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The Return of Full Employment – part 2

Steven Hail

It seems absurd to manage the economy on the basis that it is essential to create a scarcity of available jobs to limit inflation, while portraying those who are unable to find jobs as ‘dole bludgers’, or at least as people lacking in employment skills.

And yet that is what happened, firstly under Paul Keating and then later and more fully under John Howard and Peter Costello. Over time, the Commonwealth Employment Service was transformed from an institution designed to support jobseekers, to one with a focus on enforced job search and concerning itself with employability rather than genuine employment opportunities. The logical endpoint was reached when most of its functions were privatised, leading to the much maligned Jobactive network.

The years of full employment between 1945 and 1975 were based upon a Keynesian approach to economic policy. In its crudest form, this meant ensuring total spending in the economy was always high enough to ensure that there were sufficient employment opportunities for everyone, with the public sector standing by to mop up anyone who missed out.

Based on the budget papers as published at the time, rather than later amendments to the accounting, this involved Governments planning for budget deficits every year from the early 1950s into the 1970s, with discretionary increases in deficits when unemployment threatened to breach 2% and lower deficits when the economy was closer to its full employment ceiling.

The risk of rising inflation due to a wage-price spiral in a fully employed economy was not ignored. It had been discussed in the 1945 White Paper [1] where it was argued that the difficulties of managing inflation in a full employment economy were worth it, given the importance of full employment for individual well-being and social prosperity. This risk was contained, with the cooperation of unions, employers and government, until the mid-1970s, and that spike in oil prices.

The “Phillips Curve” relationship between inflation and unemployment may have become more difficult to manage over time, even if the oil price shock had never happened [2]. Structural unemployment can raise the NAIRU, due to an increasing mismatch between the skills required to compete for jobs in the modern economy and those possessed by people looking for work. However this did not suddenly become an issue in 1975.

The American institutional economist Hyman Minsky, writing in the 1960s, had a more sophisticated analysis. The apparent success of the Keynesian revolution after 1945 was contingent on a particular financial and industrial structure, state of technology, institutional set-up and set of social attitudes and historical experiences which was likely to break down over time. Keynesian stop-go policies would become less effective as time went by, and more inflationary and prone to financial crises. Minsky’s institutional analysis was far more grounded in realism than Milton Friedman’s abstract monetarism, but less susceptible to mathematical modelling, and less attractive to fellow-economists and their conservative supporters.

As the Keynesian consensus of the early post-war decades crumbled, the world had a choice between the abstract monetarism of Friedman and the institutional analysis of Minsky. And Minsky never had a chance.

Minsky believed that genuinely full employment could only be sustained in the long run if the federal government acted as an employer of last resort. Just as the central bank can always rescue the banking system, should it be short of liquidity, the federal government is always able to rescue job seekers, should the economy be short of jobs. If banks could have a lender of last resort in the interest of financial stability, workers could have an employer of last resort, in the interest of macroeconomic stability and social justice. Minsky recommended that the federal government offer a perfectly elastic demand curve for labour at the federal minimum wage.

Many of the modern proponents of a Job Guarantee are former colleagues or students of Minsky or are at least heavily influenced by his work. This includes leading American modern monetary theorists, Randall Wray, Stephanie Kelton and Pavlina Tchern-eva. Minsky himself saw Keynes as his greatest influence. The proposed Job Guarantee developed by economists at the Centre of Full Employment and Equity in Australia did not have its roots in Minsky, but in the work of William Mitchell, who is more influenced by Kalecki and Marx than by Keynes. Mitchell is one of the original developers of modern monetary theory, alongside the fund manager Warren Mosler and Wray. Not all proponents of a federal Job Guarantee are modern monetary theory economists, but the increasing prominence of this school of thought within macroeconomics, and particularly the success of Kelton’s best-selling book The Deficit Myth, has certainly helped to promote it.

The modern monetary theory federal Job Guarantee establishes an effective minimum wage, as opposed to one which is conditional on the recipient being able to obtain employment in a labour market with insufficient jobs to go around. It is funded by the currency-issuing federal government. Estimates of the fiscal impact of the Job Guarantee are consistent with there being no need to raise taxes or introduce new taxes to offset any inflationary impact from associated spending. It is genuinely universal, and available to all who are not already in full-time employment. It is voluntary, as a right which is accessible to all, but compulsory for none. It does not require the elimination of other programs. It is designed to be a permanent feature of economic management. It is to be administered locally, reflecting the local needs and skills of local workers. It is not intended to involve for-profit organisations, but to benefit of participants and their communities. It should not compete with local firms or involve any substitution of conventional public sector jobs. It is green, in the sense that the jobs should ideally enhance the environment and assist with a transition to a zero net-emission economy, or at worst have a neutral impact.

To introduce a Job Guarantee is to move away from an approach to managing the economy based on the maintenance of a buffer-stock of involuntary unemployment towards one based on a Job Guarantee pool enjoying the benefits of participating in social provisioning, with a fair wage and decent working conditions.

The Job Guarantee is a superior counter-cyclical stabiliser than the one currently provided by our tax and welfare system.

While implementation would be an administrative challenge, there are numerous examples of similar programs being introduced quickly and effectively in the historical record. Given an appropriate investment in administrative capacity we could run a national employment service as efficiently and effectively as we run healthcare, education or national defence.

Econometric studies indicate that the fiscal impact of a Job Guarantee is far smaller than that of a universal basic income [4]. They show that it is not inflationary, not in any sense unsustainable, and that a Job Guarantee can set at the margin the appropriate level of the fiscal deficit (or surplus) to maintain non-inflationary full employment.

Perhaps best of all, a Job Guarantee can remove the threat of the sack from those in poorly paid, insecure jobs with poor working conditions. It can begin to correct the excessive inequality that has been allowed to develop in Australia over almost half a century. It can permanently eradicate the non-financial costs of unemployment, improve social well-being, and have a diverse range of benefits beyond ending the waste of resources which goes with forced idleness.

Surveys indicate that this policy option is popular with voters right across the political spectrum, with people of all ages and genders. It is being discussed increasingly widely by policy makers in Washington DC and elsewhere, and in Australia has been supported by the majority of branches of Young Labor, and by a motion that was passed through the Tasmanian Parliament in 2020 by the Greens political party with ALP support.

We live in an environment where jobs are under threat from automation or the need to reduce or eliminate some activities to limit climate change, and where the implications of dividing up a society between those in secure jobs and those who no longer have easy access to employment are well understood. It is inevitable that the role a Job Guarantee could play in a transition to environmental sustainability and social justice will come increasingly under the spotlight.

Source: 27 August, 2021 https://www.fabians.org.au/afr2_ steven_hail

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