What is a Job Guarantee
The basis of the proposal is that the sovereign government unconditionally offers a public sector job at the minimum wage 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 sovereign government is thus offering to purchase a resource for which there is currently no market price – a zero bid input. In this sense, it expands its spending not by competing with other resource users but by utilising an unemployed resource. We call this spending on a price rule rather than a quantity rule.
Currently, governments tend to spend on quantity rules – so they plan a budget deficit of a certain size and allocate program budgets to match. This is a flawed approach because it relies on them being able to exactly predict the spending gap that the deficit needs to fill. The likelihood of under-spending and leaving labour resources unemployed is high under this approach.
It is far better to have some leeway in the budget where the spending gap is closed with a employment guarantee – which means that the government would always be able to create “loose” full employment (buying labour at zero bid rather than competing in the market for it) and the deficit would be whatever it had to be – that is, exactly the right size relative to GDP.
So the JG fulfils 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.
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.
There is no question that advanced countries could fairly quickly introduce this type of scheme. Most have sovereign governments that have no difficulty creating a demand for their currency. Most have elaborate taxation, welfare and other administrative procedures which allow government to engage with their populations. Most have systems of checks and balances which do not prevent corruption but tend to make it harder to become entrenched.
A government that is not sovereign in its currency may not have the fiscal capacity to run a JG system without raising revenue first. So a state government in a federal system could clearly administer and operationalise an employment guarantee but would have to “finance” it with revenue. A national government which issues its own currency does not face these revenue constraints.
The Government operates a buffer stock of jobs to absorb workers who are unable to find employment in the private sector. The pool expands (declines) when private sector activity declines (expands). The JG fulfills this absorption function to minimise the costs associated with the flux of the economy. So the government continuously absorbs into employment, workers displaced from the private sector. The “buffer stock” employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector.
So the JG works on the “buffer stock” principle. I first thought of this idea during my fourth year as a student at the University of Melbourne (in the late 1970s). The basis of the policy came to me during a series of lectures on the Wool Floor Price Scheme introduced by the Commonwealth Government of Australia in November 1970. The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC). The Government then guaranteed that the price would not fall below that level by using the AWC to purchase stocks of wool in the auction markets if demand was low and selling it if demand was high. So by being prepared to hold “buffer wool stocks” in low demand and release it again in times of high demand the government was able to guarantee incomes for the farmers. However, with some lateral thinking you can easily see that what the Wool Floor Price Scheme generated was “full employment” for wool! If the Government fixed the price that it was prepared to pay and then was willing to buy all the wool up to that price then you have an equivalent scheme.
This works just the same for labour resources – just unconditionally offer to buy all labour at a stated fixed wage and you create full employment. What should that wage be?
To avoid disturbing private sector wage structure and to ensure the JG is consistent with stable inflation, the JG wage rate is best set at the minimum wage level. The JG wage may be set higher to facilitate an industry policy function. The minimum wage should not be determined by the capacity to pay of the private sector. It should be an expression of the aspiration of the society of the lowest acceptable standard of living. Any private operators who cannot “afford” to pay the minimum should exit the economy.
The Government would supplements the JG earnings with a wide range of social wage expenditures, including adequate levels of public education, health, child care, and access to legal aid. Further, the JG policy does not replace conventional use of fiscal policy to achieve social and economic outcomes. In general, the JG would be accompanied by higher levels of public sector spending on public goods and infrastructure.
Family Income Supplements:
The JG is not based on family-units. Anyone above the legal working age is entitled to receive the benefits of the scheme. We would supplement the JG wage with benefits reflecting family structure. In contrast to workfare there will not be pressure applied to single parents to seek employment.
The JG would be funded by the sovereign government which faces no financial constraints in its own currency. In the context of the current outlays that are being thrown around in national economies, the investment that would be required to introduce a full blown would be rather trivial. I have already stated that a JG that increased employment by around 560,000 workers in Australia would require an annual outlay of around $A8.3 billion. Around 80 per cent of these jobs would be in the JG and the rest the result of the expansionary impact the JG would have on private employment.
I have written extensively about this. But keeping it simple here I merely say that the JG maintains full employment with inflation control. When the level of private sector activity is such that wage-price pressures forms as the precursor to an inflationary episode, the government manipulates fiscal and monetary policy settings (preferably fiscal policy) to reduce the level of private sector demand. This would see labour being transferred from the inflating sector to the “fixed wage” sector and eventually this would resolve the inflation pressures. Clearly, when unemployment is high this situation will not arise.
But in general, there cannot be inflationary pressures arising from a policy that sees the Government offering a fixed wage to any labour that is unwanted by other employers. The JG involves the Government “buying labour off the bottom” rather than competing in the market for labour. By definition, the unemployed have no market price because there is no market demand for their services. So the JG just offers a wage to anyone who wants it.
In contradistinction with the NAIRU approach to price control which uses unemployed buffer stocks to discipline wage demands by workers and hence maintain inflation stability, the JG approach uses the ratio of JG employment to total employment which is called the Buffer Employment Ratio (BER) to maintain price stability. The ratio that results in stable inflation via the redistribution of workers from the inflating private sector to the fixed price JG sector 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. Its microeconomic foundations bear no resemblance to those underpinning the neoclassical NAIRU.
It also wouldn’t be worth estimating or targetting. It would be whatever was required to fully employ labour and maintain price stability.
Workfare or Work-for-the-Dole:
Many people think that the JG is just Work-for-the-Dole in another guise. The JG is, categorically, not a more elaborate form of Workfare. Workfare does not provide secure employment with conditions consistent with norms established in the community with respect to non-wage benefits and the like. Workfare does not ensure stable living incomes are provided to the workers. Workfare is a program, where the State extracts a contribution from the unemployed for their welfare payments. The State, however, takes no responsibility for the failure of the economy to generate enough jobs. In the JG, the state assumes this responsibility and pays workers award conditions for their work.
Under the JG workers could remain employed for as long as they wanted the work. There would be no compulsion on them to seek private work. They could also choose full-time hours or any fraction thereof.
The JG would be integrated into a coherent training framework to allow workers (by their own volition) to choose a variety of training paths while still working in the JG. However, if they chose not to undertake further training no pressure would be placed upon them.
I would abandon the unemployment benefits scheme and free the associated administrative infrastructure for JG operations. The concept of mutual obligation from the workers’ side would become straightforward because the receipt of income by the unemployed worker would be conditional on taking a JG job. I would start paying a JG wage to anyone who turned up at some designated Government JG office even if the office had not organised work for that person yet.
For financial reasons explained below, the JG would be financed federally with the operational focus being local. Local Government would be an important administrative sphere for the actual operation of the scheme. We would abandon the Jobs Network and restore the Commonwealth Employment Service (CES), which would play and important role in coordinating the JG demand and supply with local level managers. Local administration and coordination would ensure meaningful, value-adding work was a feature of the JG activities.
Type of Jobs:
Surveys of local governments that we have done reveal a myriad of community- and environmentally-based projects that could be completed if Federal funds were forthcoming. The JG workers would contribute in many socially useful activities including urban renewal projects and other environmental and construction schemes (reforestation, sand dune stabilisation, river valley erosion control, and the like), personal assistance to pensioners, and other community schemes. For example, creative artists could contribute to public education as peripatetic performers. The buffer stock of labour would however be a fluctuating work force (as private sector activity ebbed and flowed). The design of the jobs and functions would have to reflect this. Projects or functions requiring critical mass might face difficulties as the private sector expanded, and it would not be sensible to use only JG employees in functions considered essential. Thus in the creation of JG employment, it can be expected that the stock of standard public sector jobs, which is identified with conventional Keynesian fiscal policy, would expand, reflecting the political decision that these were essential activities.
Open Economy Impacts:
The JG requires a flexible exchange rate to be effective. A once-off increase in import spending is likely to occur as JG workers have higher disposable incomes. The impact would be modest. We would expect any modest depreciation in the exchange rate to improve the contribution of net exports to local employment, given estimates of import and export elasticities found in the literature.
The JG proposal will assist in changing the composition of final output towards environmentally sustainable activities. These are unlikely to be produced by traditional private sector firms because they have heavy public good components. They are ideal targets for public sector initiative. Future labour market policy must consider the environmental risk-factors associated with economic growth. Possible threshold effects and imprecise data covering the life-cycle characteristics of natural capital suggest a risk-averse attitude is wise. Indiscriminate (Keynesian) expansion fails in this regard because it does not address the requirements for risk aversion. It is not increased demand per se that is necessary but increased demand in certain areas of activity.
So you can see that a sovereign government is a monopoly issuer of its own currency and has the capacity to purchase all unwanted labour in the economy.
The point is that in relation to the current way of dealing with the crisis, the JG has to be a better alternative. Standing by and witnessing the incredible wastage of potential labour that unemployment epitomises is surely never going to be a better strategy than putting that labour to work on public programs.
And … if it turned out to be a disaster after a year or so … you could scrap it and go back to the pitiful approaches that are being followed at present!