Friday, August 3, 2012

Job Guarantee.

The idea that government can act as employer of last resort is as old as the stars. Pericles implemented the idea 2,500 years ago in Ancient Greece.

And certainly there is nothing in theory to stop governments offering SOME FORM OF EMPLOYMENT to every single unemployed individual. Although were the idea taken that far, particularly at times of high unemployment like the present, some of the jobs created would be near fatuous: everything suffers from diminishing returns.

Numerous acronyms are used to refer to the above idea. I’ll use “JG” (short for Job Guarantee).

Two questions are addressed below. First, should JG employees be allocated to SPECIALLY SET UP projects or “employers” (as per the WPA in the US in the 1930s). Or should the employees to allocated to EXISTING EMPLOYERS (as per the UK’s “Work Programme”).

Second, should the system be confined to the public sector.

Specially set up employers.

The big problem with specially set up employers is thus.

In addition to employing those for whom JG is designed (the recently unemployed and not desperately skilled), some minimum amount of capital equipment, permanent skilled labour and materials must be employed. (I’ll refer to the latter factors of production as Other Factors of Production (OFP)).

If the amount of OFP employed is a bare minimum, then JG will be extremely inefficient compared to normal employers (public or private sector). On the other hand, the more the amount of OFP is increased, the more JG becomes indistinguishable from existing employers!

Ergo JG people might as well be allocated to existing employers.

Public versus private employers.

The big attraction of confining JG to the public sector (though JG advocates don’t seem to spell this out very often) is that no extra demand is needed to bring JG jobs into being. Thus there is no limit to the number of JG jobs that can be created – and they can be created without exacerbating inflation.

But there is a problem there as follows.

If the economy has significant spare capacity, there is no point in dealing with excess unemployment via JG: a straight rise in demand would be better. So JG really comes into its own when the economy is at capacity and unemployment is at the supposed minimum: 3-5% or whatever.

Now if unemployment is at the level at which further demand will be inflationary, then JG cannot spend any money on OFP, nor can it pay wages to JG employees that are above what they are getting anyway: benefits. Any such payments constitute an injection, or an increase in demand.

However, there is a simple solution to that problem: allocate JG people to existing employers and for free or at a heavily subsidised rate. That should induce employers to increase the amount of relatively unskilled labour they employ, while the amount of OFP they employ remains constant. At least there is an inducement there for employers to expand the amount of relatively unskilled labour they employ relative to the amount of OFP they employ.

But if JG people are allocated to PRIVATE SECTOR employers, and assuming as per the latter paragraph that employers are induced to employ just additional relatively unskilled people and no extra OFP, then we get exactly the same result: little or no extra inflation! Reason is that inflation stems from demand for OFP, not from demand for the relatively unskilled: members of the dole queue.

Other advantages of private sector JG.

First, the private sector is better at employing the relatively unskilled than the public sector: how many unskilled people can a public sector hospital, tax office or school employ? In contrast, dishing out hamburgers, stacking supermarket shelves or labouring on a building site requires less skill.

Second, the evidence is that temporary subsidised jobs in the private sector result in better subsequent employment chances and histories than temporary subsidised jobs in the public sector (see here and here).


The UK’s Work Programme is on the right lines, though obviously there are plenty of criticisms that can be made of it. For example paying less than the legal minimum hourly rate is an oddity. Are we supposed to have a legal minimum hourly wage or not in Britain?


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