Thursday, May 20, 2010

I have doubts about ELR and the Job Guarantee.

Given high unemployment it is easy for employers to find the skills they want. Therefore assuming high but falling unemployment, the productivity of each new person hired is OK: it covers the minimum, union wage, etc.

As unemployment falls further, it becomes progressively more difficult to find the right skills. Thus the productivity of each succeeding person hired falls. Or to put it in economics jargon the marginal net revenue product of labour falls. When it falls to the minimum wage, union wage or thereabouts, a further rise in aggregate employment is not possible.

In this scenario the advocates of having government as employer of last resort (ELR) or “job guarantee” (JG) to use an alternative expression, want to set up special employment schemes (like the WPA in the U.S. in the 1930s). Why?

While some WPA schemes were efficient, these schemes tend to involve a high ratio of temporary unskilled labour to other factors of production (like skilled labour, capital equipment, etc). Indeed the WPA in the 1930s acquired a knickname: “we piddle around”.

Indeed, the only scenario in which WPA type schemes can be efficient is where they involve normal or near normal ratios of different factors of production. But in this case, these schemes amount to virtually the same thing as a normal employer. So what’s the point of them?

The justification for ELR/JG/WPA schemes is particularly questionable given that there are higher productivity potential jobs out there staring us in the face: jobs which involve better ratios of different factors of production. These are the sub minimum wage or sub union wage jobs which don’t come into being because of minimum wages and union wages.

Solution: implement a subsidy that brings the latter jobs into being. Obviously take home pay of those concerned needs to be up to the minimum socially acceptable level. But the right subsidy would make the cost to the employer BELOW this level. Thus the jobs would come into being.

I suggest less emphasis on creating temporary subsidised WPA type jobs and more emphasis on creating temporary subsidised jobs with existing employers.

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