A Job Guarantee would require $A26.5 billion net to reduce the unemployment rate by 6 percentage points

When Kevin Rudd was faced with the threat posed by the unfolding GFC in late 2008 his government became very pragmatic and immediately ditched the narrative they had been pushing out throughout that year about inflation being a threat and the need for tighter fiscal policy and surpluses. They introduced, in two rounds, a fairly significant fiscal stimulus (around 4.2 per cent of GDP) which effectively saved the Australian economy from entering a recession. A significant part of that intervention was that it had various temporal properties – a cash handout in December 2008 designed to get spending power into the hands of consumers just before Xmas (the famous ‘flat screen’ payment – there were a lot of TVs purchased), which obviously was an immediate focus, and, a longer term component, which included their plan to put insulation into every home. This was aimed at job creation clearly, to address the cyclical needs, but, it was also intended to address the longer term climate crisis, that were beyond the GFC cycle. When appraising what government’s should be doing now – to deal with the socio-economic consequences of the medical crisis – that style of thinking is essential. The questions that need to be asked are: 1. What can be done now to avert an economic collapse? 2. What do we want to change about the pre-structure of the economy into the future? 3. How can we use the stimulus intervention to make those changes, while addressing Question 1. In this blog post, I go through some of that style of thinking. I also provide some specific estimates of the investment needed to introduce a Job Guarantee in Australia.

Recall that on November 19, 2008, the recently-appointed chief of staff for the Obama Administration (Rahm Emanuel) spoke at at “Wall Street Journal conference of top corporate chief executives” and said (Source):

You never want a serious crisis to go to waste. Things that we had postponed for too long, that were long-term, are now immediate and must be dealt with. This crisis provides the opportunity for us to do things that you could not do before.

As this New York Times article – On Language A Terrible Thing to Waste (July 31, 2009) – notes, Emanuel used an earlier quote by Paul Romer, who had varied an earlier quote from some marketing agency, who ….!

While Emamuel is not someone we should revere, his sentiments are not without some sense and relate to the second question I posed in the introduction.

The problem is that the way in which governments ‘take advantage’ of crises is usually to fast track the existing agenda.

So, the Australian government, for example, is making noises that they want to ensure there are significant structural changes that come out of this crisis – including wage cuts, work protection, reduction in consumer protection laws, reduction in regulations relating to urban planning and development processes, and more.

In other words, they want to take advantage of the fragility of the economy – the massive rise in unemployment and lost businesses – to create an even more undesirable future than was in place at the onset of the coronavirus.

They are already on the way to doing that. Without much of a whimper, the trade unions and the Australian Labor Party seem to have accepted their wage cutting plans already by agreeing to the JobKeeper.

You can trace back through my blog posts under the – Coronavirus – category, to see what I have written about the wage subsidy program. It is too small in terms of outlays, invoves wage cuts for most, excludes at least a million of the most vulnerable workers in the nation (casuals with less than 12 months continuous employment with the same employer), and, by the Treasury’s own estimates, still leaves at least 680 thousand workers jobless.

There is no virtue in workers accepting wage cuts and thinking they are doing the ‘right thing’ in the crisis. All progressive groups should be demanding the government pay the entire wage bill of workers who they have forced into idleness to protect the community.

But, the principle that we use the massive government intervention at present, not just to shore up the short-term economic spending needs, but, also, to create new investments and structures that we will need to fight that other crisis, which has fallen into the background at present – climate change.

Only a month or so ago, progressives were all talking about green transitions and decarbonising the economy amidst the rather dire projections that we have about a decade to get it right.

Act now was the message before it is too late!

I am not sure we even have time to prevent irreversibility in our climate. But I am no climatologist so I read the research literature and glean an understanding that we can do some things to change our future in this regard for the better.

And, I was driving home the other afternoon and was listening to the radio where an expert was talking about the dramatic improvements in our natural environment after just a short period of lockdown.

So in thinking about what the Government has already done and what it needs to do, these are some of the considerations that I think are important.

What the crisis and the official intervention has demonstrated so far is that the ‘how to pay for the interventions’, ‘where is the money coming from’, and all the rest of the ridiculous barriers that typically prevent progressive policy making from being implemented can no longer be seen to be credible.

The important questions then relate to what we want the nation to look like if and when we get through this medical crisis?

Latest labour market data

On April 8, 2020, the Australian Senate established “a Select Committee on COVID-19 to inquire into the Australian Government’s response to the COVID-19 pandemic”.

You can follow the Committee’s activities and hearings – HERE.

Today (April 30, 2020), the Committee heard from the Department of Social Services and two documents were tendered, which you can read by accessing the site linked in the last paragraph.

The documents show that:

1. Unemployment (JobSeeker) benefit payments are now being made to 1,346,172 Australian workers.

2. A further 497,665 claims for benefits have not yet been assessed and finalised, inclusing 374,087 relating to either the adult JobKeeper or the Youth Allowance (for unemployment).

3. In the period March 16-April 27, 1,456,065 claims were made for welfare support, including 1,151,658 by those seeking unemployment benefits (mostly adult JobSeeker).

4. At the end of last year, there were 728,000 receiving unemployment benefits (which was called Newstart).

As I indicated the other day in this blog post – Policy failure – Australian unemployment rate probably already around 10.9 per cent (April 23, 2020) – my estimates based on the payroll data the Australian Tax Office is now making available suggests that the unemployment rate is now around 10.9 per cent notwithstanding the wage subsidy program.

This estimate was based on ATO data up to April 4, 2020.

We started the crisis with an unemployment rate of 5.2 per cent – excessive by any estimate.

The extra unemployment benefit recipients understate the extra unemployment because many people who lose their jobs are ineligible for benefits.

But if we take those who are now on benefits (Point 1) and those who have applications in waiting to be assessed (Point 2), then the unemployment rate would be around 12.5 per cent.

That means that in over the last two weeks of March and then up to April 27, the unemployment rate has risen 7.5 percentage points.

Which suggests that employment has slumped by 8 per cent over that time.

This is much worse than even in the Great Depression.

Conclusions: 1. The unemployment rate is currently around 12.5 per cent. 2. Underemployment has risen. 3. The fiscal intervention is far too modest and needs to be considerably re-thought.

Rethinking the fiscal intervention

In relation to rethinking the current fiscal intervention of the Australian government, over the next few blog posts, I will finalise a consistent plan that brings together the temporal elements I described above and also the principles I outlined in my blog post – The European Commission non-stimulus is a waiting game before new austerity is imposed (April 27, 2020).

I will bring those thoughts together next week.

It is clear, given this latest data, that the stimulus package so far announced is grossly inadequate.

No responsible government should allow unemployment to go from 5.2 per cent to 12.5 per cent in a few weeks.

Which means two things in my view:

1. Instead of offering a wage subsidy to a select proportion of the employed labour force, which is just above the minimum wage and is paid to employers as long as they keep the workers on their books, the government should just pay the wages of the workers directly to the workers independent of what the employer chooses to do.

I outlined that idea in this blog post – The government should pay the workers 100 per cent, not rely on wage subsidies (March 31, 2020).

This would, in effect, make those workers public employees for the duration of the health crisis, and obviate all the secondary negative problems that are occurring in the form of rent defaults, mortgage default and other contractual payments defaults (energy bills, etc).

Workers would be instructed to stay at home unless they were able to continue working with compromising the health policies in place.

If the employer chose to keep trading and utilise these workers, then they would have to pay the wage bill.

But if the government temporarily took responsibility for the wages bill of the workers that are flocking into the welfare system, then it would be a superior outcome to just putting them onto the unemployment benefit, which is inadequate by any estimate, notwithstanding the Coronavirus supplement they are paying unemployed workers for the period of the crisis.

2. Large-scale public sector job creation programs are also necessary.

Prior to the crisis (March 2020 Labour Force data), the unemployment rate was already 5.2 per cent or 718.6 thousand. So we entered this downturn already in poor shape.

There were also 1,205.3 thousand underemployed workers who desired, on average, 15 extra hours a week of work but were being denied access to those hours by the suppressed spending growth, driven, in no insignificant part, by the obsessive pursuit of a fiscal surplus by the federal government.

In total there were 1,924 thouand workers (14 per cent of available labour) either unemployed or underemployed.

Even with the $A133 billion JobKeeper wage subsidy program, the Treasury estimated that the unemployment rate would reach 10 per cent by June 2020. They claimed the wage subsidy would keep the unemployment rate from rising to 15 per cent.

I considered that situation in this blog post – Policy failure – Australian unemployment rate probably already around 10.9 per cent (April 23, 2020).

In the past, to support our advocacy of a Job Guarantee, Martin Watts and I have developed a modelling framework for estimating the investment needed for the Australian government to introduce an unconditional job offer at a socially inclusive minimum wage to anyone who wanted to work.

In the last week, we have undertaken the tedious and quite exacting (because attention to detail is crucial) process of updating our databases and reconstructing our model parameters and equations to take into account the current coronavirus crisis.

I can provide the following results and information, which we completed this morning. A full report documenting our approach will be released through the – Centre of Full Employment and Equity (CofFEE) – in due course.

But here is what is relevant from this work:

1. Assume that the unemployment rate was to rise to 10 per cent, with the JobKeeper wage subsidy in place (as is being assumed by the Treasury).

2. The pre-GFC low-point unemployment rate (February 2008) was 4 per cent. So, we entered this crisis in a worse position that just before the GFC.

3. If the unemployment rate was 10 per cent and we wanted it to be 4 per cent, the government would have to create:

(a) 824.2 thousand jobs in total (assuming the participation rate doesn’t change)

(b) 773 thousand full-time jobs (assuming the full-time/part-time mix doesn’t change)

(c) 244.4 thousand part-time jobs.

4. Based upon the current national minimum wage in Australia ($A740.62 per week), an average full-time working week of 38 hours, 30 per cent on-costs (hiring costs), plus additional capital costs per worker (plant, equipment) of 35 per cent, the total annual full-time Job Guarantee job outlay would be $A77,024.48 and the annual wage received by the worker would be $A38,512.24

The capital costs etc were estimated from a survey CofFEE undertook of Local Governments to assess supervision, plant and other costs that would be required to supplement each Job Guarantee job.

The 35 per cent assumption is based on a labour intensive suite of jobs.

The outlays for part-time workers are proportional to the ratio of average part-time to full-time working hours.

You can read about that survey and all the details of our research work in this report – Creating effective local labour markets: a new framework for regional employment policy.

5. We took into account:

(a) Labour productivity – and created a ‘composite’ job.

(b) Multiplier effects of each new Job Guarantee job – so how much does GDP and consumption expenditure increase.

(c) In turn, how this impacts on corporate profits and non-government sector employment.

(d) The extra tax revenue the government receives as a result of the higher employment levels both in the public and private sector.

(e) The reduced outlays on unemployment benefits under the assumption that the 842.2 thousand workers would no longer receive income support payments. This was calibrated according to estimates of different income support payments by family structure and marital (now called partnership) status.

The results

To reduce the unemployment rate by 6 percentage points (say from 10 per cent to 4 per cent – in fact, it doesn’t matter where you begin the simulation), then the following results are relevant.

Increase in employment

1. Total rise in employment = 842.2 thousand, which is made up of:

2. Job Guarantee employment = 712.6 thousand

3. New private sector jobs = 129.6 thousand.

Why does the private sector also expand?

Because the income stimulus to unemployed workers at the start (which is the difference between their Job Guarantee wage and the unemployment benefit) provides stimulus for increased consumption spending, which induces further income growth and via the multiplier effects a much larger final increase in national income and that stimulates the growth in private sector employment and corporate profits.

So introducing the Job Guarantee dramatically improves the material circumstances of the most disadvantaged.

But it also improves the situation for employers and profit recipients (which, of course, is the driving motivation but a positive derivative impact).

Government investment

To accomplish that increase in employment, the Federal government would outlay:

1. Gross $A48.4 billion over a 12 month time period.

2. Net $26.5 billion over the same period.

What explains the difference?

The Government receives extra personal tax revenue ($A3.9 billion), extra corporate tax revenue ($A3.4 billion), reduced unemployment benefit outlays ($A11.6 billion) and increased indirect taxes ($A6.2 billion) at current policy parameters.

To implement a Job Guarantee and reduce the unemployment rate by 6 percentage points: 1. The Federal government would outlay $A48.4 billion in gross terms over a 12 month time period. 2. The Federal government would outlay $26.5 billion in net terms over the same period once the extra personal tax revenue ($A3.9 billion), extra corporate tax revenue ($A3.4 billion), reduced unemployment benefit outlays ($A11.6 billion) and increased indirect taxes ($A6.2 billion) at current policy parameters are taken into account. 3. The wage subsidy Job Keeper program involved gross outlays of $A133 billion to reduce the unemployment rate by 5 percentage points.

Conclusion

The Job Guarantee satisfies most of the that I outlined in this blog post – The European Commission non-stimulus is a waiting game before new austerity is imposed (April 27, 2020).

It can be quickly implemented.

It will likely be labour intensive – so lots of employment created per dollar outlaid.

It has strong multiplier effects, such that the private sector gains substantially in employment and profits.

It is spatially perfect – taking jobs to where people live.

It is totally consistent with longer-term objectives to reduce carbon use and only promote ‘green’ activities.

It can be corrupted but it would be hard.

It doesn’t specifically address supply-chain constraints that are important in this particular crisis. But given that most of the workers employed would be low-wage workers anyway, it is likely that a significant proportion of the wage would be spent on food, housing, transport and energy costs all of which are not particular constrained in supply at present.

It is not perfect in equity terms because the jobs would be designed to be accessible to the most disadvantaged workers. So they do not attempt to solve the skills-based underemployment problem.

Our estimates also do not explicitly model a reduction in underemployment. We will do that next.

Our definition of full employment includes zero underemployment.

That is enough for today!

(c) Copyright 2020 William Mitchell. All Rights Reserved.