Tuesday, 3 January 2012

Job Guarantee - it's really not that difficult

I have to say the furore over the Job Guarantee idea has been very instructive - particularly about what people value in the world. The amount of leaping to conclusions and post-hoc justification has been astounding to behold.

After all we're simply talking about trying to make sure an individual in a society has a way to earn a living.

As a systems person its blisteringly obvious to me why you'd want to operate this mechanism since it solves a lot of dynamic fluctuations in one go. However it is obviously not clear to most others. So let's see if I can distil it down to its essence and explain the mechanisms.

The Job Guarantee comes from the proposal that the economy should provide full employment and price stability.

Full employment means that if you want to you will be usefully engaged in society in a manner that allows you to feel of value in some way. Given that our school system trains us to derive value and status from work, then value can be given to the majority via a job of some sort. (For reasons why our school system is not really fit for purpose, see this excellent RSA Animate video).

The Job Guarantee essentially says that the state will guarantee to pay wages in exchange for your labour.

Note what it doesn't say:
  • It doesn't say that the state will necessarily compel you to take a job.
  • It doesn't say that the state will necessarily organise the work.
  • It doesn't say that you can only work for the state.
  • It doesn't say that you will necessarily receive no income if you don't want to work
It says the state will guarantee to pay you a certain amount of wages in exchange for a certain amount of your labour. That's it. Nothing else.

This is exactly the same as the state saying it will guarantee to buy your wheat, or your milk or your wool if you are a farmer producing those goods.

If you like you can view it as a put option. Every week you are essentially given a put option by the government that allows you to sell your week's labour to the state for a set price - the strike price. The state then sets the strike price. How much are the wages and how much and what type is the labour required in exchange for those wages.

That then becomes the nominal price anchor for the entire economy. Everything prices itself off that strike price.

Since the operation of the guarantee is a signal of private sector investment failure, the private sector is necessarily disciplined by its operation. Some of the consequences of that are:
  • jobs of a worse quality than the guarantee cease to exist and the firms providing them go bust - freeing up space for the more enlightened. Good riddance to them.
  • private sector firms in trouble go bust naturally and the government has no need to run around like a headless chicken panicking over the job losses - usually accompanied by a spraying of discretionary spending ineffectively in all directions. The guarantee pick up the slack automatically.
  • government can thumb its nose at threats of job losses for any of its policies, since the guarantee picks up the slack.
  • private sector malinvestment can be allowed to resolve and debt bubbles allowed to go down safe in the knowledge that aggregate demand will be maintained (but likely at a lower level - disciplining prices again) and we are less likely to lose sound investment in the maelstrom of insolvency.
  • the employability gap between private sector workers and guarantee workers is smaller which actually reduces the negotiation capacity of engaged private sector workers.
It is important that the private sector feels the discipline so that they regain their appetite for investment as soon as possible. And that happens when profit margins return to something juicy and attractive - which is what maintaining aggregate demand and employability achieves.

Importantly though the system is also getting rid of private sector dross. You need to make spaces for the entrepreneurs to move into.

And once the private sector gets its mojo back the guarantee automatically decreases - as does the private sector discipline. Which then helps the private sector get back to its self-sustaining ignition point where it can become the driver for the recovery.

So enough of the theory. How do we actually get this into practice and reap the benefits.

Interestingly most of the objections refer to edge cases (Hi George). And I have a simple solution to those.

Ignore them.

Too difficult to address for now. We can deal with them later if necessary.

Let's deal with the majority problem - a lack of work opportunites for employable people who want to work.

So at the moment* I would set the guarantee price as follows:
  • the state directly pays the wages of any new person engaged by the public, voluntary, non-profit or charity sector on receipt of a validated timesheet up to a maximum of 35 hours a week at the minimum wage.
  • the employer employs the individual and is responsible for ensuring the individual gets paid.
  • the employer is prohibited from topping up the wages or paying expenses or in any way increasing the remuneration of the individual for the work done.
And let's see how far down the road that gets us.

(* when the facts change, I change my mind. What do you do sir?)

Why not the private sector? Well the private sector lack of investment is the problem and giving them free or subsidised staff is hardly an incentive to amend their behaviour. The guarantee needs to generate a tension in the private sector that turns into a determination to reduce the number of guarantee staff via investment.

And anyway the private sector initially needs to focus on expanding output to service the newly restored aggregate demand.

I suspect that employers using significant amounts of banks loans would similarly have to be excluded from access to guarantee staff. Non-profit doesn't mean that they don't make money. Some of the best businesses I know are co-operatives. Since part of the problem is bank reticence we need to stop them getting access to the stimulus from any other direction than new investment in productive capacity.

So would prices start to go up when this is implemented? Undoubtedly some will at first. But wages would not, and that means putting up prices is a dangerous game. Finite wages purchase reduced amount of goods which means somebody loses out, goes bust and puts a few more people on the guarantee - which reduces wages some more. That is how the nominal anchor pulls prices back into line.

The existing unemployment or pension payment systems can be used to pay the wages. In the UK they are all part of the Department of Work and Pensions structure. Starting and stopping jobs is the same as starting and stopping unemployment benefit with the same PAYE implications and National Insurance registration requirements. HMRC is already into a pilot programme collecting 'Real Time information' about PAYE records to support the new Universal Credit. So those systems are there already, pay millions of people and can be adapted relatively quickly given that they are already half way through the process.

Minimum wage is already enforced by HMRC, so they would get the job of dealing with the 'Mr Donald Duck' applications. That may involve a slight increase in expenditure on rubber gloves and Vaseline admittedly.

So it's really not that difficult to reduce the jobs deficit. That state does what the state is good at - making payments and generally keeping out of the way. Aggregate demand is restored in a counter-cyclical fashion and we can run like this alongside the existing unemployment management structures for a while and see what the data says before trying to tune anything else.

To those who see Byzantine structures and government officials eating their first born I would suggest less Hollywood disaster movies and more Pulp:
You'll never live like common people,
you'll never do what common people do,
you'll never fail like common people,
you'll never watch your life slide out of view,
and dance and drink and screw,
because there's nothing else to do

And remember these are real people we're trying to help here. Real people just like you and me.


Unforgiven said...

Neil -

I like your point of view on this. I like the fact that it sets a floor on demand even better. Just the stability that it creates would lift a burden from the world. If your JG, then you don't make a lot, but you can damn well depend on it.

And so can business. We can flesh out the details as we go along; it will evolve like society itself evolves.

Unforgiven said...

We could even set them on the problem of not seeing typos until after you post!

Dan Kervick said...

I'm saving this for my MMT library Neil. There are so many things to keep up with lately.

peterc said...

Great post, Neil. Your ability with systems design comes through in the clarity of argument.

Fuguez said...

Neil -

First off: A Happy New Year.

Secondly, I have not been on your site for sometime and a huge thanks for now going through the JG. I really need to get a better understanding of this.

I have to disagree with you on the following. A JG is not the same as an "Offtake Agreement" - buying (or guaranteeing to buy) wheat at a fixed price.
The operational (and financial) risks to a farmer, say, are massively different.

I have always differentiated between the following:
a) Output Guarantees/ Offtake Agreements
b) Job Guarantees
c) Unemployment Benefit

Behaviour under these 3 different scenarios is very different even though from my understanding of the functional finance perspective there may be no difference to National Accounts.

This difference is the actual 'output' of the real economy - i.e. how much wheat you will actually get from me under each of the 3 different scenarios.

I actually think that digging holes and filling then back in may not be as bad a solution as many think as this would not affect the amount of wheat (and other stuff) in the market.

Neil Wilson said...

"Behaviour under these 3 different scenarios is very different"

Are they, or it is a macro fallacy of composition?

What is the difference between a Job Guarantee paying a wage for somebody on Gardening leave (ie the labour is scrapped after purchase) and an output guarantee where the wheat is scrapped as waste after purchase.

Does it depend on whether the farmer borrowed money to grow the wheat?

Ben said...

Great post Neil. It seems like the debate lately is getting bogged down in arguments about boondoggling and hole filling, so its useful to see the argument for a JG stripped back to its basic purpose. I don't understand the argument that says that while there is always the capacity to ensure full employment, it is not desirable to enact a policy that would achieve this.

Fuguez said...

If you simply burnt the output produced then there is no difference.

I did say that one could consider digging and re-filling holes in the ground for a JG. This is equivalent. No?

I agree. If the output of the work is scrapped or completely non-productive, then fine.

But then why the focus on people 'who want a job' - why not simply pay every (adult?) citizen the minimum wage working or not and get private sector employers to add to this amount and only tax people on excess earnings?

Neil Wilson said...

That's OK I was just trying to understand if it was the use of the output or the production of the output that you considered the important point.

So again the difference is down the how the labour in the JG is used.

Fuguez said...

Politically, it would be a hard one to sell to people. It appears that the less-productive the work, the better: digging and re-filling holes!

I can have some sympathy with it being deployed tactically (as with the examples you gave) and can see it being of use in certain types of collaborative/ co-operative work. What I would term "open-source community" work which might put a floor on the quality of services provided by the local government.

Dimm said...

What I do not get is why it is always diminished to digging and filling holes.
There are plenty of jobs that do not require special skills. Why not postmen, drivers etc. There are plenty or areas with unlimited needs for labor like care, environmental protection etc.
Even in the strict business case JS is a plus.

Unforgiven said...

Fuguez -

Not sure why you think the less productive work is better. Please explain.


Neil Wilson said...

"What I do not get is why it is always diminished to digging and filling holes."

That's politically how you bury an idea.

My approach is that the state will always allow the voluntary, charity and public sectors to expand at a fixed price.

In other words its how you do the Big Society once you remove the ideological fiscal blinkers.

Fuguez said...

Productive work is more likely to be rewarded by the private sector.
If i was to form a bin-men and road-sweepers cooperative what would happen to the 'current' bin-men and road-sweepers when we start and what would happen to the service when we get reemployed.
Might not certain (marginal) services suffer from these discontinuities?

Care jobs - I would like to believe - are not as unskilled to simply employ 'anyone' of the street.

Still it is hard to argue against it if one has unemployment benefit so i think it should be tried out to see how people behave with it.

Unforgiven said...

Neil -

Awesome RSA video in your link! Thanks!

Andy said...

Looks like a no-brainer to me.
Why dont' the Yanks get it?

gastro george said...

Here's a tangible example. My mother's 82 and can't get to the shops or the doctor or anywhere on her own. A taxi will cost her £7 each way - she can't afford that. There is a voluntary service that will do it for less than half that price - but it is not always available.

So it seems pretty straightforward that the JG could be used to create a subsidised taxi service for the elderly. It undercuts nobody, yet increases "employment" and provides a social benefit.

Talvez... said...

So would prices start to go up when this is implemented? Undoubtedly some will at first. But wages would not, and that means putting up prices is a dangerous game. Finite wages purchase reduced amount of goods which means somebody loses out, goes bust and puts a few more people on the guarantee - which reduces wages some more. That is how the nominal anchor pulls prices back into line.
Ok, here is where my doubts rise. Could you explain this point a bit more, if you don't mind?

Neil Wilson said...

If wages don't rise, credit is not available and prices rise then real purchases go down. Which in business terms means the customer may choose somebody else's product or service over yours.

And that makes the business (and what it produces) surplus to requirements so it goes bust, putting the people employed onto the Job Guarantee and resolving the private sector malinvestment.

So when you're deciding to put your prices up as a business you have to consider whether you are going to be the business the customer is going to stop buying from. It's likely to be the last option unless you are completely swamped with demand, can't get the supply and have no other choice.

That's how a nominal price anchor works - people who put their prices up are likely to be forced to put them back down because the very action of price rises causes a shortage of demand.

And it can take a while for that to play out as we've seen in the UK. There has been a squeeze on real incomes with the price of power going up significantly. And now the marginal retailers are starting to go bust.

The value of the JG is that when a marginal business goes bust it throws the employees onto the higher JG income than the lower unemployment income, which reduces the severity of the squeeze on aggregate demand.

JG doesn't absolve a government from looking for supply side limitations - such as planning restrictions or other monopoly conditions. They still need dealing with.

Dimm said...

What she said(Pavlina R. Tcherneva):

CiG said...

The macro argument sounds quite compelling, and the proposal as presented is OK, but it's OK because it's not what it says on the tin:

"the state directly pays the wages of any new person engaged by the public, voluntary, non-profit or charity sector"

This is OK, but it is not a job "guarantee" programme. There will be several percent of the workforce that no public or charity employer within their reach wants even at zero cost to them.

Or do you believe that the non-profit sector would really offer jobs to almost anyone who wants one? Could be tested with a pilot program in a small country or region. I'd be surprised if it gets a job for half the applicants...

Something obly a fraction of the applicants can realistically get cannot be called a guarantee.

Neil Wilson said...

I also said:

"And let's see how far down the road that gets us"

Baby steps. Low hanging fruit. Simplest thing that will work.

Big bang implementations don't work.

Increasing working increases demand which will then start to draw other people off the JG and unemployment queues as businesses expand to service the restored demand.

Then you see what is left and what (if anything) the state can do to help them.

Which may end up being 'not much' because the political will isn't there.

In which case the debate moves onto how much compensation they should be paid for the state's failure to provide true full employment.

Unforgiven said...

CiG -

"There will be several percent of the workforce that no public or charity employer within their reach wants even at zero cost to them."

Presumably not the lion's share? What do you guess the split would be? Remember too, that the JG applies to people who are able and willing to work.

CiG said...

@Unforgiven, my guess is that 3-5% of the workforce would remain unemployed if Neil's scheme works really well, basically stay close to some reasonable approximation of the "full employment" rate (most controversial subject itself) rather than get to 10% plus as it does now in bad times.

The "willing to work" bit is just explanatory of the aim of the measure. Operationally, you will also get people willing to get the extra money (if the scheme pays more than unemployment benefit) but with no intention or ability to work. In Neil's scheme as I understand it, this is dealt with like for regular jobs: the charity employers will assess that and not employ (or fire) these guys. People genuinely willing to work but unable to find a willing charity employer with a matching need for what they can do also remain unemployed.

@Neil, there's a marketing problem with advertising an employment support/salary floor scheme as a job guarantee when it isn't one: I'd expect many people will reject the proposal on the basis of the expected problems of a genuine job guarantee, without necessarily discovering that you're really proposing something more benign. MMT is shooting itself in the foot with this.

Neil Wilson said...

"there's a marketing problem with advertising an employment support/salary floor scheme as a job guarantee when it isn't one"

I'm sure there is, but since this article is designed for people who are discussing Job Guarantee's it is couched in those terms.

Are you sure the "every silver lining has a cloud" approach helps?

Ralph Musgrave said...

“jobs of a worse quality than the guarantee cease to exist and the firms providing them go bust - freeing up space for the more enlightened.” That phenomenon would occur to some extent, no doubt. But on the other hand in the absence of the guarantee (or min wage legislation) why would an employer NOT create more productive jobs if the employer can see a way of doing so?

To illustrate, assuming for the sake of simplicity that as an employer I make a 10% profit on my firm’s turnover, and I currently employ people on the min wage. If I then see a way of employing people doing something vastly more productive and on ten times the min wage, I’ll fire ahead and create those more productive jobs won’t I?

Neil Wilson said...

"why would an employer NOT create more productive jobs if the employer can see a way of doing so?"

No demand. It's that macro problem again of requiring the income of the employees you will pay after you create the jobs before you can create the jobs.

When you drop into that rut something external has to kick it out.

We need really need a dynamic model to play with these scenarios. The non-linearities are too difficult to construct narratively.

Andy CFC said...

Thanks Neil was really struggling with some of this but thats helped out so much

Tom Bergbusch said...

Hi Neil, just saw this on the BBC website -- to my mind it looks like something half way between workfare and a job guarantee. Any thoughts?

"Labour wants welfare to help those who 'play their part," April 6, 2013

see http://www.bbc.co.uk/news/uk-politics-22056212

Frances Coppola said...

Hi Neil

I have to agree with others - what you are proposing is not a Job Guarantee. From my point of view that is great, because I am not a fan of MMT's Job Guarantee idea. I like yours a lot better. It's analogous to a central bank supporting a falling currency by acting as buyer of last resort at a set price. When employers are intent on bidding down wages to the floor, using the threat of unemployment as the means of forcing employees to accept wage cuts, government intervening to support the market price of labour would be a damn good thing.

One problem though is exit from the scheme (this is a bigger problem in JG, but it also applies to your idea). The growth of jobs in the public sector could result in a sizeable crowding-out effect. Wages in the private sector would have to be quite a bit higher to entice people away from their guaranteed public sector/NFP/charity jobs, wouldn't they? Also, assuming that these public sector/NFP/charity jobs were actually real jobs doing something useful, what would happen to the output of those institutions when all these workers went back to the private sector? What would replace it? Would it matter if it wasn't replaced?

I tried this on the MMT lot about JG and got nowhere. For example, Bill Mitchell suggested that JG workers could be used to provide elderly care....don't the elderly need care in good times as well as recessions? For me this is the fundamental problem with countercyclical job guarantees. Real jobs aren't cyclical. Only jobs that don't matter can be cyclical.

Or am I missing something?

Neil Wilson said...

"Or am I missing something?"

This is the Job Guarantee - as proposed by all the MMT economists.

If you have interpreted what they have written as anything else, then you have got the wrong end of the stick.

What you call a 'crowding out effect' is deliberate. It eliminates the crap jobs at a stroke, and replaces them with something else. Precisely the same effect - and to a larger extent - occurs with any other income support system.

And when the private sector booms, the Job Guarantee jobs are 'crowded out', again deliberately.

"Real jobs aren't cyclical."

Yes they are. McDonalds, et al. struggle to recruit at the height of a boom.

At the moment you'll barely see a recruitment sign anywhere in those organisations.

What you are seeing and believing is based upon your preconception of what a 'job' is, which is artificial. That's not what a job is.

A job is something else in aggregate, and I've got a post on the subject brewing. Actually it's turning into a fairly substantial chunk of work - because of the misconceptions that have built up on all sides.

Neil Wilson said...

And I'm forgetting my manners.

Thank you very much for the thoughtful comment. It is extremely helpful.

I will incorporate your concerns into the post I'm working on. Hopefully it'll help.

Tom Hickey said...

As Bill Mitchella says, procycllically firms hire up accepting lower quality, and countercyclically firms fire down, shedding lower quality. The least qualified become the unemployed, the bulk of which are lower skilled. This is the buffer stock of unemployment that expands and contracts across the cycle, resulting it idle and deteriorating resources, which creates a permanent drag on the economy. The MMT JG simply hires off the bottom by extending a job offer to anyone willing at able to work at the level of compensation established as the price anchor, ie., the money value of an hour of unskilled labor.

The choice is between a buffer stock of employed such as the MMT JG, or a buffer stock of unemployed as under current policy in most places. Which is more effective socially, politically, and economically in a democracy and also more economically efficient in a capitalistic one in which the private sector leaves permanent cohort of unemployed? Of course, capitalists prefer a buffer stock of unemployed since that reduces labor bargaining power and reduces wages. But look at the cost to the society as whole. Should capitalists be subsidized at this horrendous cost? That is not only an economic issue but also a social and political one. And it is one that is decided by political power, in a plutocratic oligarchy in favor of capital and at the expense of labor. While this may work for firms at the micro level, at the macro level it costs everyone through the drag it involves.

Ralph Musgrave said...

“It’s not that difficult”?? Well of course it’s not: the idea that the state can provide some sort of public sector type work (if only picking up litter) is stark staring obvious. The idea is CENTURIES old.

The problem is that most advocates of JG haven’t go the brain to get beyond the above ultra-simple idea.

“Note what it doesn't say…It doesn't say that the state will necessarily compel you to take a job.”

Well actually many advocates of JG DO ADVOCATE a “compulsion” or workfare element. In fact that element is actually essential and for a reason set out by the Swedish economist Lars Calmors: he called it the “iron law of active labour market policy”. But that “iron law” is way beyond the comprehension of the above mentioned and for the most part brainless advocates of JG.

“freeing up space for the more enlightened” . . . the idea being that if we destroy low grade jobs, that will enable better jobs to take their place. Just one problem there: any employer with a really productive job on offer will be able to outcompete those offering low grade jobs for the labour concerned ANYWAY. You don’t need JG to achieve that outcome.

“nominal price anchor for the entire economy”. What, so the existence of JG jobs stops employers bidding up the price of types of labour in short supply given excess demand? Warren Mosler used to advocate that idea, but has now admitted that the idea is nonsense.

Given excess demand, you’ll get excess inflation. Whether we have a JG system in operation or not is almost entirely irrelevant far as inflation goes.

Neil Wilson said...


Not sure that makes any sense at all. It's very confused.

Again the idea that giving people work to do will automatically cause inflation and 'excess demand' is laughable. In which case any new job creation by anybody should be banned immediately.

If there isn't sufficient excess capacity in the economy to service the increased demand then you have to tax away spending capacity from those who have been rewarded to excess by the failed capitalist distribution system.

Essentially the capital distribution system is short-sighted and needs a pair of corrective glasses applying.

So the rule is very simple. You expect that the extra demand from the new wages is paid for by quantity expansion - because if it isn't you'll have to tax spending on luxuries by rich people to make space for it.

Again the argument you put forward is always the same - please step back from the inflation boundary and consider what happens as you move from our current involuntary employment state with a large output gap to one of 'loose full employment'. Once you do that you see that you can halt the private sector expansion at any point, yet you still retain strong effective demand.

As David Graeber pointed out recently, most modern economy jobs are a complete waste of time. They are not really required at all - other than to provide people with income with which to purchase output from the production of machinery.

What people need is income to buy stuff that machines make, and they need to be doing something for that income so that others don't resent them for having that income - altering their own behaviour in response.

So the requirement for you to do something comes from your peers - who need to believe that you have earned your money before they will allow you to have it long term. And that appears to be a fundamental human characteristic. Humans will only share resources with others who are prepared to pull on the rope.

And yet you need labour to be expensive and largely unavailable so that capital replaces jobs with machines. That way you get, for example, automatic touchless car washes and nice parks, rather than the state subsidised poor standing outside in all weathers with sponges providing excessive profit to a capitalist who refuses invest.

So you have to give everybody something to do, yet you also have to make labour scarce and expensive. Very much a circle that needs squaring.

I would suggest taking a different viewpoint on this area. It is fascinating because it runs up against the issues of fundamental human psychology and you get a much better view of the problem reading sociology and psychology papers.

Pretty much all classically trained economists just haven't a clue in this area. You'll get little insight reading economic papers.

Tom Hickey said...

Yes, the capitalistic distribution system is flawed. Which results in a number of issues.

The point that Keynes was making in his "euthanize the rentier" is that there is a fundamental flaw in the capitalistic distribution system that needs to be corrected — hoarding.

Saving as several purposes, like deferred consumption or investment ("saving up for later") and security provision (rainy day and retirement funds). Saving beyond that is hoarding and is parasitical on circular flow.

Another flaw is favoring capital over labor as indicated by the name "capitalism." Then the capitalists goal is to make sure that labor is categorized as a commodity and laws enacted to prevent anything that might increase the bargaining power of labor and thus "distort" the labor market.

Another flaw is capitalist's failing to realize that low wages inhibit innovation that increases productivity, whereas high wages create the incentive to increase productivity to decrease the amount of labor needed.

This should be a beneficial effect socially by increasing leisure, but that doesn't happen owing to increasing the profit share instead of distributing gains more equally.

Without government intervention, capitalism results in Dickensian times. Been there.

In addition, the Kalecki profit equation and sectoral balances as well show that profits must come from net exports (not possible for all countries simultaneously), private borrowing (not sustainable in the long run) or government deficits. Ergo, either economic problems for capitalism as a global system or else governments supporting profit share, i.e., hoarding under the existing system.