficit at this unemployment rate. Full employment would be the default setting for policy. Fifth, employers would be forced to contemplate how to better utilise labour and how to raise labour productivity through investment in machinery, technology and training. There would no longer be the emphasis upon cost cutting, lower wages and static efficiency gains associated with surplus labour conditions.

The Job Guarantee is the synthesis between the right to work and a full employment policy

What are the roots of the Job Guarantee proposal?

The logic of the Job Guarantee is based on the operations of the Wool Floor Price Scheme introduced by the Commonwealth Government of Australia in November 1970. The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC). The Government then guaranteed that the price would not fall below that level. There was a lot of lobbying to get the floor price as high above the implied market price. The price was maintained by the AWC purchasing stocks of wool in the auction markets. The financing of the purchases came from a Market Support Fund (MSF) accumulated by a small contribution from growers based on the value of its clip. Fund shortages were made up with Government-guaranteed loans. The major controversy for economists was the "tinkering with the price mechanism" (Throsby, 1972: 162). There was an issue as to whether it was price stabilisation or price maintenance. This was not unimportant in a time when prices were in sectoral decline and a minimum guaranteed floor price implied ever-increasing AWC stocks.

By applying reverse logic one could utilise the concept without encountering the problems of price tinkering. In effect, the Wool Floor Price Scheme generated "full employment" for wool production. Clearly, there was an issue in the wool situation of what constituted a reasonable level of output in a time of declining demand. The argument is not relevant when applied to available labour. We can define full employment to be the state where there was no involuntary unemployment and that is ensured by a sufficient number of jobs to be available in relation to the supply of labour at the current money wage rates. This amounts to a rejection of the notion that all unemployment is voluntary and that full employment can be defined by market relations - the intersection of the labour demand and supply curves at some "equilibrium price". Accordingly, mass unemployment is construed as a macroeconomic problem related to deficient demand, which in turn reflects a deficient budget deficit. The reverse logic implies that if there is a price guarantee below the "prevailing market price" and a buffer stock of working hours constructed to absorb the excess supply at the current market price, then we can generate full employment without encountering the problems of price tinkering. That idea was the seed of the Job Guarantee approach being advocated by the Centre of Full Employment and Price Stability.

The work of Benjamin Graham (1937) is also instructive. He discusses the idea of stabilising prices and standards of living by surplus storage. He documents the ways in which the government might deal with surplus production in the economy. Graham (1937: 18) says, "The State may deal with actual or threatened surplus in one of four ways: (a) by preventing it; (b) by destroying it; (c) by ‘dumping’ it; or (d) by conserving it." In the context of an excess supply of labour, governments had at this time and now adopted the "dumping" strategy via the NAIRU. It made much better sense to use the conservation approach. Graham (1937: 34) notes,

"The first conclusion is that wherever surplus has been conserved primarily for future use the plan has been sensible and successful, unless marred by glaring errors of administration. The second conclusion is that when the surplus has been acquired and held primarily for future sale the plan has been vulnerable to adverse developments."

The distinction is important in the Job Guarantee model development. The Wool Floor Price Scheme was an example of storage for future sale and was not motivated to help the consumer of wool but the producer. The Job Guarantee policy is an example of storage for use where the "reserve is established to meet a future need which experience has taught us is likely to develop" (Graham, 1937: 35). Graham also analysed and proposed a solution to the problem of interfering with the relative price structure when the government built up the surplus. In the context of the Job Guarantee policy, this means setting a Job Guarantee wage below the private market wage structure, unless strategic policy in addition to the meagre elimination of the surplus was being pursued. For example, the government may wish to combine the BSE policy with an industry policy designed to raise productivity. In that sense, it may buy surplus labour at a wage above the current private market minimum. In the first instance, the basic Job Guarantee model with a wage floor below the private wage structure shows how full employment and price stability can be attained. While this is an eminently better outcome in terms resource use and social equity, it is just the beginning of the matter.

Graham (1937: 42) considered that the surplus should "not be pressed for sale until an effective demand develops for it." In the context of the Job Guarantee policy, this translates into the provision of a government job for all labour, which is surplus to private demand until such time as private demand increases.

References:

Graham, B. (1937) Storage and Stability, (McGraw Hill: New York).

W.F. Mitchell (1998). “The Buffer Stock Employment Model - Full Employment without a NAIRU”, Journal of Economic Issues, 32(2), pp.547-55.

Interviews about the Job Guarantee



Professor Bill Mitchell

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