Sunday, January 24, 2010

Where is the logical niche for “make work”? Part I.

I have no idea how many make work schemes have been implemented and abandoned over the last few centuries. Perhaps hundreds. The WPA in the U.S. in the 1930s was one of the biggest such schemes. But there is a logical flaw in these schemes as follows. (I’ll refer to these schemes below simply as WPA).

1. There is not a good case for using WPA to deal with exceptionally high unemployment, e.g. the exceptionally high unemployment that occurs in a recession. That is, there is no case for using WPA to deal with “above NAIRU” unemployment. This is not to say that WPA should not operate during a recession. The point is that the cure for EXCESSIVELY HIGH unemployment is to raise demand.

2. The unemployed tend to be unskilled. This is for two reasons. First, employers tend to pick the best labour first. Second, even if the quality of unemployed labour were the same as that making up those in work, a problem would still arise as unemployment falls: it would become increasingly difficult to match available skills to vacancies. That is, given low unemployment, there is a good chance that the only job an unemployed individual can do, even if they have skills, will be an unskilled job.

3. The relatively unskilled labour on WPA schemes needs other factors of production: e.g. permanent skilled supervisory labour, capital equipment and materials. If WPA labour has no other factors of production (OFP), output will be hopeless. On the other hand of OFP levels rise to anything like those obtaining with normal employers, then the WPA scheme becomes indistinguishable from a normal employer. Thus WPA is stuck between a rock and a hard place.

Incidentally this “indistinguishability” feature was evident in the 1930s WPA: that is some WPA construction projects were indistinguishable from normal construction industry contractors in that the WPA schemes employed cranes, concrete mixers, carpenters, bricklayers, etc just like ordinary contractors. In contrast, some WPA schemes employed relatively little OFP, which resulted in hopelessly low output levels. Hence the nickname that the 1930s WPA acquired: “we piddle around”.

4. If unemployment is at NAIRU, WPA cannot take permanent skilled supervisory labour from the existing economy because the latter is already working at capacity. Put another way, if the latter OFPs are nicked from the existing economy, inflation ensues. Alternatively, if aggregate demand is reduced so as to prevent the inflationary effect of “OFP nicking”, this means that WPA jobs are being created AT THE EXPENSE OF normal jobs: hardly the object of the exercise.

5. Conclusion: there is no logical niche for WPA. That is a very negative conclusion.

Having reduced WPA to rubble, I’ll try to show how to build something from the rubble in a day or two.

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