Income or employment guarantees?

While I am still reflecting on the UNDP workshop I participated at earlier this week in New York, another issue which came up repeatedly during the workshop is the on-going dispute between those who advocate income guarantees against those (such as me) who advocate employment guarantees. I didn’t cover this dispute at all in yesterday’s blog – Bad luck if you are poor!. When you start digging into the claims made by the income guarantee lobby you realise that most of their case is built on a failure to understand how a modern monetary economy works. For those who understand the opportunities available to a government which issues a sovereign currency, then the attractiveness of income guarantees disappears (in my opinion). So this blog documents some of this debate.

Many researchers and development policy commentators argue for the introduction of a Basic Income Guarantee (BIG) as the primary policy weapon against poverty. They highlight the fact that there is a lack of employment alternatives available to the poor in LDCs and that the social assistance grants system has demonstrated an ability to reduce poverty in countries where they are implemented.

The introduction of a BIG would seem to be an easy way to eliminate poverty and avoid the connection between income receipt and labour market participation. Most BIG proponents (for example, Van Parijs, Widerquist and Lewis, Clark and Kavanagh) believe that full employment is now unattainable.

I have been critical of the concept of the BIG for many years and clearly prefer employment guarantees as a major source of income security. BIGs provide a palliative solutiuon at best. Support for the BIG is based on a failure both to construct the problem of income insecurity appropriately and to understand the options that a government which issues its own currency has available to maintain full employment

So the question is income guarantee or employment guarantee?

In most LDCs (and advanced countries) there are no economic or financial constraints to achieving full employment. Only ideological and political constraints exist. In fact, each policy response (BIG or JG) requires that the same ideological and political barriers, relating to philosophical notions of citizenship and individual rights, be confronted and overcome. But when compared to a full-scale public sector employment program, the BIG is a second-rate option and is inherently inflationary.

The BIG conception of income insecurity and unemployment is highly problematic. The existence and persistence of unemployment and the link to income insecurity is generally recognised by BIG advocates but the former is rarely explained. An exception, is leading BIG advocate, Belgian academic Philipe van Parijs who presents both an explanation of unemployment and a related model of BIG financing. Drawing from orthodox neoclassical theory, Van Parijs considers that unemployment arises because wage rigidities impede atomistic competition and prevent the labour market from clearing.

Various explanations for the wage rigidities include trade union power, minimum wage legislation, and bargaining processes, which generate efficiency wages (insider-outsider arrangements). So unemployment is caused by the departure from competitive equilibrium rather than any macroeconomic failure.

Van Parijs then proposes a rather bizarre, and very neo-liberal solution in terms of a redistribution of the ‘property right’ represented by the alleged existence of ’employment rents’, associated with scarce jobs. He proposes a tradeable entitlement to an equal share of the scare jobs and then the scheme can be ‘financed’ by taxing workers who enjoy the employment rents. So the unemployed are really allowing those in employment to enjoy being employed.

The implicit full employment concept here is unacceptable, because it is engineered through an artificial withdrawal of the available labour supply, so that some of the unemployed are reclassified as not in the labour force.

There are insurmountable problems with this representation of income insecurity and the BIG financing model.

• Within their own logic, efficiency wage bargains reflect freedom of association and maximising decisions for both parties to the contract. Productivity would fall if firms only offered the competitive wage. Recruitment would become more difficult and turnover would rise. The wage outcomes are not dysfunctional and are not imperfections that can be eliminated to restore an otherwise (perfectly) competitive labour market;
• Clearly, if workers are willing to work at the efficiency-wage, and there are queues for jobs, then there must not be enough demand for the output they produce. Unemployment is demand-deficient in this case and firms would not hire more workers at lower wages.
• Justice, for Van Parijs, occurs when there are no employment rents, which means wages equal their (textbook) competitive levels. Assume that the imperfections (that create the rents) could be eliminated then within the logic of the competitive neoclassical model there would be equal endowments, market-clearing real wages and zero involuntary unemployment. There would also be zero employment rents and zero employment envy, but also no tradable commodities to support the basic income. In other words, this form of BIG financing depends on the existence of market imperfections.
• The BIG literature presumes that the good life enjoyed by the employed worker is at the expense of the unemployed and that scarcity is the problem. But while jobs might be scarce at present, are there no useful activities in which the unemployed could be engaged?

The final point is at the heart of the difference between the BIG and JG approaches to income insecurity. The solution to income insecurity has to go beyond palliative care. Unemployment is the most significant source of income insecurity. A more efficacious, and less apologetic, response to unemployment requires an understanding of why some people do not have access to paid employment and to alter the conduct of macroeconomic policy so that it achieves sustainable full employment at reasonable wages. This requires, in part, the implementation of a JG and the use of fiscal power.

In addition to constructing the problem of income insecurity incorrectly, the mainstream BIG literature advocates the introduction of a BIG within a ‘budget neutral’ environment. This is presumably to allay the criticism of the neo-liberals who eschew government deficits. One of the sensitive issues for BIG proponents is thus its perceived ‘cost’. This issue has been an important part of the development debate in many countries.

However, much of the debate about the viability of the BIG is conducted on the false premise that the government is financially constrained. Once we recognise that there is no financial constraint on a sovereign government spending, many of the problems created by BIG theorists can be avoided.

First, if the budget impact is kept to a minimum, there would only be a small increase in aggregate demand resulting from a modest BIG scheme which would be unlikely to provide sufficient hours of work to meet labour force preferences.

Second, it is highly unlikely that labour participation rates would fall with the introduction of the BIG, given the rising participation by women in part-time work (desiring higher family incomes) and the strong commitment to work among the unemployed. But there could be an increase in the supply of part-time labour via full-timers reducing work hours and combining BIG with earned income.

Third, employers in the secondary labour market will probably utilise this increase in part-time labour supply to exploit the large implicit BIG subsidy by reducing wages and conditions.

Fourth, some full-time jobs may be replaced with low wage, low productivity part-time jobs leading to falling investment, skill accumulation and ultimately falling average living standards.

Finally to provide a more generous BIG but keep the budget impact modest, higher taxes would be necessary which could impact on labour supply if substitution effects dominate. While some BIG advocates argue that there will be little impact on the participation rate of the recipients of BIG who are on low pay or are unemployed others point to the so-called liberating impact on individuals who can make real choices about whether or not to participate in paid work.

Under budget neutrality, the maximum sustainable BIG would be modest. Aggregate demand and employment impacts would be small, and even with some redistribution of working hours; high levels of labour underutilisation are likely to persist. Overall this strategy does not enhance the rights of the most disadvantaged, nor does it provide work for those who desire it.

Demand for labour would clearly increase more through a net government deficit than under a budget neutral regime. However it is the impact on labour supply that is of critical importance. If the level of BIG is increased, total labour supply is likely to decrease. So you move towards full employment by stealth – pushing workers out of the labour force rather than providing work for them.

Given the net stimulus to employment and output of a generous BIG, there is the logical possibility of excess demand for labour at full employment, resulting from the artificial reduction of the full employment level of employment, which compounds the inflationary pressure. The alternative is that the excess demand for goods would be increasingly met via imports with consequential effects for the exchange rate and the domestic price level, which would accentuate the inflationary pressure.

In the absence of an inbuilt counter-inflation mechanism, rising wages would make the BIG relatively less attractive. This may lead to some ‘lifestylers’ choosing to return to the labour market, while the government may respond by raising taxes and/or reducing government expenditure, which would tend to raise unemployment. In both cases demand pressure would decline, but to the extent that the inflationary process had assumed a cost-push form, wage and price inflation may only decline slowly.

It is thus possible that an unsustainable dynamic could be generated in which there were periodic phases of demand-pull inflation and induced cost-push inflation at low rates of unemployment, followed by contractionary policy and high rates of unemployment. These economic outcomes are consistent with the indiscriminate Keynesian policy of the past. The dynamic efficiency of such a pattern is highly questionable given that the hysteretic consequences of unemployment keep being manifested. Even if this Keynesian expansion achieves full employment, considerable economic inflexibility is created. The ebb and flow of the private sector cannot be readily accommodated, and the likelihood of inflation is thus increased.

In addition, the inflationary process at full employment could threaten to change the distribution of real income, weakening the inducement to invest and making the achievement of sustained full employment even more difficult. Over time there would be political pressure to raise the BIG in line with changing community expectations that reflect higher wage levels. Policy makers would need to correctly anticipate the impact on labour supply.

Thus, the introduction of a BIG policy is likely to be highly problematic with respect its capacity to deliver both sustained full employment and price stability.

In contradistinction, the Job Guarantee (JG) approach which creates a buffer employment capacity in the economy – is the only way to sustain full employment with price stability in the face of private spending fluctuations. Given the JG hires at a fixed price in exchange for hours of work and does not compete with private sector wages, employment redistributions between the private sector and the buffer stock can always be achieved to stabilise any wage inflation in the non-JG sector. The payment of market wages to JG workers undermines this counter-inflation mechanism, so that the full employment policy is reduced to an indiscriminate Keynesian expansion. The JG pool thus ebbs and flows according to private sector demand levels.

Finally, we need to consider the effect of a BIG on social attitudes to work and non-work. While BIG advocates argue that the universality of the payment will make it more acceptable to the community, this claim ignores the distinction between BIG recipients who choose to work and those that choose more leisure and no paid work. Paid work is still at the heart of our economic existence and culture. Unemployment remains a major source of stigma and the popular media vilifies those without work.

The research evidence strongly supports the view that any work is better than no work for the vast majority of workers.

There is a presumption in the BIG literature that the good (employed) life that the worker has is at the expense of the unemployed and that the scarcity of jobs is the problem. We cannot say that the provision of an income without work is equivalent to the provision of an income with a job, when there is evidence of significant social needs in local communities, which remain unmet due to inadequate levels of spending to fund the jobs.

Scarcity of employment is the chosen policy position of the nationarl government, rather than being a natural or given occurrence.

Payment of a BIG to all citizens would signify a further withdrawal by the State from its responsibility to manage economic affairs and care for its citizens. Young people must be encouraged to develop skills and engage in paid work, rather than be the passive recipients of social security benefit. The failure to engage in paid work cannot be narrowly construed as an inability to generate disposable income which can be addressed through a benefit, but entails a much broader form of exclusion from economic, social and cultural life, which has highly detrimental consequences.

BIG advocates fail to explain how its availability will promote meaningful engagement on the part of the disadvantaged, who have limited income earning opportunities. The universal availability of the BIG, does not overcome the stigma associated with voluntary unemployment of the able-bodied, who do not have caring or other responsibilities.

The achievement of full employment would rule out the need for a BIG. However, all citizens who are unable to work, due to illness; disability or caring responsibilities should still get social security benefits.

There is also a concern expressed by BIG advocates that Job Guarantee schemes cannot apply in developing countries because the scale of the problem is too large. Does our logic apply to developing countries? The repeated claim is that in high unemployment countries where there is already a high wage sector defended by vested interests, the introduction of an employment guarantee based on public works projects would be unsustainable.

This is a common argument made by development economists against employment guarantees as a solution to poverty arising from mass unemployment. However, these criticisms typically are based on notions of financial unsustainability underpinned by a government budget constraint.

We consider there to be nothing intrinsically different in a developing economy that maintains sovereignty of its own currency that would prevent the introduction of a JG, particularly when such economies lack adequate social and economic infrastructure. There are political, ideological and perhaps administrative issues that need to be confronted but these are common to both policy suggestions – BIG and JG alike.

Conclusion

Work remains central to identity and independence, and persistent unemployment remains the central cause of income insecurity. While the introduction of an BIG has superficial appeal – by allowing individuals to subsist without work – the model fails to come to grips with the failure of macroeconomic policy to provide paid employment opportunities and secure incomes for all.

Initially, the question is how much do you interfere with the market allocation system. Neo-liberals emphasise the sanctity of the market allocation system and argue that it is better to achieve non-economic objectives such as equity via non-market transfers. Our assumption is that equity (and by implication poverty) is also a substantial economic problem – a failure to maximise the potential of the most value resource available to any country – its labour.

In that sense, most of the debate surrounding the relative merits of in-kind versus income transfers; and the relative merits of using the wage system to achieve redistributive goals fail because they are based on flawed textbook market models that ignore market failure and second-best arguments.

The use of a BIG as the primary means of poverty reduction for the following reasons:

• It creates a dependency on passive welfare payments;
• It creates a stigmatised cohort;
• It does not provide any inflation buffer and is inconsistent with the macroeconomic principles that apply to a fiat monetary system.
• It does not provide any capacity building. A BIG treats people who are unable to find adequate market-based work as consumption entities and attempts to meet their minimum consumption needs. However, the intrinsic social and capacity building role of participating in paid work is ignored and hence undervalued;
• It is sometimes said that beyond all the benefits in terms of self-esteem, social inclusion, confidence-building, skill augmentation and the like, a priceless benefit of creating full employment is that the “children see at least one parent going to work each morning”. In other words, it creates an intergenerational stimulus that the BIG approach can never create.

Unlike the BIG model, the JG model is a far better vehicle to rebuild a sense of community and the purposeful nature of work. It is the only real alternative if intergenerational disadvantage is to be avoided. It also provides the framework whereby the concept of work itself can be broadened to include activities that many would currently dismiss as being leisure, which is consistent with the aspirations of some BIG advocates.

It also allows for capacity building by integrating training and skills development into the paid work environment.

It is clearly relevant to less developed countries.

Saturday Quix

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