Job Guarantee and Inflation Control

In this vein we are suggesting that politicians should set a minimum acceptable living standard and ensure that a base level job is always available to allow all citizens to achieve that living standard independent of welfare payments. This is the essence of the JG. Analogous to the central bank’s function of lender of the last resort, the JG functions as a buffer which absorbs all potential employment, at the accepted minimum wage. Government then is also the employer of the last resort.

An additional advantage is that by creating an employment buffer stock government also facilitates inflation control.

Please read my blog – Full Employment with a Job Guarantee – for a detailed introduction to the JG concept.

While it is easy to characterise the JG as purely a public sector job creation strategy, it is important to appreciate that it is actually a macroeconomic policy framework designed to deliver full employment and price stability based on the principle of buffer stocks where job creation and destruction is but one component.

The idea came to me in 1978 when I was studying agricultural economics at the University of Melbourne. My earlier works discusses the link between the JG approach and the agricultural price support buffer stock schemes like the Wool Floor Price Scheme introduced by the Australian Government in 1970.

This was a system where the government desired to stabilised farm incomes and so agreed on a price for wool with the farmers. The government would then purchase excess wool supplied into the market to ensure the agreed price was maintained and in better times sell wool. They kept the wool in big stores spread all around the country.

So the government held buffer stocks of wool to manage the price. The JG is a buffer stock scheme too.

While generating full employment for wool production, there was an issue of what constituted a reasonable level of output in a time of declining demand.

The argument is not relevant when applied to unemployed labour. If there is a price guarantee below the prevailing market price and a buffer stock of working hours constructed to absorb the excess supply at the current market price, then a form of full employment can be generated without tinkering with the price structure.

The other problem with commodity buffer stock systems is that they encouraged over-production, which ultimately made matters worse when the scheme were discontinued and the product was dumped onto the market. These objections to do not apply to maintaining a labour buffer stock as no one is concerned that employed workers would have more children than unemployed workers.

Benjamin Graham wrote in the 1930s about the idea of stabilising prices and standards of living by surplus storage. He documents how a government might deal with surplus production in the economy. He said the:

State may deal with actual or threatened surplus in one of four ways: (a) by preventing it; (b) by destroying it; (c) by “dumping” it; or (d) by conserving it.

In the context of an excess supply of labour, governments now choose the dumping strategy via the NAIRU. It makes much better sense to use the conservation approach via a JG. Graham (1937: 34) noted:

The first conclusion is that wherever surplus has been conserved primarily for future use the plan has been sensible and successful, unless marred by glaring errors of administration. The second conclusion is that when the surplus has been acquired and held primarily for future sale the plan has been vulnerable to adverse developments …

The distinction is important in the JG model. The Australian Wool Scheme was an example of storage for future sale and was not motivated to help the consumer of wool but the producer.

The JG policy is an example of storage for use where the “reserve is established to meet a future need which experience has taught us is likely to develop” (Graham, 1937: 35).

Graham also proposed a solution to the problem of interfering with the relative price structure when the government built up the surplus. In the context of the JG policy, this means setting a JG wage below the private market wage structure. To avoid disturbing the private sector wage structure and to ensure the JG is consistent with price stability, the JG wage rate should probably be set at the current legal minimum wage, though an initially higher JG wage may be offered if the government sought to combine the JG policy with an industry policy designed to raise productivity.

Under the JG, the public sector offers a fixed wage job, which we consider to be price rule spending, to anyone willing and able to work, thereby establishing and maintaining a buffer stock of employed workers. This buffer stock expands (declines) when private sector activity declines (expands), much like today’s unemployed buffer stocks, but potentially with considerably more liquidity if properly maintained.

The JG thus fulfills an absorption function to minimise the real costs currently associated with the flux of the private sector. When private sector employment declines, public sector employment will automatically react and increase its payrolls.

The nation always remains fully employed, with only the mix between private and public sector employment fluctuating as it responds to the spending decisions of the private sector. Since the JG wage is open to everyone, it will functionally become the national minimum wage.

Inflation control under a Job Guarantee

The fixed JG wage provides an in-built inflation control mechanism. In an earlier published paper I called the ratio of JG employment to total employment the Buffer Employment Ratio (BER).

The BER conditions the overall rate of wage demands. When the BER is high, real wage demands will be correspondingly lower. If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers transferring from the inflating sector to the fixed price JG sector.

Ultimately this attenuates the inflation spiral. So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the JG policy achieves this via compositional shifts in employment. That is it can also deal with a supply-shock that generates distributional demands that ultimately cause inflation.

The BER that results in stable inflation is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state JG level, which is dependent on a range of factors including the path of the economy.

A plausible story to show the dynamics of a JG economy compared to a NAIRU economy would begin with an economy with two labour sub-markets: A (primary) and B (secondary) which broadly correspond to the dual labour market depictions. Prices are set according to mark-ups on unit costs in each sector.

Wage setting in A is contractual and responds in an inverse and lagged fashion to relative wage growth (A/B) and to the wait unemployment level (displaced Sector A workers who think they will be re-employed soon in Sector A).

A government stimulus to this economy increases output and employment in both sectors immediately. Wages are relatively flexible upwards in Sector B and respond immediately.

The compression of the A/B relativity stimulates wage growth in Sector A after a time. Wait unemployment falls due to the rising employment in A but also rises due to the increased probability of getting a job in A. The net effect is unclear.

The total unemployment rate falls after participation effects are absorbed. The wage growth in both sectors may force firms to increase prices, although this will be attenuated somewhat by rising productivity as utilisation increases. A combination of wage-wage and wage-price mechanisms in a soft product market can then drive inflation. This is a Phillips curve world.

To stop inflation, the government has to repress demand. The higher unemployment brings the real income expectations of workers and firms into line with the available real income and the inflation stabilises – a typical NAIRU story.

Introducing the JG policy into the depressed economy puts pressure on Sector B employers to restructure their jobs in order to maintain a workforce. For given productivity levels, the JG wage constitutes a floor in the economy’s cost structure. The dynamics of this economy change significantly.

The elimination of all but wait unemployment in Sector A and frictional unemployment does not distort the relative wage structure so that the wage-wage pressures that were prominent previously are now reduced.

The wages of JG workers (and hence their spending) represents a modest increment to nominal demand given that the state is typically supporting them on unemployment benefits. It is possible that the rising aggregate demand softens the product market, and demand for labour rises in Sector A.

But there are no new problems faced by employers who wish to hire labour to meet the higher sales levels in this environment. They must pay the going rate, which is still preferable, to appropriately skilled workers, than the JG wage level. The rising demand per se does not invoke inflationary pressures if firms increase capacity utilisation to meet the higher sales volumes.

With respect to the behaviour of workers in Sector A, one might think that the provision of the JG will lead to workers quitting bad private employers. It is clear that with a JG, wage bargaining is freed from the general threat of unemployment.

However, it is unclear whether this will lead to higher wage demands than otherwise. In professional occupational markets, some wait unemployment will remain. Skilled workers who are laid off are likely to receive payouts that forestall their need to get immediate work.

They have a disincentive to immediately take a JG job, which is a low-wage and possibly stigmatised option. Wait unemployment disciplines wage demands in Sector A. However, demand pressures may eventually exhaust this stock, and wage-price pressures may develop.

A crucial point is that the JG does not rely on the government spending at market prices and then exploiting multipliers to achieve full employment which characterises traditional Keynesian pump-priming. Traditional Keynesian remedies fail to provide an integrated full employment-price anchor policy framework. In fact, a Keynesian policy agenda would impact more significantly on inflation if it was true that a JG was inflationary as a result of its impacts on demand in the product market.

Would the NAIBER will be higher than the NAIRU?

This last point invokes a fierce debate as to relative sizes of the NAIBER vis-à-vis the NAIRU. Some commentators argue that the NAIBER would have to be greater than the NAIRU for an equivalent amount of inflation control.

There are two strands to this argument. First, the intuitive but somewhat inexact view is that because JG workers will have higher incomes (than when they were unemployed) a switch to this policy would always see demand levels higher than under a NAIRU world.

As a matter of logic then, if the NAIRU achieved output levels commensurate with price stability then, other things equal, a higher demand level would have to generate inflationary impulses. So according to this view, the level of unemployment associated with the NAIRU is intrinsically tied to a unique level of demand at which inflation stabilises.

Second, and related, it is claimed that the introduction of the JG reduces the threat of unemployment which serves to discipline the wage setting process. The main principle of a buffer stock scheme like the JG is straightforward – it buys off the bottom (at zero bid) and cannot put pressure on prices that are above this floor. The choice of the floor may have once-off effects only.

It should be noted that while it is clear that JG workers will enjoy higher purchasing power under a JG compared to their outcomes under a NAIRU policy, it is not inevitable that aggregate demand overall would rise with the introduction of JG.

But assuming aggregate demand is higher when the JG is introduced than that which prevailed in the NAIRU economy, a traditional economist (and some Post Keynesians) might wonder why inflation is not inevitable as we replace unemployment with (higher paying) employment.

Rising demand per se does not necessarily invoke inflationary pressures because by definition, the extra liquidity is satisfying a net savings desire by the private sector.

Additionally, in today’s demand constrained economies, firms are likely to increase capacity utilisation to meet the higher sales volumes. Given that the demand impulse is less than required in the NAIRU economy, it is clear that if there were any demand-pull inflation it would be lower under the JG. So there are no new problems faced by employers who wish to hire labour to meet the higher sales levels.

Any initial rise in demand will stimulate private sector employment growth while reducing JG employment and spending.

The impact on the price level of the introduction of the JG will also depend on qualitative aspects of the JG pool relative to the NAIRU unemployment buffer. It is here that the so-called threat debate enters.

The JG buffer stock is a qualitatively superior inflation fighting pool than the unemployed stock under a NAIRU. Therefore the NAIBER will be lower than the NAIRU which means that employment can be higher before the inflation barrier is reached.

In the NAIRU logic workers may consider the JG to be a better option than unemployment. Without the threat of unemployment, wage bargaining workers then may have less incentive to moderate their wage demands notwithstanding the likely disciplining role of wait unemployment in skilled labour markets.

However, when wait unemployment is exhausted private firms would still be required to train new workers in job-specific skills in the same way they would in a non-JG economy.

Further, JG workers are far more likely to have retained higher levels of skill than those who are forced to succumb to lengthy spells of unemployment. It is thus reasonable to assume that an employer would consider a JG worker, who is already demonstrating commitment to working, a superior training prospect relative to an unemployed and/or hidden unemployed worker. This changes the bargaining environment rather significantly because the firms now have reduced hiring costs. Previously, the same firms would have lowered their hiring standards and provided on-the-job training and vestibule training in tight labour markets.

The functioning and effectiveness of the buffer employment stock is critical to its function as a price anchor. Condition and liquidity is the key. Just as soggy rotting wool is useless in a wool price stabilisation scheme, labour resources should be nurtured as human capital constitutes the essential investment in future growth and prosperity.

There is overwhelming evidence that long-term unemployment generates costs far in excess of the lost output that is sacrificed every day the economy is away from full employment. It is clear that the more employable are the unemployed the better the price anchor will function.

The JG policy thus would reduce the hysteretic inertia embodied in the long-term unemployed and allow for a smoother private sector expansion. Therefore JG workers would constitute a credible threat to the current private sector employees. When wage pressures mount, an employer would be more likely to exercise resistance if she could hire from the fixed-price JG pool.

As a consequence, longer term planning with cost control would be enhanced. So in this sense, the inflation restraint exerted via the NAIBER is likely to be more effective than using a NAIRU strategy.

Another associated factor relates to the behaviour of professional occupational markets. In those markets, while any wait unemployment will discipline wage demands, the demand pressures may eventually exhaust this stock and wage-price pressures may develop.

With a strong and responsive tertiary education sector combined with strong firm training processes skill bottlenecks can be avoided more readily under the JG than with an unemployed buffer stock in place. The JG workers would be already maintaining their general skills as a consequence of an on-going attachment to the employed workforce.

The qualitative aspects of the unemployed pool deteriorate with duration making the transition back in the labour force more problematic. As a consequence, the long-term unemployed exert very little downward pressure on wages growth because they are not a credible substitute.

Responsible fiscal practice in MMT

This is the macroeconomic sequence that defines responsible fiscal policy practice in MMT. This is basic macroeconomics and the debt-deficit-hyperinflation neo-liberals seem unable to grasp it:

1. The sovereign government, which is not revenue-constrained because it issues the currency, has a responsibility for seeing that the workforce is fully employed.

2. Full employment means less than 2 per cent unemployment, zero underemployment and zero hidden unemployment.

3. The sovereign government can purchase any real good or service that is available for sale in the market at any time. It never has to finance this spending unlike a household which uses the currency issued by the sovereign government. The household always has to finance its spending (as do state and local governments in a federal system).

4. The non-government sector typically decides (in aggregate) to save a proportion of the income that is flowing to it. This desire to save motivates spending decisions which result in the flow of spending being less than the income produced. If nothing else happened then firms would reduce output and income would fall (as would employment) and households would find they were unable to achieve their desired saving ratio.

5. The government sector must in this situation fill the spending gap left by the non-government sector’s decision to withdraw some spending (in relation to its income). If the government does increase its net contribution to spending (that is, run a budget deficit) up to the point that total spending now equals total income then firms will realise their planned output sales and retain current employment levels.

6. The government sector’s net position (spending minus revenue) is the mirror image of the non-government’s net position. So a government surplus is equal $-for-$, cent-for-cent to a non-government deficit and vice versa. So if the non-government sector is in surplus (a net saving position) then income adjustments will render the government sector in deficit whether it plans to be in that state or not. If income is falling in the face of rising saving behaviour of the non-government sector and that spending gap is not filled by government net spending then the budget deficit will rise (as income adjustments cause tax revenue to fall and welfare payments to rise). You end up with a deficit but the economy is at a much less satisfactory position than would have been the case if the government had have “financed” the non-government saving desire in the first place and kept employment levels high.

7. A fiscally-responsible government will attempt to maintain spending levels sufficient to fill any saving but not push nominal aggregate spending beyond the full capacity level of output.

Conclusion

Given the overwhelming central bank focus on price stability, and the critical roll of today’s unemployed buffer stocks of unemployed, we argue that functioning and effectiveness of the buffer stock is critical to its function as a price anchor.

Condition and liquidity are the keys. Just as soggy rotting wool is useless in a wool price stabilisation scheme, labour resources should be nurtured as human capital constitutes the essential investment in future growth and prosperity. There is overwhelming evidence that long-term unemployment generates costs far in excess of the lost output that is sacrificed every day the economy is away from full employment.

It is clear that the more employable are the unemployed the better the price anchor will function. The government has the power to ensure a high quality price anchor is in place and that continuous involvement in paid-work provides returns in the form of improved physical and mental health, more stable labour market behaviour, reduced burdens on the criminal justice system, more coherent family histories and useful output, if well managed.

It is also the case the training in a paid-work environment is more effective than contextually isolated training schemes, which have become the fashion under the active labour market programs pursued by governments in all countries over the last two decades.

Now don’t say MMT doesn’t integrate a concern for inflation at the level of first principles.

Bill Mitchell

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6 responses to “Job Guarantee and Inflation Control

  1. I was going to leave a large post about the problems with this but I reckon I could just save myself the time by simply saying that this won’t work.

    • Thanks for the comment Sean. I have a few questions, why don’t you think it will work? Are the issues you have political or operational?

      Have you followed all the previous posts to understand the logic of this post?

      If the issue you have is political – say for example selling the idea will be extremely difficult – then I understand. Otherwise I’m interested in your view.

  2. I think there are a number of operational and political issues with the job guarantee. For instance, if you have a job guarantee, how do you ensure that people actually do productive work? If you are guaranteed a minimum wage, why would you do any real work? It will present a massive opportunity cost as money is shifted to low-return, unproductive “work” rather than higher-return private or public sector investment. It is a form of welfare.

    • I see millions of jobs that will add value to communities and to the environment everywhere I go and they are not being done because no-one will fund them.

      You might say they are not being done because they are not productive. But productive is not confined to contributing to the profit bottom-line of a capitalist enterprise. There are many things that deliver social returns that will never spin a private profit.

      JG workers could participate in many community-based, socially beneficial activities that have intergenerational payoffs, including urban renewal projects, community and personal care, and environmental schemes such as reforestation, sand dune stabilisation, and river valley and erosion control & much more. Most of this labour intensive work requires very little capital equipment and training. There is a comprehensive explanation of the mechanics available here.

      I don’t go into it here, as this is a general guide but there is nothing to say you cannot be fired under this scheme. All the real pros and cons of a private sector job apply. You are required to work, it is not passive. It develops skills of the low skilled and enables them to function on a subsistence level (unlike the below subsistence level of today’s passive welfare). I would suggest re-reading Full Employment with a Job Guarantee

  3. Just wondering how peak oil will affect this proposal or how you would factor in peak oil or declining oil supplies. Once oil supplies are officially in decline this will impact employment in a very significant way over the next 30 to 50 years as the worlds economy runs on two things money/credit and oil in the form of a universal energy as well as the basis of a lot of production material, plastic, transport, etc. with a shortage or loss of oil the world economy goes into decline if a replacement is not found. I would be interested to learn how you would use a job guarantee under this scenario.

    • I am sorry this reply took so long, I have been trying to work out how to say what I wish to say in as few words as possible, so it is less likely I am misunderstood. By happen chance I found an article today that does it all for me. If you click the link, scroll down to the section titled “environmental concerns” and you will have your answer.

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