Posted: April 10, 2005

Government and the JG Part 5

The blogs slowed over the last few weeks due to workload deadlines. But here is Part 5 of the series that are progressively examining (paragraph by paragraph) the letter from Federal Minister for Employment and Workplace Relations to the Australian Local Government Association (ALGA) outlining why the Federal Government will not introduce a Job Guarantee in Australia which would provide a guaranteed public sector job to anyone who wants to work at federal minimum award wages (FMW) and thus provide inclusion for the most disadvantaged workers in our community. For background see the first blog in this series which explains the decision taken by ALGA at their 2004 National Congress and their approach to the Government to fund a Job Guarantee. The reply from the Federal Minister for Employment and Workplace Relations Kevin Andrews on August 13, 2004 has been published by ALGA HERE.

In this blog we focus on the The Minister's argument about how a Job Guarantee would distort the wage structure and lead to inflation. He says ...

The CD-JG could also affect the private sector wage structure by putting a floor on wages, leading workers in the private sector to try to increase the differential between wages for 'real jobs' and CD-JG jobs, particularly if CD-JG workers are assumed by others to have lower productivity. This in turn may lead to wage increases in job guarantee schemes and subsequent impact on overall wages.

First, does the Minister advocate there being no floor on wages? This would be the first time a senior Government official has publicly advocated the abandonment of Australia's Safety Net wage (which is the FMR) and would represent a significant departure from previous policy. There is already a floor on money (nominal) wages - the judicially determined Safety Net wage - see AIRC site for more details of the national wage cases that determine this minimum wage. In relation to recent debate about proposals to change the manner in which the minimum wage is determined, the Prime Minister said when addressing the Business Council of Australia's annual strategy forum said that industrial relations reform was at the top of his agenda, but that a minimum wage should always be preserved. He is quoted as saying "We are examining the way the minimum wage is set, but I have to say to you that I think it would be out of step with the Australian ethos to not have a minimum wage".

Second, there is no presumption that workers employed in Job Guarantee jobs would be significantly less productive than those currently employed in the private sector at minimum wages. We never blink when the private sector adds more minimum wage unskilled employment and claim that the new workers employed are less productive than the existing minimum wage workforce. The Job Guarantee workers would be the same pool of workers! Further, productivity in a modern economy is not an individual attribute unlike the erroneous depiction presented by neoclassical marginal productivity theory. Productivity depends on the type of capital used in conjunction with labour, the organisation of the workplace, the team-dynamics within the workplace and more. It would not be surprising that some workers in Job Guarantee jobs, realising that their labour was contributing to enhancements of community well-being, would actually be highly productive within the limits set by the capital used.

Third, it is true that by design the Job Guarantee wage would represent a wage floor that prevents serious deflation from occurring and defines the private sector wage structure. But as noted above, this is just the role played by the Safety Net wage in Australia. The Job Guarantee wage is thus set at the bottom of the private wage structure and does not disturb the relativities inherent in that structure. That is, the policy represents an unconditional offer from Government to purchase labour at a fixed wage - the government is thus 'buying off the bottom' which can never lead to a bidding war which would drive up labour prices. However, it is also true that as a political decision, the Government could easily introduce the Job Guarantee such that the wage was above the current minimum wage - as an industry policy decision to eliminate inefficient, low productivity private employers. In this situation, the wage structure would realign and some low productivity jobs in the private sector would be eliminated to the benefit of all. But where the Government decides to pitch the Job Guarantee wage is a political decision. The only 'Job Guarantee specific' fact is that the wage that is set for Job Guarantee workers becomes the minimum wage.

Fourth, would this be inflationary? Definitely not! The Job Guarantee wages cannot rise unless the Government decides to increase them. This wage would not react to wage pressures in the private sector. That is the basis of the inbuilt price stability feature of the Job Guarantee that the Minister (or should I say his advisers in the Department of Employment and Workplace Relations) fails to or refuses to understand. The anti-inflation dynamics are as follows. If the private labor market is tight, the non-Job Guarantee wage will rise relative to the Job Guarantee wage, and the Job Guarantee pool drains. The smaller this pool, the less influence the Job Guarantee wage has on wage patterning. Unless the government stifles demand, the economy may experience an inflationary episode, depending on the behavior of labour and capital in the bargaining environment. In the face of private wage-price pressures, the Job Guarantee maintains inflation control with the assistance of traditional aggregate demand management policies, which will choke aggregate demand and induce slack in the private sector. The difference between this approach and the NAIRU approach is that the slack does not reveal itself as unemployment, and in that sense the Job Guarantee may be referred to as a 'loose' full employment. The Job Guarantee policy generates inflation stability because the suppression of private demand asserts the numeraire price -- the Job Guarantee wage. This leads to the definition of a new concept, the Non-Accelerating Inflation Buffer Employment Ratio (NAIBER), which, in the Job Guarantee economy, replaces the NAIRU as an inflation control mechanism. The Buffer Employment Ratio (BER) is the ratio of Job Guarantee employment to total employment. The reference to the buffer employment is that the Job Guarantee functions as a buffer stock to absorb the workers who are currently not demanded by the private sector. As the BER rises, due to an increase in interest rates and/or a fiscal tightening, resources are transferred from the inflating private sector into the Job Guarantee at a price set by the government; this price provides the inflation discipline. The disciplinary role of the NAIRU, which forces the inflation adjustment onto the unemployed, is replaced by the compositional shift in sectoral employment, with the major costs of unemployment being avoided. That is a major advantage of the Job Guarantee approach.

Finally, what exactly is a 'real job'? Is a low wage, low skill, precariously-casual job flipping lentil burgers a real job? Is a real job one that provides the worker with a wage in return for a day's labour which then underpins aggregate demand in the economy? Does the checkout operator in the local supermarket question each customer as to whether they have a real job or an unreal job, prior to taking their payments for goods? Is a real job only a private sector job - in which case, the Ministerial advisers in the Department of Employment and Workplace Relations do not have real jobs either? We could go on. It is a nonsense to distinguish real jobs from unreal jobs. The fact is that the Job Guarantee provides income-earning opportunities to all those who are unable to currently find jobs elswhere. These jobs would be so designed as to be inclusive to all disadvantaged workers. The Job Guarantee is thus superior to the current buffer stock method of controlling inflation - the NAIRU approach whereby the Government deliberately designs macroeconomic policy such that some people are excluded from being able to be welfare-independent because the economy does not provide enough work for all those who desire it. It is simply unhelpful to think of these jobs are being unreal. The Job Guarantee workers would have to get out of bed in the morning, prepare for work, then engage in meaningful value-adding activities, and at the end of the day go home and spend their incomes. Just like the rest of the employed workforce.

Blog entry posted by bill