Thursday, August 8, 2013

So raising demand exacerbates inflation? Well then try this…

I don’t expect anyone to understand this. Pearls before swine and all that. You don't mind being called a swine do you? Anyway, here goes.
Instead of raising demand, why not use the money that would have been used to raised demand to cut costs: e.g. use the money to subsidise all labour. Labour is THE ULTIMATE COST, so the subsidy would have an anti-inflationary effect, while at the same time extra money is pumped into the economy, so output and employment rises.
Spotted the flaw? . . .  No?
The flaw is that the labour subsidy is a once and for all effect, a secular effect, while the basic cause if inflation is still operative and it’s a permanent effect: that’s the fact that there is some level of employment at which the quality of dole queue labour is so low that employers rather than take dole queue labour, tend to pinch labour from other employers, consciously or unconsciously. I say “consciously or unconsciously” because many employers seek extra staff by advertising in papers etc, and inevitably employees of other firms see those adverts and sometimes apply for the relevant jobs. (Looking at those adverts was actually a common pastime during lunch breaks at the first job I ever did.)
So those adverts result in the price of labour being bid upwards, and that effect is PERMANENT, as long as the above “low quality of dole queue labour” phenomenon persists. So the above subsidy wouldn’t work.
OK, then. Can we circumvent the latter problem? The answer is “yes”, and as follows.
Subsidise JUST those relatively low quality dole queue individuals. That way the subsidy compensates for their low quality RELATIVE TO already employed labour. Which means employers would take on that dole queue labour rather than bid up the price of labour. Hey presto: unemployment falls. Or more accurately, NAIRU / the “natural level of unemployment” falls to below its previous level.
Next problem:
People on the dole who are unsuitable for any job in their area on 1st Jan are not necessarily STILL UNSUITABLE a month later: they might have found a job to which they are ideally suited. So how do we know when to stop the subsidy in respect of any given employee?
Well it’s easy: easy in theory at any rate. All one needs to do is call employers’ bluff.
That is, if an employer claims the subsidy in respect of individual X, then have state employment agencies threaten to remove X at any time after X has been in the subsidised job for more than say a month, (and maybe allocate X to another subsidised job, or return X to the dole queue). If X REALLY IS a fully viable employee, the employer will cease claiming the subsidy and keep the employee. Alternatively, if X is genuinely non-viable, then the employer won’t mind losing X.
And there’s nothing wrong with that relatively fast labour turnover: there’s no harm in the unemployed sampling a variety of different jobs because the mere fact that they’re unemployed means their existing set of skills may be obsolete or in excess supply, so they may very well have to find a type of work very different to their previous job.
Problem solved. NAIRU is reduced, the natural level of unemployment declines, the Phillips curve shifts or whatever way you want to put it.
Don’t understand? Well sleep on it, and read it again tomorrow. Seek and ye shall find. Knock and it shall be opened unto you.

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