Responses to Blog #42: Intro to the Job Guarantee

By L. Randall Wray

Thanks for all the comments and the interesting discussions. Sorry this will be late as I’m in Brazil at a couple of conferences. A number of the comments were on topics we will discuss later—especially Vincenzo’s design of his own preferred JG. I am purposely keeping it general in the beginning, and gradually we will introduce the specifics. But note that the discussion made it fairly clear that no “one size fits all” will work everywhere. The real world program will need to be carefully designed to fit “conditions on the ground” (as our Pentagon warriors love to phrase it). We need to look at the general, universal program first so I will stick to that. Later I will argue that in some circumstances it might not be practical (due to political, institutional, sovereignty, managerial capability, or productive capacity constraints) to implement the universal program from the get-go.

As I will explain, the universal program takes workers as they are, with no income, training, experience, or level of educational attainment restrictions. It is non-invidious:  all races, genders, sexual preferences, political ideologies, and ages (with only a lower legal limit that is similarly applied to all workers) are accepted. Jobs are provided where workers are—they do not have to move to take a job, and commutes to work should be reasonable. Reasonable work schedules will be provided for those who prefer to work part-time. In the universal program, all full-time workers receive the same wage and benefit package; there might be an adjustment for part-time workers (i.e.: a worker who chooses to work a couple of hours per week might not receive the full benefit package—this is a detail we could discuss later).

Finally I want to emphasize again that this program EXPANDS choice, it does not REPLACE an existing choice. I say that because many critics will say “Oh, this is just workfare—making people work for the dole”. No it is not. It adds to the existing set of programs that make up the social safety net. Whether it might make sense to tighten up the safety net once the JG is in place is one of those specific details that we can discuss later. But first let’s try to understand the JG as an add-on, not a replacement. Workfare already exists, and there are strong political movements to reduce the social safety net. Some readers might oppose those movements, others might support them. But what we are trying to do here is to understand the JG program. After that we can discuss how existence of the JG might strengthen or weaken the hand of those who support or oppose social safety nets.

So with that preface, I’ll tackle a few questions.

Q1: Joe made a comment to respond to a comment that favored health standards for JG workers.

A: I agree with Joe: there certainly will be some health standards for particular jobs. For example, anyone who will work with children will have to take a TB test. And some jobs will be too physically hard for some workers. However, always keep in mind that a universal JG program takes workers as they are. It offers a choice. For example, the vast majority of people with disabilities want to work for pay (the last figure I recall seeing was about three-fourths) and yet even after decades of progress in theUS in reducing discrimination in hiring of people living with disabilities, the vast majority still cannot find steady work. The JG would take them—all of them—and design jobs for them. It’s the right thing to do. I realize our Neoclassical Scrooges will say: “but it is not efficient. They will never produce value anything close to the wage we pay them.” My answer: such a consideration does make sense in a small business firm, but it makes no sense for a society. All humans have a right to participate as fully as they can in the society in which they live. (Yes, that is a progressive notion, but science is progressive, and as we heard last week, reality has a liberal bias, too.) The deck is already stacked against many of those with disabilities. The public purpose must be biased toward them, to unstack the deck. Anyone who wants to contribute to society should be provided the opportunity to do so.

Q2: Joe also dealt with a question about time limits.

A: I go farther: no time limit. Ever. Take workers as they are, give them jobs they can do. Forever. (Well, until they leave this world.)

Q3: Ralph: marginal product of labor less than the wage mumbo jumbo.

A: We’ve known since Sraffa in the 1920s that the neoclassical theory of the labor market (firms hire labor up to the point where the marginal product just equals the real wage) is logically confused. No serious neoclassical economist would argue the way Ralph is arguing. It was disproven decades ago. It is nothing but a flawed ideology—a myth. Now, I did say that firms hire the amount of labor they think they will need to produce the amount of output they think they can sell. Given that, they will hire an additional worker only if she will work harder, better, or for lower pay. (We do not need to get into “real” wage since that is also a silly neoclassical idea: firms pay nominal wages, and you offer to work for a lower nominal wage if you want to try to replace an existing worker.)

However, I will concede to Ralph that if a firm thinks he will work harder, smarter, or better than an alternative worker, he will get the job. (It also helps if the employer knows Ralph’s family! We know that networks are the most important determinants of employment.) So yes, there is some concept of “productivity” with the “more productive” workers getting hired first. Perceived productivity is highly subjective on the part of employers—who have all sorts of biases (race, gender, religion, sexual preference, and so on)—and even after workers are hired it is hard to know what their productivity is (since production is social). But I admit that the JG program will tend to have those workers viewed as potentially “less productive”—and in that sense the JG intentionally “hires off the bottom”, taking those workers who are left behind in the private jobs lottery.

In any case, there is no independence between wage paid and “productivity”, marginal or otherwise. Higher wages induce greater effort (“efficiency wages”). And we actually measure much of our nation’s output by price, which is related to cost of production that in turn is largely determined by wages paid. Nice circular argument the neoclassicals get themselves into!

Q4: Neil and others: let private employers hire JG workers?

A: That is one of those specific details we’ll leave for later. As you will see, I’m skeptical of this (due to worker substitution) but am not 100% opposed. It depends. But we do not want workfare in place of the JG!

Q5: Neil and others: what about incentives for workers to leave JG for private sector jobs?

A: The JG program wage and benefit package becomes the base—the minimum wage. Other employers will need to recruit workers out of the program by offering them something better: higher wage, better benefits, better chances at career advancement, and so on.

What if a worker decides she really likes what she is doing in the JG and refuses higher wage offers in the private sector? Fine. Nay, good. She’s happier and we get the public purpose done. Obviously when that happens, the JG increased her available choices and now she gets paid work while contributing to society. Why would anyone be against that?

Many private firms face a problem: how can we get someone to take this crappy job, earning wages so low no one can live on them, with a cruel boss who enjoys watching workers suffer? Their solution: let’s get rid of the social safety net so that the only alternative is starvation. Of course that will be the proffered remedy from the employer side. It is the public’s duty to force employers to improve pay and working conditions.  Supporters of the JG do not need to downplay this aspect of the program. Yes, the JG and MMT are inherently progressive. Firms will have to shape up or go out of business. That is progress.

Q6:Tyler: Why would the JG be less inflationary than pumping up demand or supply sides?

A: It is very hard to get an economy to run at a pace where everyone who wants a job can get one. And even if you can occasionally get there, the economy never manages to stay there at continuous full employment. It takes directed employment programs. The JG can do it by directly creating jobs, so it’s consistent with a much lower level of aggregate demand. That is not to say we necessarily want to keep demand depressed. The notion is that the JG operates like a bufferstock program for labor, so we can achieve full employment with much less pressure on wages. But we will have to wait for the full explanation.

28 Responses to Responses to Blog #42: Intro to the Job Guarantee

  1. Thanks Randy. I’m looking forward to the next installment.

  2. “Yes, the JG and MMT are inherently progressive. Firms will have to shape up or go out of business. That is progress.”

    Indeed.

    The JG is competition. It stops businesses getting flabby. I can’t understand the objection from those who say they believe that competition is good and must be encouraged at all costs.

    Or is it in reality that they believe profit is good and must be encouraged at all costs.

    • Well, we had a similar debate here in the US about the health care public option – which was defeated unfortunately. Private sector companies argue that competition with the government is unfair, because governments don’t operate on the basis of profit – and can even operate at a permanent net loss – and therefore can out-compete those poor, unfortunate private sector companies who are required to make money for their owners and pay their CEO’s millions of dollars.

      • But with the public option you can simply require the program to make, say, a 2% profit, or it ends. Not so with this, as it will make no revenue.

        And I don’t have a problem with a JG program competing with employers for labor, but it shouldn’t compete with them for business. Obviously they shouldn’t work to make someone else money — no picking fruit, or no one will hire farm workers and pay them out of their revenue. And it also shouldn’t be allowed to compete with existing public employee jobs — many local governments would love to shed workers and cut taxes while replacing them with people payed by a federal welfare program. So what do you allow them to do? Clean the streets. Any road maintenance involving no tool more complicated than a shovel. Maybe classroom assistants if they pass a background check.

        Maybe my imagination is failing me here. It’s not like I can’t imagine jobs that the government could be creating. We’ve been letting our infrastructure slowly deteriorate over time, we need to overhaul it anyway, we’re sending unemployment checks to teachers as we fall behind China in education, and so on, but… I can imagine these things provided by programs that are intended to provide these things, providing money according to teaching and infrastructure related goals ideally to those who are good at the job. But when we switch to a program whose goal is to provide jobs wherever they’re lacking to those having the hardest time finding them, then it becomes harder to see what you can have them do and making sure you’re not eliminating better paying jobs that you weren’t on the hook to pay for in the process.

        • If cleaning streets is a valid public purpose, then it ought to be done anyway, JG or not. If local governments are budget-constrained, and that’s why they won’t do it, then it is up to the Federal government to give them money, since the Federal government can create money and local governments cannot. Likewise for any “public infrastructure” project you can imagine, that government has done traditionally, or sporadically, including maintenance of previously constructed projects, like water and sewer systems. None of these are appropriate JG activities, because when the economy improves and the JG workers are hired away into private industry, we must continue doing them. They are activities to be done by permanent public employees.

          JG workers should mainly do things that are now staffed by volunteers, like working at food banks and Habitat for Humanity. Most of us know a local charity that is always looking for volunteers. They might also be dispatched by the JG center on an ad hoc basis to temporary employment agencies that have need for day labor they cannot staff in the normal way, but in this case the workers should be paid by the employer, not the JG program. And they can be paid for job search and resume writing, and various training activities designed to help with job search or skills development. (for training, I’m thinking things like a 1-week class on Microsoft Access for end users, not things like a PhD program in economics.) As the economy improves and the supply of JG labor decreases, the need for food bank volunteers and such will automatically decrease as well.

  3. Randy Wray says “Reasonable work schedules will be provided for those who prefer to work part-time.”

    There are two other merits in part time work. First it gives time during the working week to job search (not that job searching while doing a full time job is all that difficult).

    Second, pay has to kept down if JG employees are to have an incentive to seek regular jobs, but that in turn can mean paying less than the minimum wage (as occurs currently in Britain with the “Work Experience” scheme). Personally I’m not bothered about people getting less than the min wage (I do several hours of work a week for nothing at all). But if we as a society decide that this ultra-low pay per hour is not acceptable, then part time work could ensure the hourly rate was up the min.

    TIME LIMTS. If JG consists of subsidising people into work with EXISTING EMPLOYERS, there is much to be said for limiting the time a given employee stays with a given employer: it makes it difficult for the employer to employ people who are perfectly viable WITHOUT any subsidy on a long term and subsidised basis. And it’s not just private employers that can abuse this or similar systems. Public sector employers abused CETA, I believe.

    Re the marginal product of labour, I don’t think you’ve got the point I’m making Randy. I’m very definitely NOT REFERRING to the bog standard microeconomic idea set out in economics text-books. That’s the idea that an individual employer (or industry) faces a downward sloping demand curve for its product (and possibly also a rising supply curve for specific types of labour), which in turn means that the marginal revenue product of labour declines with increased numbers employed.

    I’m referring to a MACROECONOMIC point: the fact that as unemployment falls, the suitability for job seekers for vacancies also falls. Amongst other reasons, that is because of the simple statistical fact that the fewer job seekers there are in a given area, the less the likelihood of employers finding suitable candidates for vacancies. And when the suitability drops to some level, you hit NAIRU.

    Ergo if “unsuitable” employees are subsidised, NAIRU will drop, or it can be by-passed. There are of course other reasons for thinking JG type schemes raise aggregate employment, but I’ve poured cold water on some of these reasons here:

    http://mpra.ub.uni-muenchen.de/19094/

    So I regard the above marginal product point as important because the other reasons for thinking JG brings a net increase in employment are flawed.

    Next, you ask “Why would anyone be against” people being tempted away from private sector work and induced to do public sector type work on JG. I am “against” and for the following reasons.

    Generous pay on JG discourages job seeking, i.e. it reduces aggregate labour supply to the regular jobs market (as pointed out or implied by Vincenzo). That in turn is inflationary which means AD must be reduced, which in turn means the relevant JG jobs are at least to some extent simply AT THE EXPENSE OF regular jobs (public or private sector).

    And that pessimistic view is backed by evidence produced by Lars Calmfors to the effect that the “extra” jobs produced by Swedish ALMP systems have to a significant extent been AT THE EXPENSE OF regular jobs. (Of course Swedish ALMP systems are not identical to JG, but they are similar.)

    Now JG jobs tend to inefficient compared to regular public or private sector jobs. So riddle me this: what’s the point of destroying an efficient job (public or private sector) and replacing it with a less efficient one?

    Conclusion: to say that the issues here are complicated is the understatement of the century!

  4. Way to muster up the reserve army of the unemployed in a campaign against slothful capitalists who would play workers against one another!

    Competition is a religious sacrament–up until a point where it really crimps profits and labor market rent seeking.

  5. Philip Pilkington

    “Generous pay on JG discourages job seeking…”

    I think this totally misses the point. If minimum wage is, say, €9 and we set the JG wage for €12 there is going to be a significant amount of AD added to the economy (and probably a once-off increase in the price-level). This boost of AD plus the possible boost in the price-level will ensure that private sector profits/revenues increase (ala Kalecki profit equation). With the new found profits/revenues the firms can then offer a higher wage than the JG — say €14 where they would have been offering €9 before.

    The key point is that Ralph is assuming an economy in some sort of high employment equilibrium. But this hasn’t been true for a LONG time (asset bubbles have been floating not-so-great employment levels). If we assume deficient AD, however, the JG will clearly not ‘outcompete’ already existing private sector jobs for workers as it will raise the private sector at the same time as it is implemented and ensure they can offer higher wages.

    • The question as to what sort of a boost AD needs is totally separate from the question as to what the optimum wage of JG workers is. In other words AD can be boosted via generous JG pay, but equally AD can easily be boosted while implementing a JG scheme that paid miserable wages.

      Second, I didn’t intend to assume above that the economy is “in some sort of high employment equilibrium.” However, I often do make that assumption when discussing JG type schemes and for a very good reason. This that when the economy has plenty of spare capacity (or when unemployment is well above NAIRU, to put it another way) the best cure for unemployment is a straight rise in AD. In other words JG type schemes only really come into their own when unemployment is at or below NAIRU. Hence my reference to NAIRU in the comment I made a few hours ago (above).

      Having said that, I’m not suggesting that JG type schemes should be closed down and abandoned when unemployment rises above some level.

      • Wouldn’t an economy in a high employment state outcompete the JG with higher wages?

        The argument against JG is not so much one of concern for profit, as capital frequently opposes policies that would lead to long term increased profitability if it entail short term costs such as shifting health care financing from the job to the government financed via small tax increase.

        No, the opposition to JG here is about losing control in the workplace when workers have options.

        • Marcos, You ask “Wouldn’t an economy in a high employment state outcompete the JG with higher wages?” The answer is clearly “yes” for a portion of the unemployed / JG employees. But even given a booming economy, there is always a significant proportion of the workforce who remain unemployed (roughly 5%).

          • I’m an aging tech worker, the market is booming here where I live, but the hours are grueling, the skillset is narrow but very deep, and the odds fall to the younger workers fresh out of college who end up like the flame out scene in “Logan’s Run,” hoping to get out alive, but most often washing out after 9-18 months of 60 hour weeks.

            Fresh out of school, I was pulling in $40/hr in 1990 which translates to $65/hr today, my last contract last year was $62/hr. By 1999, I was making $100/hr, which today is about $125/hr today. Today’s wages are well short of $125/hr for tech consulting in most areas of practice while the cost of living has risen markedly, the price of housing alone has tripled in the Bay Area since 1999, food, health care and transportation likewise. So we’ve got flatline or declining wages even in the most vital of all economic sectors outside of direct government contracting chasing life necessities that have doubled and tripled. Adding to “free market” pressures are the H1-B visas issued to mostly South Asians which are a special cut out to make sure that tech wages stay flat or drop. See Dr. Norm Matloff’s ucdavis page for details.

            How is anyone over 40 who has a live and interests outside of tech expected to compete with kids fresh out of college or South Asians motivated like new immigrants to escape hellish poverty? I’d have no problems taking part-time JG doing some sort of tech work as the market does not have much use for me these days. Gimme a job that pays my bills, gives me a trip or two per year to the Sierra and I’m good, thanks. If the private market cannot offer me a way to work to live, only the option of living to work, then the JG is for me.

      • Philip Pilkington

        “In other words AD can be boosted via generous JG pay, but equally AD can easily be boosted while implementing a JG scheme that paid miserable wages.”

        The point is that if you pay miserable wages the private sector won’t need to rise wage bill to siphon workers out of scheme. But if you pay decent wages they will have a (nominal) revenue increase that they can use to pay higher wages. It works both ways.

        “In other words JG type schemes only really come into their own when unemployment is at or below NAIRU.”

        As implied above: JG style program raises what you call NAIRU (which isn’t a real concept anyway). By rising AD and, in lieu of that, providing a once-off boost to nominal prices, NAIRU shifts to a lower-level. Lesson: NAIRU doesn’t mean anything… its a dodgy concept based on a neoclassical view of the labour market (which you seem to share, but which Post-Keynesian theory rejects).

        • Thanks, Phil, you saved me the work, of replying to Ralph. I would only add that their isn’t a shred of empirical evidence corroborating the existence of the NAIRU, as Bill Mitchell has shown on his blog. In addition, Ralph also knows this because he read the relevant posts and exchanged with Bill about the NAIRU, quite unpersuasively, in my recollection. I really don’t think we need to rehearse those exchanges here.

          However, I think the bottom line on the NAIRU is this. If anyone, including Ralph, wants to conjecture that there is a NAIRU, then I think they ought specify a mathematical theory with auxiliary statements allowing one to predict changes in the NAIRU and to test those predictions against empirical evidence. Without that the NAIRU is nothing but a bad joke allowing people who want to avoid responsibility for not creating Full Employment w/Price Stability too claim that they have done so, because the economy they’re discussing has reached whatever specific NAIRU is in fashion among the NAIRU myth-makers at any particular time.

          Every person in the street knows what Full Employment is: it is that state where everyone who wants a full-time job has one available to them, so that the only people who don’t have jobs are people who don’t want work or who are in transition from one job to another. If anyone, like Ralph and the other NAIRU mythmakers wants to advance another definition of Full Employment then let’s see a theory that can stand up to empirical tests before we even think about crediting a view that will leave millions of people across the world unemployed and without hope for a decent life as a matter of public policy.

          • Joe, I’ll take your points in turn. You claim “their isn’t a shred of empirical evidence corroborating the existence of the NAIRU, as Bill Mitchell has shown on his blog.”

            (Incidentally, and to repeat, I personally us the acronym NAIRU in a fairly loose sense: to refer to the fact that at some level of employment, inflation goes thru the roof, i.e. there is a relationship between AD, employment and inflation.)

            As to empirical evidence, the UK finance minister Anthony Barber organised a big rise in demand around 1972. The result was (surprise, surprise) a rise in inflation. See:

            http://en.wikipedia.org/wiki/Anthony_Barber

            And three or four centuries ago the Spanish brought large quantities of New World gold back to Europe. Given European currencies were then gold based, what do you think happened? Inflation ensued – i.e. the price of gold dropped relative to other commodities (surprise, surprise, again).

            But I’m sure I could produce more evidence if I tried.

            Pavlina Tcherneva also criticises increases in AD for the inflation that often ensues. See:

            http://www.levyinstitute.org/pubs/pn_12_02.pdf

            Is she is wrong as well?

            Re Bill Mitchell (and to repeat) he argues against NAIRU, but then uses his own phrase for the same idea: “inflation barrier”. He contradicts himself.

            Re your claim that I “exchanged with Bill about the NAIRU”, I don’t remember any significant exchanges with Bill on this matter.

            Re your claim that some sort of “mathematical theory” is required to underpin NAIRU, it strikes me that the whole NAIRU idea is so simple and obvious that it doesn’t need any sort of theory. Anyway the “theory” is as follows.

            There is such a thing as supply and demand: if demand for any product rises, prices tend to rise. They don’t rise too badly given plenty of spare resources, but when the economy is at capacity, there are few spare resources. Thus given a large increase in demand when the economy is at capacity or at some particuar and relatively low unemployment level, ALMOST ALL PRICES will rise. Plus they will continue to rise until AD is reduced to a level such that the economy can meet demand.

            I’m amazed I even need to spell that out.

            Next, you repeat the argument which is popular with JG advocates (including Pavlina) namely that advocating a relationship between AD, employment and inflation somehow induces such advocates to claim that full employment in the conventional sense (i.e. unemployment of about 5%) is an entirely satisfactory situation, thus we needn’t try to do more.

            I’d imagine about 95% of those who believe in the above relationship are perfectly well aware that unemployment of ANY PERCENTAGE is a not entirely satisfactory. Those advocates are simply saying that 5% is about the best we can do with conventional policies (i.e. absent JG or similar).

            There are currently 3,000 deaths a year on British roads. Many think that that is about the best we can do without spending ludicrous amounts on safety measures. Would you argue that the objective should be zero deaths a year regardless cost?

            And it is possible that the cost / benefit ratio for a large scale JG operation just isn’t too brilliant. Lars Calmfors, a Swedish economist did a study of unconventional employment creation policies (some of them similar to JG) and concluded that the cost / benefit ratio was extremely poor (though personally I’m not that pessimistic). See:

            http://mitpress.mit.edu/books/chapters/0262012138chap1.pdf

        • Philip, You seem to suggest in your first two paragraphs that high wages for JG people forces regular employers to respond by also paying higher wages. If you are saying the latter higher wages are purely nominal wage increases (i.e. there’s no REAL wage increase involved), then that is just pointless: it achieves nothing, except more inflation. So that idea is a non-starter.

          But if you are saying higher nominal wages for JG employees results in higher REAL WAGES all round, then I’m sceptical to put it mildly. If raising real wages was as easy as simply printing more dollars / Euros and having everyone pay themselves more in nominal terms, that’s great news.

          Re your last para, I don’t get the first half of the paragraph. However I’ll deal with your criticism of NAIRU. What I mean by NAIRU is simply the idea that at some level of employment, inflation rises to an unacceptable level. I couldn’t care less whether or not it “accelerates” as per the “A” in NAIRU: the point is simply that there is a relationship between inflation and unemployment.

          If (as you seem to imply) there is no such relationship, then that is even better news than the idea that we can all grow rich by printing dollars, Euros, etc. In other words why bother with JG? Why don’t we just have a massive increase in AD? That way unemployment will fall to near zero and (as I understand you) there will be no inflationary consequences.

          I also note that the World’s most vociferous critic of NAIRU, Bill Mitchell, finds the NAIRU concept indispensable because he uses his own phrase for the same idea: “inflation barrier” as he calls it. That’s hilarious as far as I’m concerned.

          • Philip Pilkington

            It depends on whether there is an output gap or not. If there is the JG highers real wages in line with productivity (ignoring exchange rate issues, of course — but these are important). If there is no output gap all wages will have a ONCE OFF rise nominally. What this does is redistributes some of the ‘share’ to workers that would have been otherwise unemployed.

            HOWEVER, it does not cause inflation. Inflation is a continuous rise in the price of goods. This would be a ONCE OFF rise in wages and prices that would simply be a redistribution.

            “What I mean by NAIRU is simply the idea that at some level of employment, inflation rises to an unacceptable level. I couldn’t care less whether or not it “accelerates” as per the “A” in NAIRU: the point is simply that there is a relationship between inflation and unemployment.”

            If it doesn’t ‘accelerate’ then its not inflation. That’s why there’s an ‘NA’ and an ‘R’ in NAIRU — you know? NON-ACCELRATING RATE? Pretty elementary stuff here… Inflation is a RATE OF CHANGE in prices. Not a once off shift. So, you can redefine inflation and NAIRU (to IU?) to suit your own purposes, but recognise that you’re using your own nomenclature for your own arguments.

            No offense, but I’ve seen you hanging around the MMT blogs for at least a year. All this stuff is clearly spelled out in the literature. And your canards about money printing to prosperity are just asinine.

          • So our only options are run-away inflation or some percentage of people who want jobs being unemployed? Talk about a non-starter. If systemic unemployment is a requirement of the system, perhaps the system needs to be changed.

          • Philip Pilkington

            @diptherio

            Don’t listen to this rubbish. Abba Lerner invented the NAIRU concept.

            http://en.wikipedia.org/wiki/NAIRU#Origins

            “An early form of NAIRU is found in the work of Abba P. Lerner (Lerner 1951, Chapter 14), who referred to it as “low full employment” attained via the expansion of aggregate demand, in contrast with the “high full employment” which adds incomes policies (wage and price controls) to demand stimulation.”

            He also invented the idea of a Job Guarantee.

            http://en.wikipedia.org/wiki/NAIRU#Criticism

            “Others, such as Abba Lerner (1951, 1967) and Hyman Minsky (1965) have argued that a similar effect can be achieved without the human costs of unemployment via a job guarantee, where rather than being unemployed, those who cannot find work in the private sector should be employed by the government. This theory replaces the NAIRU with the NAIBER (non-accelerating-inflation-buffer employment ratio).”

            In short, he understood what Ralph does not.

      • Why not just let the market decide the optimal JG compensation rate? The rate it takes to get to full employment is the optimal rate. I guess it depends on what you want to optimize.

  6. What level of inflation do we consider unacceptable is the question we should ask?

    Inflation itself is not inherently bad.

    Will the level of inflation matter if real growth/output is consistently in excess of inflation?

  7. Finally, a reasoned argument!

    It is high time, we begin to address the fundamental differences between micro-economics and macro economics,
    between the firm/household and the national economy. Lessons I learned in ECON 301 back at Purdue WRT
    agricultural markets. Ag markets are monopsonies with many sellers and few buyers. Each seller can maximize his revenue by producing as much as his farm can. However, when farmers do that, they run up against inelastic demand which cuts prices as much as 50% for over production as little as 5%. Hence the need for regulated production, or of a buyer of last resort, to prevent collapse of farm prices, ie: a price guarantee.

    In the JG as outlined above, we see a similar approach to labor, which operates similarly. The JG provides a buyer of last resort, to prevent collapse of wages, benefits, and working conditions.

    My variant on the JG is a health guarantee (HG). The HG is a single payer health system funded by a universal medical insurance scheme organized as a Federal Agency, similar to Medicare. This scheme is funded by premiums paid by all citizens through witholding. This program externalizes health costs from firms, reducing overhead. As I envision it, this program is primarily focused upon preventative medicine, vs massive intervention, and involves clinics staffed by employees paid salaries, similar to the VA Medical System. In that regard, the clinics, like their counterparts in France and Canada, would have no means of collecting monies. Also, I envision strict limits on managerial staff, and a higher proportion of MDs in the mix vs the current trend toward PAs and Nurse Practitioners. The scheme could have tiers of coverage, segregated by which procedures are dealt with, vs CoPayment. Yes, I do not believe in CoPayments. Instead, given malingerers, the system would correctly diagnose their neuroses, and route them to psychiatric counseling, where they belong.

    INDY

  8. Philip,

    You say “It depends on whether there is an output gap or not. If there is, the JG highers real wages in line with productivity…”

    As I understand you, you are saying that given an output gap, JG wages can be increased (which will push up other wages), and inflation will not ensue: reason being the output gap. Ergo everyone is better off in real terms.

    I suggest the increase in real wages can only come from increased real production, i.e. (which in all probability will involve increased employment). So what you are saying is that given more money sloshing around, AD rises, as do real wages and employment. Agreed.

    But it’s the rise in AD that is the fundamental cause of increased real wages, not the fact of having generous wages for JG employees. I.e. I still think you are conflating two issues that should not be conflated: the question as to the optimum level of AD is, and the question as to the optimum level of JG wages relative to other wages.

    Re your point that increased pay for JG employees given no output gap will cause a once off rise in prices rather than inflation (which is normally defined as CONTINUOUSLY rising prices), I agree. I.e. I should’nt have used the word inflation in that scenario.

    Next you claim that if inflation is not accelerating it isn’t inflation (“If it doesn’t ‘accelerate’ then it’s not inflation.”). The definition of inflation in my Oxford Dictionary of Economics does not mention the word “accelerate”. Ditto my “Dictionary of Economics and Commerce” by J.L.Hanson and my Penguin Dictionary of Economics.

    Looks like we both made boo-boos when it comes to using the word “inflation” correctly.

    • Philip Pilkington

      All good on this. Except this one:

      “Next you claim that if inflation is not accelerating it isn’t inflation (“If it doesn’t ‘accelerate’ then it’s not inflation.”). The definition of inflation in my Oxford Dictionary of Economics does not mention the word “accelerate”. Ditto my “Dictionary of Economics and Commerce” by J.L.Hanson and my Penguin Dictionary of Economics. ”

      There are plenty of synonyms for ‘accelerate’. But even if they screwed it up — they may have — inflation is a general increase in prices over time. Consider the NAIRU concept (which does include the word accelerate and for a reason). The reason that NAIRU concerns itself with rising wages is because if there is one wage increase others will follow — and so on until we all live in Zimbabwe.

      Fine. Might happen. Might not (probably not…). But let’s say it does. With JG this cannot happen. Because JG sets a floor and a ceiling at the same time. It’s like the dole or minimum wage. It doesn’t rise through bargaining in a ‘labour market’. Dole recipients don’t bargain for their welfare — and minimum wage earners don’t bargain for their set rate (although unions do lobby sometimes, but there’s a big difference). JG wage rises because the government say it rises — like the dole or the minimum wage. If you’re an interest group that wants it to rise… well, go use your democratic clout and argue your case. Just like today with the minimum wage.

      Once JG is put in place — as Lerner knew well — NAIRU is irrelevant. The government sets the rate of unemployment. The once off adjustment is a simple adjustment mechanism. More like a once-off exchange-rate fluctuation than a real inflation. Which, incidentally, we can assume happened identically when they introduced the dole or the minimum wage!

  9. Ralph @5:49 , 03/25, you said:

    “You claim “their isn’t a shred of empirical evidence corroborating the existence of the NAIRU, as Bill Mitchell has shown on his blog.”
    (Incidentally, and to repeat, I personally us the acronym NAIRU in a fairly loose sense: to refer to the fact that at some level of employment, inflation goes thru the roof, i.e. there is a relationship between AD, employment and inflation.)”

    Ralph, you cannot just pay word-games with the NAIRU concept and then debate me on the basis of your own private definition of it. My statement about evidence was about the NAIRU, not about your version of the term’s loose use. I never said there is no relationship among AD, employment, and inflation. Neither does any other MMT proponent. All of us agree that demand-pull inflation will occur if AD is pushed beyond the point of FE. So, what else is new?

    The UK and Spanish examples below have nothing to do with the NAIRU hypothesis. If you think they do, then please state the hypothesis accurately and show us how these examples are relevant. In particular, please show us precisely how Barber’s policies pushed unemployment up beyond a precise NAIRU value that you deduce from economic data gathered at the time coupled with neoliberal theory and auxiliary rules predicting that NAIRU value. You understand what I’m saying Ralph. No BSing around! No loose talk! Just a deduction of the changing NAIRU values and a showing that price increases accelerated when the rate of unemployment fell below the NAIRU value, and also a showing that such price increases were due to employment increases fueled AD increases from deficit spending, rather than due to cost-push inflation imposed by monopolistic commodity suppliers like the oil cartel. I’m betting that you can’t show this Ralph. Prove me wrong!

    On the Spanish case, please provide a similar derivation, along with appropriate data. Again, I’m betting you can’t do that, and that you’re just blowing smoke about the possible connection between spending on a JG in a fiat currency system to create full employment and the Spanish introducing too much gold into the European economy to drive economic activity way beyond the capacity of Europe to produce real wealth.

    Since you haven’t shown that either the UK or Spanish situations are comparable to the present US situation, I have to conclude that you haven’t produced any evidence corroborating the NAIRU yet, so I seriously doubt your ability to produce such evidence even if you do try. As for Pavlina, of course, I like her argument in the piece you cited, but I’m sure that if she reads this she will tell you that her very nice model in no way supports the NAIRU hypothesis.

    I do remember some exchanges between yourself and Bill on the NAIRU, but I won’t trouble myself to look them up.

    On Bill contradict himself by specifying an “inflation barrier” like the NAIRU his idea is as follows: http://bilbo.economicoutlook.net/blog/?p=10554

    “The fixed JG wage provides an in-built inflation control mechanism. In an earlier published paper I called the ratio of JG employment to total employment the Buffer Employment Ratio (BER).

    “The BER conditions the overall rate of wage demands. When the BER is high, real wage demands will be correspondingly lower. If inflation exceeds the government’s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers transferring from the inflating sector to the fixed price JG sector.

    “Ultimately this attenuates the inflation spiral. So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the JG policy achieves this via compositional shifts in employment. That is it can also deal with a supply-shock that generates distributional demands that ultimately cause inflation.

    “The BER that results in stable inflation is called the Non-Accelerating-Inflation-Buffer Employment Ratio (NAIBER). It is a full employment steady state JG level, which is dependent on a range of factors including the path of the economy.”

    I think Bill’s idea is based on an FE buffer stock, while NAIRU is based on an Unemployed Buffer Stock. These ideas are very different and you are very wrong in saying that he contradicts himself.

    Next, first the idea of NAIRU isn’t simple and obvious. The simple and obvious idea is that everyone who wants a full-time job can get a job offer and that when that condition exists we have FE. The NAIRU is a sophisticated rationalization for watering down the idea of FE so politicians can get away with not enabling it. As far as your statement of the theory of the NAIRU is concerned. It is ridiculous. That is not NAIRU theory it is just the conventional idea that everyone grants that if AD exceeds the capacity of the economy to produce what is demanded then there will be demand-pull inflation. MMT, of course, agrees with that idea as does everyone else. So I say again, that is not NAIRU; it is just your own sad attempt to redefine the idea so that you can avoid granting the point that there is not a shred corroborating the NAIRU idea. The NAIRU idea is formulated very well by Bill and also tested here: http://bilbo.economicoutlook.net/blog/?p=1502 It fails any reasonable expectation based on the assumption that its exists.

    Finally, you argue that those who argue for FE at about 5% know perfectly well that such a level isn’t satisfactory, but that they’re saying it’s the best we can do with conventional policies. Well, I certainly agree they’re saying that, and I think Pavlina would agree with that also. But, I also think that this is exactly the reason why MMT advocates using the JG to directly create jobs at a living wage rate that will eventually stabilize demand-pull inflation while producing FE with frictional UE of about 1.5% – 2%.

    Finally, the difference between 2% unemployment in the US and 5% is between 5 and 6 million people. Assuming we can make it down to 5% with State Revenue Sharing and FICA tax cuts, and assuming costs of $40,000 per person per year including fringes, the estimate for JG costs would be about $240 B per year, certainly an amount that is less than 2% GDP. So, I’m not arguing for an expenditure that tries to reach FE regardless of cost. Instead, I’m saying:

    1) once the other stimulus measures take hold in say about 6 months time then JG annual costs will fall to about the $240 B figure or less than 2% of GDP;
    2) nor will they stabilize there because the JG program itself will have a substantial fiscal multiplier reducing the number of JD people to between 500K and 1 Million within another 6 months bringing the annual cost down to about $60 B on a continuing basis, which would probably amount to 0.3% of GDP assuming that FE would bring GDP up to $18 T in short within a year of a serious MMT program being implemented; and
    3) since the Government’s deficit spending on the JG is fiat money, why should we care about the cost, unless we begin getting demand-pull inflation? However, the MMT hypothesis is that we’ll have none of that before FE using the JG is reached anyway, and at that point we can stop the deficit spending. As for Lars Calmfors and his work. He didn’t study a JG program within a larger MMT context, so please don’t pretend his work is any kind of empirical test.