MMP Blog #44: The Job Guarantee and Macro Stability

By L. Randall Wray

The JG posts here at MMP have generated a huge number of comments. I have focused my responses at the comments more-or-less directly directed to the actual posted blogs. I can understand the impatience: many questions have not been answered. However many of these questions and comments concerned upcoming topics.

Let us move on to macro stability issues. I have given JG talks all over the world and the two main objections raised always refer to inflationary impacts and exchange rate impacts. It seems to me that those who respond with these fears have not paid attention to the set-up of the program and to the MMT arguments.

So this post will provide quite general responses to questions about “macro stability”. It is necessary to keep in mind as you read the following that we are talking about a program that pays a fixed (but periodically adjustable) wage (plus benefits) that becomes the floor in the economy. Government never bids against the private sector at a higher wage. But those who fall out of private sector jobs can always move into the JG and receive the JG wage.

Also note we are adding the program onto the existing economic system. All other programs and policies of economic stabilization are still available. There is no claim that the JG will completely and by itself stabilize wages, prices, and exchange rates, much less private demand. It will not “tame” the business cycle, by itself. Wall Street will still make the same crazy bets and periodically go bust.

Our claim is that the economy with a JG will be more stable than one without the JG.

And, finally, we do not believe the JG solves all “labor market” problems. But it does offer a job at a basic wage to anyone who wants one. That is an improvement over the current system.

So let us turn to the two main issues concerning stabilization: inflation and exchange rates. Next week we continue the arguments.

Critics of JG/ELR. Critics argue that a job guarantee would be inflationary, using some version of a NAIRU-Phillips Curve approach according to which lower unemployment necessarily means higher inflation. Some argue that JG/ELR would reduce the incentive to work, raising private sector costs because of increased shirking, since workers would no longer fear job loss. Workers would also be emboldened to ask for greater wage increases. Some argue that the program would be so big that it would be impossible to manage it; some fear corruption; others argue that it would be impossible to find useful things for the workers to do. It has been argued that a national job guarantee would be too expensive, causing the budget deficit to grow on an unsustainable path. We will examine some responses to these criticisms in the following sections.

Macroeconomic Stability Issues. This subsection will address issues surrounding macroeconomic stability, such as wage and price inflation and exchange rates. Subsequent blogs will address affordability and manageability issues. (Affordability questions should by now be quite easy for all readers to resolve; manageability issues might be more difficult.)

As discussed, the program would set a fixed (but periodically adjusted) basic compensation package. This will ensure that the JG/ELR wage will not pressure private wages in a competitive spiral. Such a wage would only set a floor below which private sector wages could not fall; thus, it operates like an agricultural commodity price floor—which does not cause prices to rise but only prevents them from falling.

Indeed, an JG/ELR program designed along these lines can be analyzed as a buffer stock program that operates much like Australia’s wool price stabilization program used to operate (an Australian advocate of the JG, William Mitchell, actually developed his proposal after recognizing that it could operate in a manner similar to his government’s wool program). The government purchases wool when the market price falls below the price support level, and sells wool when the market price rises above that level. By design, the program stabilizes wool prices in order to stabilize farm income and thus consumption by those who raise sheep.

If you do not like sheep, think corn. The problem with sheep and corn is that no one except the farmers care if sheep and corn are fully employed. So why not labor? What about a buffer stock program for humans that want jobs? This was the logic that set Bill Mitchell to thinking about a JG.

In the JG/ELR program, government offers a floor price for labor, paying the program wage to participants. Government “sells” labor at any price above the JG/ELR wage to firms (and non-JG/ELR government employers). Just as in the case of a floor price for wool, a floor price for labor cannot directly generate inflationary pressures on the market wage.

Indeed, so long as the buffer stock pool of labor is large enough, it will help to restrain market pressures on wages as government “sells” labor in a boom. Further, because labor is an input to all production, to the degree that wages are stabilized by the program, production costs will be more stable. Above we noted that income and thus consumption of wool suppliers is stabilized by a wool buffer stock; JG/ELR will directly stabilize income and consumption of program workers, and if other wages and incomes become more stable because of the program, that will further enhance macroeconomic stability.

Critics fear that existence of the program will embolden workers, leading to rising wage demands and inflation. However, there are two reasons to doubt that this effect will be large. First, an effective labor buffer stock will tend to dampen wage demands because employers always have the option of hiring out of the pool if the wage demands of non-JG/ELR workers are too high. The price demands of wool suppliers are attenuated by the government’s buffer stock of wool; stubborn wool suppliers cannot raise wool prices much above the government’s sell price.

The second reason to doubt that obstinate workers will adopt accelerating wage demands is because the further their wages rise above the JG/ELR wage, the greater the costs to them of losing their higher-paying jobs. If the JG/ELR wage is $10 per hour, it may well be true that nonprogram workers earning $10.50 per hour will be emboldened to demand $10.75, but they are not likely to continue to demand ever-higher wages in subsequent years simply because they can fall back on a $10 per hour JG/ELR job. (Please note, the numbers used here are purely for illustration. They do not represent a proposal for a JG wage at ten dollars Austrian, Canadian or American.) The cost of losing a $15 per hour job is not the same as the cost of losing a $10.50 per hour job.

In sum, it is very hard to sort out all the possible effects but it is hard to see that the JG favors labor more than employers—or vice versa.

Still as I said last week, those “worst employers in America” that currently pay far below a living wage could well be forced to raise compensation or go out of business.

I cannot see that that is a bad thing.

What about exchange rate effects? A related argument concerns the exchange rate: if jobs are created that provide income to the poor, consumption will rise, including purchases of imports. This will worsen the trade deficit, depreciate the currency, and possibly lead to accelerating inflation through an exchange rate “pass through” effect (import prices rise as the currency depreciates, adding to inflation of the price level of the domestic consumer basket). In other words, unemployment and poverty are viewed as the cost of maintaining not only low inflation, but also the value of the currency.

Two kinds of responses can be provided. The first is ethical. Should a nation attempt to maintain macroeconomic stability by keeping a portion of its population sufficiently poor that it cannot afford to consume? More generally, is unemployment and poverty an acceptable policy tool to be used to maintain currency stability? Are there other tools available to achieve these ends? If not, should policymakers accept some currency depreciation in order to eliminate unemployment and poverty?

There are strong ethical arguments against using poverty and unemployment as the primary policy tools to achieve price and exchange rate stability. And even if currency stability is highly desired, it is doubtful that a case can be made for its status as a human right.

However, we can challenge the notion that the program actually threatens price and currency stability. To be clear, we should not argue that the program would have no effects on a particular index of prices (such as the CPI) or on the exchange rate. Instead we argue that the JG/ELR program provides an anchor for the domestic and foreign value of the currency, hence, actually increases macroeconomic stability.

As argued above, JG/ELR will not cause domestic inflation, although it can lead to a one-time wage and price increase, depending on where the wage (and benefit package) is set. Similarly, if JG/ELR does increase income when implemented, this can lead to a one-off increase of imports. Even if the exchange rate does decline in response (and even if there is some pass-through inflation), the stable wage will prevent a wage-price spiral. If a nation is not prepared to allow its trade deficit to rise with rising employment and income in the JG/ELR program, it still has available all policy tools at its disposal with the lone exception of forcing the poor and unemployed to bear the entire burden. In other words, it can still use trade policy, import substitution, luxury taxes, capital controls, interest rate policy, turnover taxes, and so on, to minimize pressure on exchange rates if they should arise.

23 responses to “MMP Blog #44: The Job Guarantee and Macro Stability

  1. Crystal clear! I’m anxious to see if people can stick to the points made in this post in discussion.

  2. The entire buffer stock argument as set out above and as set out by Bill Mitchell is flawed. JG is no more effective in “restraining market pressures on wages” than is unemployment. I.e. if a country has a given number of JG employees making a given amount of effort to find regular jobs, that has exactly the same “restraining” effect on wages as the same number of UNEMPLOYED individuals making the same effort to find regular jobs.

    Of course JG can make JG employees more employable, and that in turn would certainly “restrain market pressures on wages”. But that point was not mentioned above and it’s not the basic point in the buffer stock argument.

    And before anyone jumps to the conclusion that I’m against JG in any shape or form, I’m not. I just think the buffer stock argument does not stand inspection.

    • Philip Pilkington

      “JG is no more effective in “restraining market pressures on wages” than is unemployment.”

      Eh… duh!? We discussed this. NAIRU becomes NAIRBU. That’s what Lerner always said. It has roughly the same amount of effectiveness as current unemployment-based policies… but everyone has a job and become far more employable.

    • Golfer1john

      I don’t think anyone meant to imply otherwise. A buffer stock of workers is a restraining influence on wages, whether they are unemployed or JG-employed. I can’t see why there would be any difference in the influence, and I don’t recall Randy or anyone else arguing that there would be any difference. The point is that the JG-employed buffer stock IS just as effective as an unemployed buffer stock, and far more humane and far more beneficial to the economy.

  3. “Of course JG can make JG employees more employable, and that in turn would certainly “restrain market pressures on wages”. But that point was not mentioned above and it’s not the basic point in the buffer stock argument.”

    That’s precisely the point. People engaged doing something have a lower hiring risk than those not doing a job. Reducing risk reduces costs in the economy.

    Therefore the buffering effects of an employed buffer stock are superior to an unemployed buffer stock on that basis alone. It’s better to pay people and have them in the shop window than pay people and hide them away.

    And that’s before you add in the smiles on people’s faces from having a job and some self worth – as the recent channel 4 documentary Mary’s Bottom Line showed in spades.

    If anybody doubts the positive effects on ordinary out of work people getting a simple low paid job – some for the very first time in their lives – they should watch this programme. Hopefully its available wider than the UK, but certainly anybody in the UK should watch it.

  4. ” the greater the costs to them of losing their higher-paying jobs.”

    Does that then require that the system remove its employment protection programmes so that employers can ‘hire and fire’ at will?

    Or does it work at a more macro level, where those businesses with, say, unionised high staff costs are vulnerable to failure due to competition from businesses able to hire directly off the JG pool?

  5. Alex Seferian

    I began yesterday to review all previous blogs, and although roughly half way through, find them very enlightening. Thank you. Regarding this most recent post, I understand from a video conference that appears in another blog (Modern Money Mechanics – Fiscal Sustainability Teach-In) that a JG-program was implemented in Argentina. Can you please comment on that experience, or point me in the direction of materials that may shed further related light? This country has one of the highest inflation rates in the world right now, but I have to assume that relates to other macro-economic policies in place, and not the specific JG-program that is the topic of this blog.

  6. L. Randall Wray

    Ralph: I replied directly to you on exactly that point last week. You prefer to hire the pre-prison unemployed population? You are no businessman. Nor are you a careful reader. Our argumen has ALWAYS been that employed bufferstocks are better than unemployed bufferstocks from the point of view of recruiters. It is so obvious that even you ought to concede that.

    Alex: go to and for papers I wrote with Pavlina Tcherneva on Jefes. Unfortunately, Argentina has almost phased out the Jefes program, so it cannot act as a buffer stock program. In any event, while it did tremendous good in the first few years, it always deviated in significant ways from our proposal. Still we learn a lot from mistakes.

  7. Alex Seferian

    Thank you Ralph and and Randall.

  8. Randy and Neil,

    As I said above, I am not arguing against JG: I was trying to make the point that the buffer stock analogy is of limited relevance to JG, and for the following reasons.

    In that the employability of some categories of JG people IS NOT improve by doing JG work (and the empirical evidence is that in some cases it doesn’t) JG is no more of a buffer stock than is unemployment (which also fails to improve employability). So in this “no improvement” context, claiming that JG introduces an entirely new element to the labour market (i.e. a buffer stock) is just not true.

    In contrast, to the extent that employability DOES IMPROVE under JG, this a welcome characteristic of JG, but it’s not a characteristic of a typical buffer stock of some physical commodity. If anything, the quality of physical buffer stocks DETERIORATES with time. So what is left of the buffer stock analogy? Not much, far as I can see.

    Re the fact that JG schemes (like buffer stocks of physical commodities) can stop the price of labour falling below some minimum, that need is already catered for in most countries by minimum wage legislation. So that’s another buffer stock characteristic which is not hugely important.

    I’m not saying the buffer stock idea is complete nonsense. But personally I find it such a poor analogy that I’m just not tempted to use it. I can think of better arguments for JG.

  9. JG as a title works just fine for a fiscal progressive like me, but maybe there’s a title that would strike a chord with hardworking Americans who hate taxes because they incorrectly think their money is being used for unemployment benefits and the like.

    The Work-For-Pay Initiative, maybe.

    • Golfer1john

      EMployment Insurance.

      If you have homeowners’ insurance, and you lose your home, they get you another one.

      If you have car insurance, and your car is wrecked, they get you another one.

      If you had EMployment insurance, and you lose your job, they get you another one.

  10. Excellent post.
    You noted one off inflation from this. I would think this could be significant. You are talking about employing upwards of 20 million people (unemployed/underemployed) most of whom are not today receiving any payments in unemployment benefits. So I’m wondering what the increase in spending will be? It would seem to be in the order of 300 billion a year or so not counting benefits. That is a pretty good stimulus and on the plus side, maybe we can get the economy moving again. But there is a second order effect here. There are millions of jobs out there that pay only minimum wage and your $10 an hour far surpases that. So there will be an added bump as these businesses raise their wages to compete or simply go out of business.

    I understand you angst about Argentina, but the issue of inflation there will be asked repeatedly.

    I don’t know of any congressman who is today proposing a JG. That is unfortunate but there maybe some reasons. I’m sure you can think of all the arguments against this: competes with other business, increased inflation (like Argentina), hires lazy people, interferes with the feds mandate, cost of the program, give away, welfare, make work with shovels, etc. If you propose health benefits, the challenge gets even bigger. Who knows this could trigger another supreme court battle as the government directly competes with the private sector. (I know, it is a buffer stock.)

    I’m not really asking for answers here. All of them are solvable with good will. And I would support the program. So you are now engaged in step one: education. But this needs to move to the political arena. And when it does, the questions will only increase.

    • Golfer1john

      Yeah, the EMployment Insurance proposals do include benefits that most minimum-wage jobs do not include. Health care is the biggest, but also child care, usually, and 401(k). Warren Mosler shrugs that off by saying he also proposes federal funding of health care and child care for everyone, not just JG workers. $8/hr with primo benefits would lure lots of workers from the private sector who do not have such benefits now.

      I think if we tried to do JG now, with 20+ million unemployed and underemployed, it would be a logistical nightmare and the cost would be politically un-doable, even if the JG wage were $10 cash only, no benefits. We first have to have a better fiscal policy (aka “pump-priming”) to get unemployment down to a more normal level, and then JG needs to be phased in so as not to cause too much political shock.

  11. Won’t the effects on inflation be dependent on country-specific institutional structure? How strong are labour unions for example. Is this primer for US-specific case or universal? We know there are countries where labour unions are strong. In some countries they negotiate at company level, in others whole profession negotiates as one unit.

    “The second reason to doubt that obstinate workers will adopt accelerating wage demands is because the further their wages rise above the JG/ELR wage, the greater the costs to them of losing their higher-paying jobs.”

    Typically when one set of workers negotiate higher wages other have to pay more to buy their work, and if there is reduction in demand for that work only the new entries to that profession get cut off, so it’s win with no lose to the “insiders” in the profession. Should we brake these monopolies up or limit their right to negotiate over wages to reduce prise pressures?

    • Golfer1john

      In a relatively free economy, it is difficult for a labor union to raise its members’ wages very far above the market for very long. The UAW has done it off and on for many years, and ended up bankrupting two of the three largest auto companies (one of them twice) in the process. As long as the employer faces competition, including competition from abroad, the union’s efforts are self-defeating even for the old-time union members (union bosses make out OK, though, so the effort will still be made). I don’t see it necessary to break them up, only to ensure that markets are relatively free, and consumers have choices, as much as possible. Monopolies are always short-lived, unless supported by government.

  12. Alex Seferian

    Hi Randall – I just finished reading the over 40 posts and it all makes a lot of sense, although admittedly I had to read some parts several times and it has taken me some effort to unlearn a lot of what I was taught in college as an Econ major. I just have two questions if I may, that although not associated with JG are linked to past writings. I was hoping a latecomer can be accommodated in this way.
    1. Are not Debt-to-GDP ratios for countries with sovereign currencies entirely irrelevant… a non-issue? Who cares if this ratio surpasses 60%, 90% or any figure for that matter as long as inflation is kept in check? In fact, is it not natural for this ratio to increase over time as productivity increases, and as yearly deficits accumulate (given a propensity for the non-government sector to net save)? No big deal if in 50 years the ratio of Debt-to-GDP is 500% as long as the country has kept, during the period, inflation in check.
    2. Apart from inflation, the other real limit to an increase in government “debt” may relate to the main use for the currency: that it is the sole mean for US residents, in the case of the dollar, to extinguish their tax liabilities. The more “debt” outstanding, or the greater the yearly budget deficit (ignoring the current account), the more cash (savings) will be accumulated by the private sector. If these cash holdings become “too large”, then there will come a time when there is “too low” an incentive for the private sector to engage with the government and act as a counterparty in its spending program. This follows from the argument that what makes people accept a currency is mainly that it serves to pay their taxes. Theoretically, if for example 100% of the public were to hold enough currency to pay for a decade worth of future theoretical taxes, then during 10 years the government would have a relatively tough time hiring people, or implementing a good part of its spending program. For this reason, and this reason alone, in addition to keeping inflation in check, government budgets, over time, should not deviate too much from an average trend of “reasonable” deficits (whatever that may mean). During periods of crises (such as the current one), the deviation can and should be larger. Is the above train of thought coherent?
    Thank you in advance and Happy Easter.

    • Golfer1john

      1. Right on.
      2. Interesting thoughts, but paying taxes is not the “main” use of money, it is simply the one condition that gives the government-issued fiat money its value. Once that value is established by the tax requirement, then that money is widely accepted for other purposes, and not easily displaced. Today, there is $15T of debt outstanding (private sector savings) and about $2.5T annual taxes, so on average people have 6 years of taxes saved up. Not everyone, but average. Some have more, many more than 10 years, and we don’t see them refusing government contracts or jobs for that reason. They still have living expenses (usually far more than the amount of their taxes) and generally need to maintain an income stream to support their spending, so they still need money no matter how many years of taxes they have saved up.

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