Employment guarantees in vogue – well not really

Two related articles in The Economist last week (November 7, 2009) caught my attention. The first article – Battling joblessness – Has Europe got the answer – was about how the Continent may be a guide to all of us in tackling unemployment. The second article – Faring well – was extolling the virtues of India’s National Rural Employment Guarantee Act (NREGA). They provide a further basis for discussing employment guarantees.

In Battling joblessness the proposition is put that while America has seemingly had a better labour market record than Europe in the last decades, in the current downturn:

Although output in the euro area has fallen as much as in America, the unemployment rolls have not grown as much. The euro-wide jobless rate is up by less than a third, compared with a doubling across the Atlantic. At 9.7%, euro-area unemployment is high, but slightly lower than in America …

The article then highlights what it sees as a great “policy divergence” between the two regions. There have been large fiscal stimulus packages in the US but “relatively little of that money has gone … to slow firing, boost hiring or support the jobless.” By contrast policy in Europe has reflected a “more coherent strategy” which has used public spending to “subsidise a shortened work week”, reduce “labour costs and, in a few cases, offers tax subsidies to support new jobs.”

They say that Europe has learned the lesson from previous recessions where “misguided early-retirement schemes” only institutionalised idleness. So this time, the governments in Europe have tried to support firms to retain workers which avoids one of the major costs of a recession – the long aftermath of long-term unemployment, which lasts for years and spans generations.

However, the article is critical of the way that the Europe government’s have executed this strategy. The shorter-week subsidy – which we discussed in yesterday’s blog – The enemies from within – is characterised as “paying firms to hoard workers” which means that governments have propped up demand:

… by fossilising a country’s job structure and preventing the shift of workers from industries with excess capacity (like carmaking) to more promising ones. That ossification will surely come to haunt continental Europe. And in an economy like America’s, where the end of the debt-fuelled consumer-spending binge is forcing big structural shifts, it would be insane.

The point is that a recession does have a certain cleansing effect in terms of industry structure. With different vintages of capital equipment in existence at any point in time, the high cost, inefficient, low productivity capital can hang on and deliver profits to firms if aggregate demand is buoyant. However, as soon as the slump occurs, these plant-types are turned off forever if there is no intervention to support them.

Once the upturn comes and firms start to believe the demand recovery is likely to be robust (there are acute irreversibilities in capital formation) then the best-practice technology tends to enter the production process. This investment which lowers the average vintage age is typically associated with higher productivity and low unit cost production which renders the old inefficient capital redundant.

So the ossification argument has some credibility. But then what do you do to prevent long-term unemployment from becoming entrenched yet allow the dynamic restructuring of capital to occur?

The Economist article says that:

Rather than encourage labour hoarding, governments should promote hiring. Policies that do so span a broad spectrum. At one extreme lie public-work schemes of the kind introduced in the 1930s and now used on a massive scale in India … A more modest and sensible approach for today’s rich economies is to increase firms’ incentives to hire new workers. That is why Europe’s governments are right to focus on waiving or reducing their high payroll taxes, especially for additional hires. And it is why American proposals to finance an extension of unemployment insurance with payroll taxes are misguided. Heavy labour taxes are one reason why Europe entered the downturn with far higher unemployment than America. Lightening that burden would do most to boost jobs – on both sides of the Atlantic.

First, the prejudice of the author is evident in the “more modest and sensible” terminology.

Second, the government might sensibly do both – reduce payroll taxes and introduce an employment guarantee.

My sometime co-author and friend Warren Mosler has been advocating a payroll tax holiday in the US for the last few years to address the loss of jobs. He believe that by cutting them the government will add to aggregate demand and support employment.

It is crucial for this argument that aggregate demand increases. Warren’s argument is not that employment is constrained by excessive wage costs but that firms will only employ if they can sell the goods that the workers are producing. His assumption is that the firms will pass on the payroll tax cuts either in new investment, higher wages or other spending.

It is clear that payroll taxes are transaction-based imposts that add to hiring costs for the firms that are subjected to them. In Australia, if you cut the tax by 20 per cent you would give employers around $3 billion per annum extra.

Do they reduce the incentive to hire? That is debatable. It is like saying paying a wage is a disincentive to hire which in one sense it clearly is.

The driving force in employment decisions is always whether there is a market for the goods and services that will be produced at the current cost level. Clearly, if the rate of profit is threatened by higher wages (and add-ons to the hiring transaction) then firms may stop investment and that will reduce aggregate demand and cause employment growth to fall.

The important point is that the revenue considerations that usually stop any discussion about dropping payroll taxes are irrelevant to a modern monetary economy. The debates between the commonwealth and the states over this issue just reflect an ignorance of the way the monetary system operates.

If it could be definitively established that payroll taxes do significantly reduce employment growth, then the federal government could compensates the states fully out of its own spending and scrap the whole scheme. When aggregate demand is weak it is probably a good idea to err on the side of caution and get rid of them – at least for a time.

However, I doubt that scrapping payroll taxes will significantly reduce unemployment (and underemployment). That is why MMT suggests that the sovereign government should introduce a Job Guarantee before it does anything else.

I discuss the concept of a Job Guarantee in considerable detail in this blog – When is a job guarantee a Job Guarantee? . Essentially it is an unconditional and universal job offer at the minimum wage (calibrated to be an inclusive living wage) to anyone who wants a job. It would mostly eliminate unemployment (except frictional) and probably eliminate underemployment.

So in terms of being “modest and sensible” (as above in The Economist article) it all depends on what you are trying to achieve. If you want a few more jobs retained then a modest policy can achieve that.

But if you want to sustain full employment (below 2 per cent official unemployment, zero underemployment and zero hidden unemployment) then what is “modest and sensible” changes.

The reality is the Job Guarantee approach is the only guaranteed way that the national government can ensure there are enough jobs available at all times without activating an inflationary spiral. It is a very modest approach given those aims – choosing to work via the automatic stabilisers.

I found it interesting that the terminology “modest and sensible” was being used with no real benchmark – but that is the way the neo-liberals operate – blur the “costs” of their policy positions and redefine concepts such as full employment to be something totally different (higher unemployment and underemployment) that what a reasonable assessment would conclude.

The second Economist article – Faring well started by noting that “India’s grand experiment with public works enjoys a moment in the sun”.

The experiment they are referring to is the National Rural Employment Guarantee Act (NREGA), which guarantees 100 days of minimum-wage employment on public works to every rural household that asks for it. So the NREGA is a cut-down partial Job Guarantee.

The Indian Government maintains a wonderful NREGA Home Page with a wealth of information available.

The Economist says that there are some administrative issues associated with the NREGA scheme but:

Despite such flaws, the NREGA is winning praise from unexpected quarters. One reason India weathered the financial crisis of the past year was the strength of rural demand, many economists argue, and one reason for that strength was the expansion of the act to every rural district in April 2008. Once dismissed as a reckless fiscal sop, the scheme is now lauded as a timely fiscal stimulus. Because it must accommodate anyone who demands work, it can expand naturally as the need arises.

In my recent book with Joan Muysken Full employment abandoned we wrote (p.255) that the NREGA was designed “to bridge the vast rural-urban income disparities inequality that have emerged as India’s information technology service sector has boomed” The problem facing the Indian government was that there was too much migration from the poor rural areas into the burgeoning urban areas.

They decided, sensibly, to reduce the incentive for the migration by creating work and lifting standards of living in the rural areas. The scheme, despite its shortcomings (see below) has been very successful and millions of jobs have been created and a noticeable dent in poverty has occurred.

Wages paid sometimes exceed the going private sector wage and this has led to complaints from employers who want to pay below what effectively becomes the minimum wage.

In my work for the ILO last year, which involved an evaluation of the South African Expanded Public Works Programme and designing a minimum wage framework for the scheme (and hence the economy as a whole), this issue was always raised. I noted in my Report:

First, the aim of the South African government is to significantly reduce unemployment and to eliminate absolute poverty and also provide for an improved personal capacity to manage risk via savings (that is, reducing relative poverty). The proposal to increase the minimum EPWP wage is consistent with that overriding objective. However, maintaining sectors in the private labour market that pay “poverty wages” is not consistent with that policy. It in the interests of the South African economy that higher productivity employment is fostered rather than relying on low-wage, working poor jobs to absorb the unskilled labour force.

Second, the EPWP can serve an industry policy to promote a quickening of this move to a high-wage, high productivity economy by placing pressure on market economy employers through the wage floor it establishes

I argued that if the EPWP wage became the national minimum then both demand and supply effects would be present. Employers currently paying below the wage would be confronted with the decision of operating that new legal minimum or closing down. What happened to the workers who lost their jobs depends on how many EPWP jobs were created and the impact of the higher wages on spending and overall job creation. There would also be a dynamic present to restructure existing employment.

If the EPWP was scaled up into an unconditional wage offer to anyone who wants a jobs (which we recommend) then the supply effects are likely to be significant.

In this latter context, employers paying below the proposed minimum would start to find it difficult to attract labour as the EPWP jobs (being always available, local and better paid) would become far better alternatives to the available labour. The employers would then be forced to invest in productive capital to increase the productivity of labour and pay at least proposed minimum per month to retain labour.

There may be some cases where a worker would agree to working below that if the job provided them with other non-pecuniary rewards that compensated. It is unlikely that all the workers who are currently earning below proposed minumum per month would be attracted to the EPWP.

If the EPWP minimum wage became the statutory minimum in South Africa, it is clear that this is the most desirable way in which to introduce and sustain a national employment guarantee system, then the private sector employers would face an immediate need to restructure their workplaces (invest in higher quality capital) to meet the new legal minimum wage levels but more importantly to stop the migration of their labour forces to more attractive EPWP employment.

Some employers would close their operations because they would not be able to operate at the higher costs. Economic development always involves a movement from lower productivity-higher cost production to higher productivity-lower cost production.

The ability of the EPWP to absorb this displaced labour would depend, in turn, on its scale. If there was a true EPWP safety net operating then these closures would shift workers into higher income areas and represent an improvement. That is the rationale of using the EPWP as a quasi-industry policy which can stimulate the South African economy towards the desirable high-wage, high productivity growth path.

The following Table is taken from Full employment abandoned (Table 9.1, p.257) and compares the ideal Job Guarantee with the partial schemes introduced in South Africa (EPWP), Argentina (Jefes) and the NREGA in India. You can readily appreciate that the underlying modern monetary theory (MMT) which drives the JG conception is missing from the other schemes.

For example, in the NREGA sub-national governments, which are revenue-constrained, contribute to the investment outlays of the scheme. Further, the scheme is not universal nor unconditional. Nor does it provide a permanent job offer which means there is no “buffer stocks” capacity available in India.

Also, given the wage arrangements (some of the wage can be paid in food) the NREGA does not provide a comprehensive nominal price anchor. By paying a minimum wage to all workers, the JG creates what we call “loose full employment” – in the sense it places no pressures on the price level in its own right. It can also be used to discipline the inflation process by redistributing workers to the fixed price sector. There is no such capacity in NREGA.

Finally, NREGA provides no training capacity. The ideal JG would integrate skills development into the unconditional job offer and thus build dynamic efficiencies into the economy and provide the least-advantaged workers income security but a ladder to move to higher productivity jobs in the future.

The Economist article then makes an interesting point:

Policy wonks argue that cash handouts to the poor would be easier to administer, and would leave the recipients free to work the fields or roll beedis for private employers. But the poor themselves seem surprisingly sceptical of such an idea. “If money comes for free, it will never stay with us,” one elderly farmer says. “The men will drink it.” To wring anything out of India’s calcified bureaucracy takes a fight. If people feel they have earned their money from the government, they become more determined to claim it, even if that means waiting all day outside the village bank.

Mainstream economists always think cash handouts are better way of solving income insecurity because it allows the recipient to choose and it is always assumed that the individual knows best. The problems with this conception are manifest. The most obvious one noted in the quotation above is that individuals do not hunt alone. They tend to have families and have to assume wider responsibilities.

So often more enlightened policy advocates will argue that “in-kind” transfers are better – because at least the children will be fed! The NREGA is a twist on that theme and raises another very important point.

The “in-kind” component is the job. And it works to get “food on the table” instead of “grog down the throat” because people intrinsically value their involvement in productive work. There is a sense of achievement in earning one’s living.

Mainstream economics textbooks have labour-leisure choice models to determine labour supply. Labour is a bad and hence undesirable, leisure is a good. The only way you will engage in a bad is if you are paid. But this extremely blinkered view of the world that mainstream economists have reflects their ignorance of work in other social sciences. Economists have one of the worst records as a discipline in cross-citations of other disciplines. They just think they know everything – and end up knowing nothing much at all.

Other disciplines (sociology and psychology, for example) reveal that work is seen as desirable (rather than a bad) and the value of it extends far beyond the wage earned. That is one the reasons I always advocate creating jobs rather than paying basic income guarantees or other forms of income support.

And then we get to an interesting part of the article. The Economist suggest that the “idea has appeal even in rich countries”. They go on:

Paul Gregg of Bristol University and Richard Layard of the London School of Economics have called on the British government to provide a “job guarantee” to anyone out of work for more than 18 months (and any youngster out of work for a year). In countries like Britain, there is a thin line between a job guarantee – providing work to anyone who needs it – and workfare – denying benefits to anyone who refuses it. Mr Gregg and Lord Layard are insistent that the government pay market wages for the jobs it provides under any such scheme. “This is essential for the credibility of the job,” they write.

You can read Layard’s latest Job Guarantee proposal with Paul Gregg HERE. They say:

If we intend to follow this approach, there is everything to be said for announcing it now. The alternative is to come up with a new commitment every 6 or 12 months, which would be far less impressive. We should use a new term ‘The Job Guarantee’ which will resonate with people, rather than have headline talk about modifications to the New Deal, which is pretty arcane to most people.

You will see at the end of this blog an E-mail I send Richard Layard questioning his claim to be authoring a “new term”. I will post his reply if I get one.

Their proposal can be summarised as a very short-term job for people after they had been in an active labour market program for 12 months. So it aims to attack the problem of long-term unemployment rather than unemployment per se

For the 18-25 year olds they would be churned through two labour market programs (JSA and Gateway) and then offered a 6-month paid job. For the over-25 year olds they would not get access to the 6 months of guaranteed employment until they had been churned through 18 months of humiliating and useless labour market programs.

They say that the Job Guarantee jobs have to be “useful” and argue that:

… there is a mass of low-tech maintenance which needs to be done on public housing, schools, hospitals and roads, by LTU given 1-2 weeks’ training. Similar there is a mass of social care (e.g. home help) which can be usefully provided by LTU. The work needs to be managed professionally with a visible leader at the centre.

They also note that “Job search should be encouraged during the Job Guarantee” and that workers should be “paid the rate for the job (mainly MNW)” to ensure the jobs are credible. They correctly note that if the worker is “paid benefit-plus” then everyone will conclude it is “workfare”.

The material they provide on costing and the sensitivity to that issue indicates that they do not understand that the British government is not revenue-constrained and can therefore “afford” to hire everyone who wants a job at the minimum wage (MNW).

So while this is a better arrangement than no guarantee, it remains a mean-spirited scheme designed to distract attention from the fact that Layard’s other policy ideas have not only inflicted significant damage on the most disadvantaged individuals right across the world but have also failed to achieve their stated purpose.

By way of context, Layard, Nickell and Jackman’s (1991) book Unemployment, Macroeconomic Performance and the Labour Market was the theoretical bible used by the OECD to introduce its 1994 Jobs Study which set the labour market policy agenda until today. The OECD advocated extensive supply side reform with a particular focus on the labour market, because supply side rigidities were alleged to inhibit the capacity of economies to adjust, innovate and be creative. The proposed reform agenda was variously adopted by many governments.

It was introduced as monetary authorities increasingly adopted inflation targeting (formal and informal) which their policy on price level targets and used unemployment as the instrument to achieve these targets. It also was accompanied by growing fiscal conservatism, which in Europe has been expressed in the Maastricht Criteria and the Stability and Growth Pact. In Australia there was also a major fiscal retreat, resulting in 10 years of Federal surpluses and the introduction of the privatised Job Network and pernicious industrial relations legislation as well as other nasty supply-side policy changes.

However, some 15 years after the OECD Jobs Study was released, the OECD economies still generated high unemployment rates and broader forms of labour underutilisation have increased. The trend to part-time and casualised employment which fails to provide enough hours of work to match the preferences of the workforce is widespread throughout OECD countries. Now we are back in recession, it is difficult to see what has been achieved by the supply-side labour market policies other than to punish the most disadvantaged workers in our communities.

There is also strong evidence to show that active labour market programs of the type praised by the OECD have been largely ineffective in reducing unemployment and improving the outcomes of the most disadvantaged workers in the labour market. The situation will worsen in the current downturn.

Interestingly, in 1997, Layard started to express doubts on the supply-side labour market policies that he initially promoted and which were so zealously taken up by the OECD and governments around the world. Layard (1997: 202) concluded that:

If we seriously want a big cut in unemployment, we should focus sharply on those policies which stand a good chance of having a really big effect. It is not true that all polices which are good in general are good for unemployment. There are in fact very few policies where the evidence points to any large unambiguous effect on unemployment and some widely advocated policies for which there is little clear evidence.

For example, Layard (1997: 192) argues that further cuts in the duration of benefits would only increase employment at the costs of the creation of an underclass with an “ever-widening inequality of wages.” [“Preventing Long-Term Unemployment”, in J. Phillpott (ed.), Working for Full Employment, Routledge: London, 190-203.]

Further, in 2001, another member of the LNJ team, Stephen Nickell wrote (Nickell and Quintini, 2001: 5) in relation to the United Kingdom that:

… simply because a change in the benefit system reduces equilibrium unemployment …. [by making unemployment less attractive] … it does not necessarily imply that it is a good thing. It is arguable, for example, that the current benefit system is simply too mean. In fact, to have a system which operates well, it is not necessary to plunge households into poverty should the sole breadwinner lose his or her job.

At present, the UK economy has melted down but all sides of politics are resisting abandoning their so-called “flexible labour market” policies. The Government’s ability to stop the economy from freefalling is that they claim they are “cash-strapped” despite being sovereign in sterling and they also believe large scale public works programs are wasteful and inefficient.

With millions of unemployed workers doing nothing I wonder what their definition of waste and inefficiency is.

And it is from this background that Layard comes in which his plan for a “job guarantee”. So is this a true Job Guarantee scheme? Emphatically no!.

Questions that arise:

Q1. If there are so many productive jobs available why not make the job offer unconditional and universal? Why force the unemployed to jump through hoops for 12 or 18 months?

Answer: There are millions of jobs that can be done. The reason they don’t make it unconditional and universal is because they fail to understand their own monetary system and harbour a belief that deficits are bad.

Q2. If the output is productive (that is, valuable) why stop a person’s participation in the scheme after 6 months? What possible motive is there for that truncation?

Answer: No reason for the truncation other than a failure to understand their own monetary system and harbour a belief that deficits are bad.

Q3. Is the British government sovereign in sterling?

Answer: Obviously. That means no revenue-constraints – they can buy whatever is offered for sale. So why not see how many workers actually want a minimum wage job?

Conclusion

I think Richard Layard should stop using the term Job Guarantee until he is prepared to advocate something more than a scrap of direct job creation in the face of millions of unemployed workers.

If the British government could get beyond their “gold standard” fiscal straitjacket then the solution is there for them to take – give all those who want a job, immediate employment and integrate skills development into the paid work environment.

The investment (I don’t use the word cost in this context) would return benefits many times over.

Postscript

Here is the text of the E-mail I sent Lord Layard today in relation to his use of the term Job Guarantee …

Wednesday, November 18, 2009

Dear Richard

I noted your recent publication with Paul Gregg which recently attracted interest in The Economist. I know your ideas on the idea of a short-term job/training offer go back at least to the 1998 Getting People Back to Work publication.

In your recent short paper with Paul, you say:

“We should use a new term ‘The Job Guarantee’ which will resonate with people, rather than have headline talk about modifications to the New Deal, which is pretty arcane to most people.”

But I would have thought your use of this terminology was hardly in the spirit of inventing a “new term” – for example, Wendell Gordon used the term years ago.

Further, my own work and that of my collaborative colleagues (Randy Wray, Mat Forstater and many others) has been working on the concept of employment guarantees for years now and have published the ideas extensively in well ranked journals and in books with top publishers.

While the US academics tend to use the term ELR (employer of last resort), I followed Gordon (with credit) and used the term Job Guarantee.

If you do a Google search on the term Job Guarantee – the first placed item returned refers to my work.

My recent book Full employment abandoned: shifting sands and policy failures, published by Edward Elgar UK provides a comprehensive account of the work.

So you are hardly introducing a new term nor should you take credit for the conceptual development lying behind the idea. In fact, your model is a very limited conceptualisation of the possibilities of a Job Guarantee.

I would hope in the future that you adopt standard academic practices and credit the extant literature on the concept.

But I am also glad that you are trying to change the debate somewhat in the UK. It sure needs it.

best wishes
bill