Why we need a job guarantee in Australia

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Victorian Labor released a policy document entitled “Labor’s Plan for Jobs and Growth” in November, detailing some “practical and affordable initiatives” to “kick-start” the Victorian economy. It’s opening paragraph highlights the importance of a job:

A job provides dignity, a sense of purpose, a productive contribution to the community and an income to support a family. Victorian Labor has always believed that a central responsibility of any Victorian state government is to create high-quality and diverse jobs for Victorians.

Most of the initiatives  — some very worthwhile — however do not involve direct intervention by the government to address the market’s failure to provide full employment. In fact, capitalism requires a pool of unemployed people to draw labour from. Even “full employment” refers to five percent unemployment or less — a figure that Australia has enjoyed for some while. The reasons for this is that employers like the pool of unemployed people to help keep wages low. Having a larger pool of unemployed workers means that if a workforce starts to demand too higher wages, they can be replaced by willing and waiting jobless people. In macroeconomic terms, this is wage-inflation, and unemployment below five percent in theory helps cause it.

Significant unemployment is therefore a built-in part of our market economy. Unemployment is a purposeful market failing. It is neither natural nor the result of individual laziness (as conservatives argue).

Unfortunately, this means that large numbers of people must live with unemployment.

Of course, a State Labor policy on jobs cannot be expected to address what, fundamentally, is a national challenge. Only the Commonwealth Government has the capability and means to truly address unemployment at scale.

Over in the UK, the UK Labour Party has unveiled a new “compulsory jobs guarantee“. It is in some regard very similar to Howard’s “work for the dole” scheme.

… under the jobs guarantee, government will ensure there is a job for every adult who is long-term unemployed and people out of work will be obliged to take up those jobs or face losing benefits.

Initially the guarantee would be for adults who are out of work for 24 months or more, but we would seek to reduce this to 18 or 12 months over time.

Now, a jobs guarantee is a policy whereby the national government acts as an employer of last resort.

This means, that rather than our current system where there is a “reserve army” of unemployed workers for the private sector, there is instead a reserve of employed workers.

The UK Labour model is interesting, but somewhat misses the point, as Chris Dillow of Stumbling & Mumbling explains:

You can rely on the Labour party to live down to its reputation as a party of capitalism. Its “compulsory jobs guarantee” does so in two ways.

First, the fact that it will be compulsory for the long-term unemployed to take up the jobs panders to a mistaken “divide and rule” rhetoric that distinguishes between skivers and strivers. As Neil says, the party is – yet again – “running scared of the Daily Mail”.

Secondly, the policy will, as Liam Byrne says, “provide subsidy” to private sector employers to hire the long-term unemployed.Labour will, in effect, give taxpayers’ money to Tesco so it can employ more shelf-stackers.

And herein lies the economic problem with the scheme. At the margin, employers will prefer to hire a subsidized long-term unemployed person rather than an unsubsidized short-term unemployed one. In this sense, Labour’s plan improves job prospects for the long-term unemployed, at the expense of the short-term unemployed, and has a deadweight cost of paying companies to do what they would have done anyway*.

Labour’s plan thus falls far short of more sensible “employer of last resort”-style policies to combat unemployment. It accepts capitalism as it is, and fails to confront the fact that capitalism is unable to provide work for all.

The effect of UK Labour’s plan, in my view, would not be to help create more jobs, or indeed to get more people into work. As Dillow notes, it would only subsidise what companies would do anyway. Because it simply subsidises the private sector rather than create jobs directly, it would appear to me (and I’m no economist) that no net jobs would created.

A genuine jobs guarantee program would offer a basic wage (including benefits, like annual and sick leave, superannuation, etc) to anyone who is ready and willing to work. It ensures “full employment” because anyone who is ready and willing to work at the job-guarantee wage rate should be able to find a job — whether in the private sector or a “guaranteed” job. “Guarantee” jobs would “hire off the bottom”, employing the “reserve army” of jobless people. If the private sector downsizes during a recession, people who lose their jobs can find a “Guarantee” job. During an expansion, workers are hired out of the “reserve” pool by the private sector.

The size of the job guarantee pool is thus determined by the performance of the private sector. When aggregate demand is high, the size of the “Guarantee” pool is small. When demand is low, the “Guarantee” pool is higher. It never competes with the private sector with higher or rising wages; it does not seek specific skills or aim to employ a specific number of workers.

In some regard, a job guarantee acts as a kind of countercyclical pump priming, with the added benefit of providing individual working people with dignity, a sense of purpose and productive contribution to the community. Unlike traditional pump-priming (which is typically in the form of tax cuts or increased spending of other kinds) a job guarantee doesn’t rely on trickle-down. It pump-primes where it is needed most. What’s more, unlike most “money drop” policies, people are required to do work to receive it.

Additionally, many job programs, like those proposed by Victorian Labor, involve education programs and demand stimulus (e.g. government procurement policies). The likelihood that these programs are successful is still determined by the ability for the government to target demand stimulus, and how rapidly their effects work through the economy. Education and training programs, which are of course essential, take time, and also rely on jobs being available once the worker has their new qualification.

The job guarantee would also come with a large array of social benefits. There are many socially and economically productive things that need to be done, but are not.

A chief argument against a genuine job guarantee (as opposed to a “work for the dole” scheme) is that it would still be subject to a NAIRU constraint. Now, I don’t profess to being an economist, but my understanding of the job guarantee policy and of NAIRU is that the job guarantee works as a pump-priming measure regardless of the level of demand (unlike other measures). For example, a job guarantee could take place during a government policy of deflationary fiscal contraction. Thus, full employment could come without the inflationary pressures that would come through a typical demand stimulus (basically, it won’t raise private sector wages).

All the other stuff about NAIRU constraints on a job guarantee are about the settings of the policy. For example, how workers behave when they know there is a “Guarantee” job waiting for them if they lose their private sector job; or how a jobless person would behave when presented with the choice of a “Guarantee” job or idly collecting welfare.

Because the jobs guarantee doesn’t compete with the private sector, and “hires off the bottom”, it can achieve full employment without setting off inflation.

Another significant argument against a job guarantee is that it would be a “make work” program, or would in fact disguise “under-employment”. In this context, under-employment refers to the under use of a person’s occupational skills, rather than time-based under-employment (which clearly the job guarantee would solve). Again, this comes down to the design of the program.

The design of “Guarantee” jobs obviously must ensure that the positions created are accessible to the most disadvantaged people in our community — they do after all suffer most from unemployment. Job design for “Guarantee” jobs must therefore ensure that the work the person is doing is closely matched to their skills and capabilities. In most cases, the jobs will be low skilled, low productivity ones; this is because high skilled, high productivity jobs will be non “Guarantee” jobs (e.g. private sector jobs). However, workers with “Guarantee” jobs will benefit from the team-based collaboration, on-the-job training and morale benefits which should prepare them for a non “Guarantee” job. The “Guarantee” jobs should be designed for transitional, short-term unemployment.

And of course, there will still be some unemployment. This recognises that between a person losing a job and gaining a new job (whether or not a “Guarantee” job), they will be unemployed. Many of these people may choose to job search full time rather than take a “Guarantee” job. During these times, there should be unemployment benefits, as usual.

The main argument that I can see against a jobs guarantee is that a “basic income guarantee” — i.e. the Dole or a welfare payment — achieves similar goals without the requirement for work. I see the reverse: unemployment benefits would still remain, but after a short time the jobless person could choose to work in a “Guarantee” job.

I’m pleased to see that Victorian Labor is prepared to tackle the issue of jobs and employment. It’s heartening to see their commitment to sustained investment in training and education; investment in infrastructure; using procurement policies to stimulate local demand for goods and services; and most significantly, that the Victoria’s past job growth success was not the result of good luck  but rather concerted government policies.

Likewise, while I don’t see UK Labour’s compulsory jobs guarantee (AKA, work for the dole) scheme being particularly effective in addressing joblessness, I am glad that Labour is campaigning to change public opinion on welfare.

I would like to see one of the big ideas launched by Federal Labor this year to be a jobs guarantee. It would be big, bold and I think it would be popular (enough).

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  1. Dean Duke - January 6, 2013

    .@alexanderwhite evaluates the concept of a job guarantee that would see government act as an employer of last resort: http://t.co/Rde0j7uY

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