Monday, August 15, 2011

Two points which advocates of “make work” / job guarantee type schemes often don’t get.

The “make work” or “job guarantee” idea has been around for centuries, if not thousands of years. (Pericles advocated or implemented the idea in ancient Athens.) MMTers tend to call the idea “job gurantee” (JG). But the idea has flaws, as follows.

First there is the idea that because the schemes involve public sector type output, no increase in demand is required, hence there is allegedly no inflationary effect.

The latter idea would be valid if the wage paid is the same as unemployment benefit and the only factor of production involved was otherwise unemployed labour (i.e. relatively unskilled labour). But any form of employment that involves only unskilled labour and no permanent skilled labour or materials or capital equipment will be hopelessly unproductive. Ergo finite quantities of the latter other factors of production (OFP) must be employed.

But JG is caught between a rock and a hard place here, as follows. If little OFP is employed, JG will be very unproductive. But the more OFP is employed, the more JG becomes the same as a normal public sector employer. And if JG becomes near indistinguishable from a normal public sector employer, then arguments will arise (trade unions or no trade unions) as to why the pay and perks of JG employees are any different to those of normal public sector employees.

Also, ordering up OFP from the rest of the economy (assuming the economy is at capacity) will be inflationary, so that destroys the “no inflationary effect” idea. Alternatively, if the inflationary effect is dealt with by reducing demand for the rest of the economy, then JG jobs will be AT THE EXPENSE OF regular jobs: not the object of the exercise.

A possible escape from the above dilemma might seem to come where the economy is well BELOW capacity. But in this scenario, JG is not the best solution for the problem: the best solution is to raise demand. That’s what I call a “rock and hard place scenario”.

Are JG schemes are productive?

Make work schemes can be reasonably productive, given very high unemployment, and JG enthusiasts sometimes cite this as evidence that JG schemes can ALWAYS be productive. Examples of relatively productive JG type schemes include the Jefes program in Argentina and the WPA scheme in the US in the 1930s.

Re the WPA, Jonathan Kesselman in a Brookings Institution book called “Creating Jobs” (editor: J.L.Palmer) claims there is evidence that WPA schemes in New York state were 75 – 90% as efficient as their regular private sector equivalents.

Certainly given very high unemployment, JG has relatively few problems. For example there will be a good availability of skilled labour. Plus any OFP ordered up from the regular economy will not be inflationary because the economy is not near capacity.

Unfortunately the above points are not a merit in JG, because (as mentioned above) given very high unemployment, it ought to be possible to go for a much better way of reducing unemployment, namely raising demand!


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