Thursday, March 21, 2013

Why workfare works (or doesn’t).

The standard leftie criticism of workfare (e.g. the UK’s Work Programme) is that downtrodden “unemployed through no fault of their own” peasants shouldn’t be “forced” into slave labour.
It normally escapes the notice of lefties that if one person is being supported on benefits, another is “forced” out to work (let’s call it “slave labour” just for added emotional impact) and has to pay taxes to support those on benefits.
Ergo, workfare has little effect on the total amount of “force” or coercion or slavery.
But that’s a minor and political point. The really important question (of interest to less than 0.1% of the population) is: why might workfare bring about an AGGREGATE increase in employment  or GDP? There are 3 reasons, as follows.

1. Less temptation to live on benefits.
First and most obviously, such schemes reduce the temptation to live on unemployment benefits. And that effect comes in two ways. First, workfare results in the unemployed getting workfare type jobs (surprise surprise). Second, workfare induces the unemployed to find normal / regular / unsubsidised jobs.
It might be tempting to rebut the latter point by claiming that the total number of jobs is somehow fixed, thus increased efforts by the unemployed to find work are a zero sum game. But that isn’t true: increased efforts by the unemployed to find work improves aggregate labour supply, which in turn reduces inflation at any given level of employment, which in turn makes possible an increase in aggregate demand and total numbers employed.
Labour supply in the US has been improved constantly over the last two hundred years by the arrival of about half a million job seekers a year. Far from raising unemployment by half a million a year, the only net effect is raise numbers employed by about half a million a year.

2. Hysteresis.
This is the argument that those who are unemployed for too long lose skills and work habits. That’s a plausible idea, but it has been challenged here.
Plus if people who have not done a regular job for two years or so have difficulty getting to work on time and/or are so lacking in skills that have difficulty in finding work, one has to wonder how school leavers or people who have taken fifteen years off work to raise children manage to get jobs.
Anyway, hysteresis is certainly a POSSIBLE effect.

3. Improving the inflation / unemployment trade off.
Understanding this effect requires a concentration span of at least three minutes – i.e. it’s beyond the comprehension of 99% of the population. Moreover, this effect gets at THE BASIC CAUSE OF UNEMPLOYMENT.  That is, what is the factor or reason that makes it relatively easy to keep unemployment below roughly 10% of the workforce, but far more difficult to take it below roughly 5%? The reason, and way in which workfare ameliorates that factor is as follows.
As unemployment falls, employers start bidding up the price of labour (or giving in more easily to wage demands). That happens because when unemployment is sufficiently low, the QUALITY of labour on the dole queue doesn’t meet employers’ requirements. So the above trade off can be improved by making the unemployed (or at least some of them) available to employers at a subsidised rate.
The subsidy would make up for the above mentioned inadequate quality, hence the inflation / unemployment trade off improves, hence demand can be increased and unemployment reduced permanently.
There is a slight problem with the latter idea in that to a finite extent, employers replace normal or regular employees with subsidised WP / workfare employees. That problem is impossible to avoid altogether. On the other hand, WP employees turn over relatively quickly, and there is a limit to how many “quickly turning over” employees any given employer can cope with.
And that quick turnover is not a demerit in WP: indeed it should be positively encouraged. That’s first because, as already suggested, it dissuades employers from using WP employees to displace regular employees. Second, where someone is unemployed, that ipso facto means there are no vacancies for them using their existing skills or experience. It’s thus no bad idea for them to gain experience in a different type of work: if the skills they DO POSESS are no longer in demand, they may HAVE TO find work that uses other skills.

Workfare encourages low productivity?
There is a potential drawback with WP / workfare schemes, which is that if the system is run in any sort of a lax manner, it discourages employers from obtaining output from employees. Put another way, if WP employees cost employers nothing, then an employer will (at worst) not be too bothered if an employee produces nothing.

Is this compatible with Keynes?
It could be argued that the above paragraphs are incompatible with Keynes, and for the following reasons.
Keynes rightly attacked the idea, popular in the 1930s, that cutting wages would reduce unemployment. The latter popular idea was promoted on the basis of simple supply / demand notions: e.g. “price of apples fall, so people buy more apples”. So “cut the price of labour, and more labourers will be hired”.
So would Keynes have approved of WP?
The main flaw in the idea that cutting wages will raise aggregate employment is that wages themselves are the main constituent of demand, and it’s demand that generates employment.
In the case of WP type schemes however, no one’s wage is cut. That is, WP employees get approximately what they’d have got on benefits. So their pay is not reduced.
In short, Keynes’s point doesn’t apply here.

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