jgp

p.301で以下が参照される

Ormerod, P. (1994) The Death of Economics. London: Faber & Faber

https://www.amazon.co.jp/Death-Economics-Paul-Ormerod/dp/0471180009/

Paul Ormerod 『経済学は死んだ』

https://nam-students.blogspot.com/2019/06/paul-ormerod.html

ミッチェル2019#19:310~1で引用、

ベンジャミン・グレアム1937（Benjamin Graham, 1894 - 1976）
https://nam-students.blogspot.com/2019/06/1937benjamin-graham-1894-1976.html

https://en.wikipedia.org/wiki/Benjamin_Graham

Storage and Stability: A Modern Ever-normal Granary, New York: McGraw Hill. 1937 ISBN 0-07-024774-9[35]
Storage and Stability: A Modern Ever-normal Granary (英語) ペーパーバック – 1998/1/30
Benjamin Graham (著), Irving Kahn (はしがき), Dr. Johnson Alvin (はしがき)

ミッチェルにはより専門的な論文2001がある

The Job Guarantee and work incentives William  F. Mitchell and Martin Watts1 June 2001 Centre of Full Employment and Equity The University of Newcastle, Callaghan NSW  2308, Australia Home  Page: http://e1.newcastle.edu.au/coffee Email: coffee@newcastle.edu.au 

http://www.fullemployment.net/publications/wp/2001/01-08.pdf

参考：

MMTの雇用保証プログラム（JGP:job Guarantee Program）が目指すものとその 限界
https://nam-students.blogspot.com/2019/05/mmtjgpjob-guarantee-program.html

https://nam-students.blogspot.com/2019/06/jgp.html@

https://translate.google.com/translate?sl=auto&tl=ja&u=https%3A%2F%2Fnam-students.blogspot.com%2F2019%2F06%2Fjgp.html

304

Inflation control and the JG

While introducing a public sector job creation capacity to the economy, the JG is better thought of as a macroeconomic policy framework designed to ensure that full employment and price stability are maintained over the private sector economic cycle.

What are the mechanics of inflation control under a JG? In Chapter 17, we examined the way in which incompatible claims over the available real income could cause wage-price pressures to escalate into an inflationary episode as the claimants (labour and capital) attempt to defend their income shares.

In an unemployment buffer stock system, unemployment is used to discipline wage demands by workers and to soften the product market so as to discourage a profit margin push by firms as a means of curbing wage-price pressures and maintaining stable inflation.

We define the buffer employment ratio (BER) as:

(19.1)

BER = JGE/E

where JGE is total employment in the Job Guarantee buffer stock and E is total employment in the economy. The BER rises when the JG pool expands and falls when the JG pool contracts.

The JG approach stands employment rate by creating une

the BER

contradistinction to the NAIRU approach because instead of manipulating the

ment when wage-price pressures develop, the government manipulates

When the level of private sector activity and the distributional conflict is such that wage-price pressures form

as the precursor to an inflationary episode, the government manipulates fiscal and monetary policy settings

(preferably fiscal policy) to reduce the level of private sector demand.

Labour is then transferred from the inflating private sector to the fixed wage JG sector and the BER rises. This

will eventually ease the inflationary pressures arising from the wage-price conflict.

There can be no inflationary pressures arising directly from a policy where the government offers a fixed

wage to any labour not wanted by other employers. The JG sees the government buying labour off the

bottom, in the sense that employment at the minimum wage does not impose pressure on the market sector

wage structure. By definition, the unemployed have no market price because there is no market demand for

their services

By not competing with the private market, the JG would avoid the inflationary tendencies of past Keynesian

policies, which attempted to maintain full capacity utilisation by 'hiring off the top' (that is, making purchases at

market prices and competing for resources with all other sources of spending in the economy). In practice, these

policies often focused spending on the most advanced sectors employing higher-skilled (usually unionised) work-

ers in the defence sector, for example.

Would the incumbent workers use the decreased threat of unemployment to pursue higher wage demands?

That is unlikely. First, the JG lowers the cost of hiring for firms because the JG workers do not experience the dis-

location of unemployment and retain most, if not all, of their general and specific skills. Second, there might be

little perceived difference between unemployment and a JG job for a highly paid worker, which means that they

will still be cautious

The BER conditions the overall rate of wage demands. When the BER is high, real wage demands wil

pondingly lower and the capacity of firms to push profit margins up is reduced, due to weaker product demand.

　So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the JG pol-

icy achieves this via compositional shifts in employment through transfers in and out of the JG pool. JG policy

anchors the general price level to the price of an employed labour buffer stock, and can produce useful output

with positive supply side effects.

ーー

CHAPTER

19

FULL EMPLOYMENT POLICY

Chapter Outline

19.1 Introduction

19.2 Full Employment as the Policy Goal

19.3 Policies for the Promotion of Employment

19.4 Unemployment Buffer Stocks and Price Stability

19.5 Employment Buffer Stocks and Price Stability

19.6 Impact on the Phillips Curve

Conclusion

References

Learning Objectives

Recognise that full employment should be the primary macroeconomic policy goal in a

society that pursues internationally recognised human rights with social justice.

Assess other policies that have been adopted to promote employment.

Acknowledge that current policy settings in most developed economies are based on

the inflation rate as the primary policy target which is addressed by an unemployed

buffer stock

Analyse the economic consequences of implementing an employment buffer stock (Job

Guarantee).

19.1 Introduction

In Chapter 17, we discussed how distributional conflict between the claimants of real income could trigger infla-

tion if the competing nominal claims (wages, profits) exceeded the actual amount of nominal income produced

in each period. We saw

rate aspirations from price setters (firms), and exogenous squeezes on available national income, arising from, for

example, an imported raw material price rise.

The underlying dynamics of the capitalist system are driven by the target rates of profit determined by firms

In this context, workers' behaviour may lead to higher unemployment if they successfully achieve wages so high

that the capacity of firms to achieve the target rate of profit is undermined. This would occur because of a reduc-

tion in effective demand if firms reduced investment spending in response to the squeeze on the rate of profit.

this conflict could be triggered by rising wage aspirations from workers, rising profit

19. Full Employment Policy

291

Alternatively, firms could raise prices to protect profits and that may lead to a price wage inflation spiral. An

inflationary spiral originating from either demand pull or cost push forces requires certain aggregate demand

conditions to be maintained if that spiral is to continue. As we saw in Chapter 17, this observation means that the

concept of supply side inflation blurs into the concept of demand pull inflation, although their originating forces

might be quite different.

The main focus of this chapter is the analysis of two approaches which are designed to achieve sustained low

and stable inflation (inflation proofing). We construct the discussion in terms of a comparison between two types

of buffer stocks, both of which are created by govern ment policy aimed at avoiding aggregate demand pressures

that might fuel an inflationary spiral.

The two buffer stocks that we will compare are

Unemployment buffer stocks: Under a natural rate of unemployment (NRU) (also referred to as a non-

accelerating inflation rate of unemployment (NAIRU)) regime, inflation is controlled using tight monetary and

fiscal policy, which leads to a buffer stock of unemployment. This is a very costly and unreliable mechanism for

policymakers who are trying to achieve price stability

Employment buffer stocks: The national government exploits the fiscal power embodied in a fiat currency-

issuing system to introduce full employment based on an employment buffer stock. The Job Guarantee (JG)

model is an example of this type of policy approach.

Both of these buffer stock approaches to inflation control introduce so-called inflation anchors. In the NAIRU

case, the anchor is unemployment, which serves to discipline the labour market and prevent inflationary wage

demands from being pursued. Under a JG, the inflation anchor is provided in the form of an unconditional, fixed

wage employment guarantee provided by the government.

In this chapter, we first elaborate on why full employment should be the key macroeconomic policy goal.

Second, we briefly examine the alternative approaches that have been taken in the past to deal with chronic

unemployment. Finally, we outline and contrast the two buffer stock schemes which are designed to control infla-

tion. We show that only a JG approach provides an employed buffer stock that promotes both full employment

and price stability

Full Employment as the Policy Goal

19.2

In our discussion of public purpose in Chapter 1, we noted that in a modern capitalist economy, access to

employment is required for full participation in society. Employment, especially in formal sector jobs, not only

integrates individuals into networks linked to the workplace, but also into the social and political environment

more generally.

On the other hand, it has been well documented that sustained unemployment imposes significant eco-

nomic, personal and social costs that include:

Loss of current national output and income.

Social exclusion and the loss of freedom.

Skill loss.

Psychological harm

IIl health and reduced

expectancy

Loss of motivation.

The undermining of human relations and family life.

Racial and gender inequality

Loss of social values and responsibility.

Thus, a macroeconomic policy that uses unemployment to promote macro stability not only forces those who

are already disadvantaged to bear most of the costs, but also undermines social cohesion. Joblessness is usually

concentrated among groups that suffer other disadvantages: racial and ethnic minorities, immigrants, younger

and older individuals, women (especially female heads of households with children), people with disabilities, and

292

UNEMPLOYMENT AND INFLATION: THEORY AND POLICY

those with lower educational attainment. Lack of employment is strongly correlated with poverty and social

isolation.

The United Nations Universal Declaration of Human Rights includes the right to work, not only because it is

important in its own right, but also because many of the other economic and social entitlements proclaimed to

be human rights cannot be secured without paying jobs. Also full, productive and decent employment is one of

the UN's Millennium Development goals. Amartya Sen (1997) supports the right to work because the economic

and social costs of unemployment are staggering, with far-reaching consequences beyond the single dimension

of a loss of income (see Chapter 1 for a more detailed discussion of these issues)

Markets are not necessarily good at securing the economic and social entitlements proclaimed to be human

rights in the Universal Declaration. This is why extra-market policy - policy beyond that relating strictly to, or

driven by, the marketplace -has been needed to safeguard a variety of human rights. Within neoclassical theory

unemployment and poverty are generally assumed to be the necessary costs of maintaining macroeconomic

stability, especially price and exchange rate stability. This raises important questions. Should a nation fight infla-

tion by keeping a portion of its population unemployed and impoverished? Are there other tools available to

achieve these ends? In particular, should policymakers accept some inflation and currency depreciation in order

to eliminate unemployment and poverty? Hence, at the very least, safeguards are required to protect the minority

which suffers large concentrated costs in the form of unemployment as a consequence of a policy that leads to

the benefits of lower inflation accruing to society as a whole.

There are strong ethical arguments against using poverty and unemployment as the primary policy tools to

achieve price and exchange rate stability, especially given that as mentioned earlier the burden of poverty and

unemployment is not shared equally. And even if price and currency stability are highly desired and beneficial

for all citizens, it is doubtful that a case can be made for their status as a human right on a par with the right

to work.

Unemployment as a stabilisation tool not only violates various human rights, including the right to employ-

ment, it also sacrifices economic performance by generating redundant human resources. Indeed, with some

notable exceptions, those countries with the highest rates of underutilised labour resources tend to be nations

with the highest poverty rates.

Only government can guarantee the right to a job because markets have not, and cannot, operate at anything

approaching true, full employment on a consistent basis without direct job creation on a large scale. Only the

government can create an infinitely elastic demand for labour by offering to hire all who cannot otherwise find

employment because it does not need to take account of narrow market efficiency concerns due to its capacity

to issue and spend the sovereign currency. Private firms only hire the quantity of labour needed to produce the

level of output that is expected to be sold at a profitable price. Government can take a broader view by promot-

ing the public interest, including the right to work. For these reasons, government must play a role in providing

jobs to achieve social justice. A JG programme can secure the right to work, but with minimal undesired impacts

on wages, prices, government fiscal policy, and the value of the currency

Forstater (2006) has argued that it is difficult to conceive of a policy goal that secures a greater range of social

and economic rights than the achievement of full employment. His "fundamental welfare theorem of political

economics" says "there is no single policy that carries with it more potential benefits than true full employment

or a guaranteed job for everyone ready and willing to work" (Forstater, 2006: Slide 2).

In addition to income, employment also yields useful production and recognition for doing something

worthwhile. While economists usually focus only on the economic multiplier, there are also social multipliers

associated with job creation. These benefits include decreased crime and drug use; enhanced family and com-

munity cohesion; improved economic security, education, and healthcare; protection for the disadvantaged;

environmental protection; improved local and state government budgets; more equal distri bution of con-

sumption, income, wealth, and power; induced investment in poor communities; and promotion of social and

political stability.

While economic growth and development are desirable, they do not ensure either full or decent employ-

ment. Alternative strategies for promoting full and decent employment will be explored in the next section.

Certainly it is necessary to attack problems of unemployment, underem ployment, and insufficient pay using a

19 Full Employment Policy

293

variety of programmes and policies. These should include both private and public initiatives. However, it will be

argued that the private sector will not be able to provide for full, productive, and decent employment for all, even

with substantial support by govern ment through the promotion of private sector job creation. Only the intro-

duction of a safety net as provided by a JG can protect the human right to employment.

Policies for the Promotion of Employment

19.3

Behaviouralist, structuralist, and Keynesian approaches

A range of strategies have been adopted to address the problem of joblessness, of which the most important are

behaviouralist (problems with the individuals who are unemployed), structuralist (for example, skills mismatch),

and job shortage.

Kaboub (2008) provides an historical overview of attitudes of economists toward the unemployed, from Petty

(1662: 160) (the unemployed "ought neither to be starved, nor hanged, nor given away" because they represent

resource that could be used in public employment to enrich the nation) to Beveridge (1945:10) who wanted

full employment, defined as "having always more vacant jobs than unemployed", and to lesser-known advocates

of JG-type schemes such as Pierson (1980) and Wernette (1945). He also surveys full employment strategies that

have been adopted, such as the New Deal in the Great Depression-era USA (1933-36), the Swedish post-war

model (1950-75), job creation schemes in India (2006-), Argentina (2002-), and more recently the French pilot

programme to create jobs for laid-off workers.

Public attitudes and policy have generally emphasised behavioural and structural problems. This leads to

policies that try to motivate and train the unemployed, together with the promotion of greater flexibility (such

as wage flexibility) that would reduce labour market frictions. Here unemployment is conceptualised as largely

an individual problem arising from behavioural deficiencies, rather than being a systemic macroeconomic

problem.

However, if the problem is a job shortage, all that these policies can do is to redistribute unemployment within

the unfortunate group who are blamed for their joblessness. In an expansion, some of those job seekers who

are not hired do have the characteristics identified with the behaviouralist and structuralist arguments (since

employers hire those with the most desirable characteristics first), hence concealing the true problem: a chronic

job shortage.

While Hyman Minsky is best known for his work on financial fragility, he also argued that any public policy

that favours education and training over job creation puts the cart before the horse and is unlikely to succeed

(Minsky (1986, for example)).

First, it lays the blame on the unemployed, which can be demoralising and seems to validate existing pub-

lic perceptions regarding the undesirable characteristics that are supposedly endemic within the disadvantaged

population. The message is that the poor must change their characteristics, including their behaviour, before they

deserve to work. However, those without jobs might not view such changes as desirable or even possible.

Second, it can require a long time to see results; the gestational period to produce a worker is at least 16 years

for developing nations and 25 years or more for highly developed nations. Further, as structuralists recognised,

a dynamic economy is always leaving old skills behind and demanding new ones. At any point, there will be a

permanent, sizeable, pool of those with inappropriate skills and education, even if many individuals are able to

transition out of the pool in a timely fashion.

Third, as mentioned, there is

danger that the retrained will face a job shortage so that at best they simply

displace previously employed workers who will join the ranks of the unemployed.

For these reasons, jobs that can take workers as they are, regardless of their skills, education, or personal char

acteristics, must be made available. The upgrading of the workers' characteristics would be the second step, with

most of the necessary training occurring on the job. The unemployed need jobs, not merely the promise of a job

for those who successfully reform themselves.

Note also that if welfare (including unemployment compensation) is offered as a substitute for a job, this has

negative impacts on self-esteem, on public perceptions of the unemployed, and on human capital (skills and

experience) that deteriorates through lack of use. For these reasons, providing welfare rather than work to those

294

UNEMPLOYMENT AND INFLATION: THEORY AND POLICY

who want to work is not only an admission of defeat (accepting that the labour market fails to provide enough

jobs), but also wastes resources and generates social costs.

After the Second World War, the notion that Keynesian policies could keep aggregate demand at a suffi-

ciently high level to promote robust growth came to dominate Western thought. Further, it was believed that

high growth would keep unemployment low and thereby reduce poverty rates. Aggregate demand was sustained

in the West (especially the US) through spending on defence and public infrastructure investment, and through

the favourable treatment of private investment. The high growth strategy was supplemented by a combination of

behaviouralist and structuralist labour market policies plus welfare (itself a labour market policy, in the sense that

one of the goals of welfare for families with children and retirement income for the aged was to reduce the size

of the labour force). This was deemed necessary because growth was leaving behind pockets of hardship among

disadvantaged groups, with poverty becoming regionally and racially concentrated.

During the early post-war period, economic growth was maintained at an above-average rate, and unemploy

ment and poverty rates seemed to fall; apparently validating the Keynesian approach.

However, these policies would not eliminate unemployment and poverty because they failed to prioritise

job creation. At best, they redistributed joblessness. Further, a high growth strategy actually favoured the more

advanced sectors of the economy-that is, those with highly skilled and well-paid workers-which increased

income inequality. Finally, policy that favours high investment would prove to be unsustainable because it

generated macroeconomic instability, evidenced by inflation, currency devaluation, and financial fragility.

For these reasons, policy-induced recessions would be required to try to resto

macro stability. This led to a go/stop/go pattern of using fiscal stimulus in downturns and tight fiscal policy near

a business cycle peak. As a result, expansions were curtailed long before a sufficient supply of jobs was created in

order to achieve full employment and address poverty.

Keynesian policy fell out of favour during the stagflationary 1970s. In March 1973, the major currencies floated

after the collapse of the fixed exchange rate (Bretton Woods) system. The social safety nets adopted in the early

post-war period had been either dropped or underfunded, and neoliberalism (called neoconservatism in the US)

played a growing role in the developed economies, such as the US, UK and Australia

Finally, recessions and financial crises returned after 1970 when the belief that high growth and low unem-

ployment were inconsistent with price stability came to dominate policy formation. Financial fragility appears

to have risen over time, as evidenced by increasingly frequent and severe domestic and international financial

rable to

co

crises.

Policymakers have turned away from the use of fiscal policy to promote growth, and have largely relied on

monetary policy. Monetary policymakers in turn generally deny responsibility for maintaining high employment

and growth, except to the indirect extent that low inflation promotes a strong economy. This prioritisation of

low inflation over the achievement of high levels of employment represents the adoption of the unemployment

buffer stock approach to policy (see Section 19.4)

Substantial controversy surrounds all of these issues, but it is commonly accepted that attempts to fine-tune

the economy through Keynesian aggregate demand manipulation have proven to be largely unsuccess ful. Even

if these policies had been successful, there is little political will to return to them today, However, the chosen

replacement - neoliberalism - has not succeeded either

There are a further two policies for the promotion of employment: indirect job creation through incentives

given to the private sector, and direct employment by govern ment. Both strategies have been tried in many

economies.

Private sector incentives

There are several drawbacks to subsidised employment in the private sector. First, government needs to ensure

that firms use the subsidies to create jobs, rather than to reduce the private costs of existing employment. In a

dynamic economy with jobs continually created and destroyed, this is difficult to police because profit-seeking

firms would want to use govern ment funds to subsidise existing jobs, resulting in public spending without the

creation of any net new jobs.

ーー

19 Full Employment Policy

295

Second, as unemployment is concentrated among disadvantaged workers, the policy should encourage firms

to employ individuals they would not otherwise have hired. Again, this is difficult to monitor because firms would

want to hire those job seekers with the most desirable characteristics that are allowed under programme rules,

rather than those with average (or lower) characteristics. Further, there is the danger that firms will hire eligible

workers, displacing workers with similar characteristics who are considered marginal in some way or another.

Third, there are questions about the time span permitted for eligibility. One goal of the programme should be

to take workers with little experience or skills and prepare them for unsubsidised employment. However, if work-

ers are permitted to stay in the programme for only a specified period, there is a strong incentive for employers

to replace these workers at the end of their period of eligibility with newly eligible and subsidised workers, rather

than retaining the group who were initially hired under the job creation scheme but who no longer bring in a

subsidy. Workers who are forced to leave the programme might not find unsubsidised work.

Fourth, the setting of the wage subsidy is not necessarily simple. The subsidy required to induce firms to hire

a new worker presumably varies according to the perceived shortfall of the worker's employability relative to

the pool of workers from which the firm normally recruits. A sliding scale subsidy might be most effective, but it

could be difficult to establish the proper subsidy rates. The required subsidy will also vary according to the firm's

need for new workers. In an economic boom, a small subsidy might be sufficient to induce an employer to hire

one more worker than the firm would have otherwise employed. In a deep recession, even a 100 per cent wage

subsidy might not induce a firm to hire one more worker.

Finally, the payment of wage subsidies necessarily leads to some distortion of the market. Some firms will be

able to take advantage of the scheme, while others will not. Some existing employees will have to compete with

subsidised labour while others will not. Some lines of production will increase output because of additional work-

ers while others will not, and so on.

While none of these potential problems, even if taken together, necessarily implies that a programme of wage

subsidies should not be tried, the potential problems would seem to lead to the conclusion that such a pro-

gramme probably cannot by itself solve the problem of joblessness and ensure the right to work.

Of course, private sector subsidies will not work without a sufficiently developed private sector which is cap-

able of offering employment to a significant portion of the population. In some developing nations, especially

in rural regions, such a policy will have limited potential application. Only direct job creation at a living wage by

government will provide a sufficient supply of non-agricultural work to reduce joblessness.

atie

Direct job creation by government

We conclude that raising aggregate demand, increasing human capital, and raising the incentives to private

employers will fall short of ensuring the right to work. While each of these policies might be useful in its own

right, they must be supplemented by direct job creation by government. Most governments engage in some form

of job creation for the purpose of relieving unemployment. Arguably, the nations that achieved anything close

to full employment in the post-war years used a variety of programmes to keep unemployment low. They all

maintained, in one form or another, a buffer of jobs that were available to the least skilled workers, who otherwise

were likely to be unemployed.

The main criticisms of govern ment job creation schemes are that, unlike the JG, they typically do not pro-

vide ongoing employment under normal working conditions, and that their coverage is limited to particular

groups, such as rural workers (Mahatma Gandhi National Rural Employment Guarantee Scheme in India), heads

of household (Jefes de Hogar programme in Argentina) and

In the next two sections we examine the two buffer stock regimes that are designed to promote price stability

The first of these is not consistent with the pursuit of full employment. Indeed, by design

to stabilise prices. The second stabilises prices as it pursues full employment.

As we demonstrate, a Job Guarantee (JG) is at the centrepiece of MMT reasoning. It is neither an emergency

policy nor a substitute for private employment, but rather would become a permanent complement to private

sector employment. A direct job creation programme can provide employment at

cannot otherwise find work. No other programme can guarantee access to jobs at decent wages. Further, the JG

uth (Youth Guarantee in EU countries).

uses unemployment

basic wage for those who

296

UNEMPLO YMENT AND INFLATION: THEORY AND POLICY

approach has the advantage that it simultaneously deals with the main objection to full employment: the argu-

ment that the maintenance of full employment causes unsustainable rates of inflation.

19.4 Unemployment Buffer Stocks and Price Stability

There have been two striking developments in macroeconomics over the last forty years or so. First, a major

theoretical revolution occurred whereby Keynesianism was supplanted by Monetarism and subsequently by its

more modern variants. Second, the demise of Keynesianism in the early 1970s was accompanied by persistently

higher unemployment rates, and during the GFC they rose even higher. Further, mean economic growth rates

have fallen during this neoliberal period.

As we saw in Chapters 11 and 12, prior to Keynes' General Theory, unemployment at the aggregate level was

seen by many orthodox economists as a temporary deviation from equilibrium which was due to labour market

frictions or other market disruptions. Keynes changed the discourse to one that blamed aggregate unemploy-

ment on insufficient aggregate demand. This led in the post-war period to the belief that Keynesian demand

management policy was the proper response. Unemployment rates were usually below two per cent throughout

this period in many countries (although somewhat higher in the USA, especially among minority groups).

However, in the early 1970s, the Phillips curve trade-off appeared to break down with countries experiencing

stagflation. In time, most of the mainstream econom ists rejected demand management and returned to the older

pre-Keynesian belief that some level of aggregate unemployment is: (a) temporary and due to shocks; (b) optimal

because it is voluntary; and/or (c) the necessary cost of promoting stability. Thus the concept of full employment

as a genuine policy goal was abandoned with the introduction of the natural rate of unemployment hypothesis,

which has become a central plank of current mainstream thinking.

consistent with stable inflation.

This hypothesis asserts that only this 'natural' unemployment rate

Therefore, there is no discretionary role for aggregate demand management and only microeconomic changes

can reduce the natural rate of unemployment. Thus, the policy debate increasingly concentrated on deregula-

tion, privatisation, and the reduction of welfare state provisions within an environment of tight monetary and

fiscal regimes.

Under inflation-targeting (or inflation-first) monetary regimes, central banks have shifted their policy empha-

sis. They now conduct monetary policy to meet an inflation target,' and arguably have abandoned any obligation

to support a policy environment which achieves and maintains full employment. This almost exclusive focus on

maintaining price stability on the back of an overwhelming faith in the NAIRU ideology has marked the final

stages of the abandonment of earlier full employment policies

Since the mid-1970s unemployment in many economies has remained at high levels. In addition, low quality

casualised work has emerged in the face of the persistently deficient demand for labour hours by employers. Thus,

underemployment has replaced some unemployment.

As we saw in Chapter 17, underemployment acts in a similar way to unemployment by operating as a disciplin-

ing force on workers' wage aspirations and demands. It weakens the capacity of workers to secure nominal wages

growth. Thus, short-term unemployment and underemployment temporarily balance the conflicting demands

of labour and capital by disciplining the aspirations of labour so that they are compatible with the profitabil-

ity requirements of capital. Similarly, low market demand, the analogue of high unemployment when workers

incomes fall, suppresses the ability of firms to increase prices to protect real margins

Thus by inducing labour slack into the economy, inflation targeting supported by passive fiscal policy leaning

towards austerity has created what Karl Marx called a reserve army of the unemployed and this has reduced the

chances of an inflationary spiral emerging from the wage bargaining process.

The NAIRU approach to price stabilisation is therefore based on government spending being subject to a

quantity rule. This means that the government plans for a quantity of the local currency to be spent at prevailing

market prices to prosecute its socio-economic programme. Spending overruns are usually met with cutbacks in

an attempt to meet the fiscal targets.

We have seen significant shifts in the distribution of national income towards profits since the mid-1980s as

real wage growth has lagged behind productivity growth. This redistribution of national income has overridden

19 Full Employment Policy

297

he previous outcomes when strong trade unions met on more equal terms with employer groups to determine a

dictribution of national income that would be acceptable to both sides of the bargaining process.

But with trade unions weaker as a result of shifting industry composition towards services, smaller public

sectors and a rise in anti-union legislation, slower wages growth and low inflation in recent years have raised

fears of deflation in developed economies. As a consequence, the use of unemployment as a tool to suppress

price pressures has, based on the OECD experience since the 1990s, been successful as measured by inflation

outcomes.

The empirical evidence is also clear that most OECD economies have not provided enough jobs since the mid-

1970s and the conduct of monetary policy has contributed to this malaise. Central banks around the world have

forced the unemployed to engage in an involuntary fight against inflation and the fiscal authorities in many cases

have further worsened the situation with complementary austerity measures.

These costs are very large and have long-term consequences. In terms of the goals of macroeconomic policy

they also present a major conflict. As we have learned, a central idea in economics whether it be microeconomics

or macroeconomics is efficiency: that is, getting the best out of what is available. We have discussed the difficult-

ies that economists have in defining such a concept, and its ideological dimensions.

But economists could put aside their differences and agree that at the macroeconomic level, the efficiency

frontier should be defined in terms of full employment. The major debate, which we covered in Chapter 17,

concerned how we might define full employment. It is a fact that full employment should be a central focus of

macroeconomic theory and policy

Certainly mass unemployment, with hundreds of thousands or even millions of workers not producing any

output or national income, violates any reasonable definition of macroeconomic efficiency.

Further, persistently high unemployment not only undermines the current welfare of those affected and slows

down the growth rate in the economy below its potential. It also reduces the medium- to longer-term capacity

of the economy because the accompanying erosion of skills and lack of investment in new capacity means that

future productivity growth is likely to be lower than if the economy was maintained at higher rates of activity.

The NAIRU approach to price stabilisation is typically complemented by policies which impose obligations on

the unemployed in exchange for their welfare benefits. The unemployed usually have to demonstrate that they

are engaged in activities which are alleged to increase their likelihood of securing employment. These include

participation in training programmes and applying for a minimum number of jobs per month. Again, at best,

in a job-constrained economy these policies will merely redistribute unemployment among this disadvantaged

group.

The key question to ask advocates of the unemployment buffer stock approach to inflation control is whether

the economy, once deflated by restrictive aggregate demand management, can be safely restarted. If the underly-

ing causes of the inflation are not addressed, demand expansion will merely reignite tensions over the distribution

of income between wage earners and profit recipients and a wage-price outbreak is likely.

As a basis for policy, the NAIRU approach has major limitations, because it addresses the symptoms and

not the causes of inflation, and as a consequence, provides no firm basis for sustained full employment

and price stability.

In short, its success as an inflation anchor requires a pool of persistently high unem ployment,

The disciplining power of unemployment requires that the unemployed continue to constitute a threat to

those still in work so that the employed will moderate their wage demands. However, over time, the threat

from the unemployment pool starts to wane as the unemployed endure skill losses, while suffering lengthening

periods of unemployment, and firms introduce new technologies and processes. This is referred to as hysteresis

(see Chapter 18). In this case, the so-called NAIRU has to be pushed higher and higher by contractionary fiscal

and monetary policy for the same degree of threat to be maintained.

On any reasonable grounds, this approach to price stability is very costly and ultimately unworkable in a mode

ern economy. High and sustained leyels of unemployment undermine the social and political stability of a nation,

which creates unintended costs that go far beyond those that are itemised above.

298

UNEMPLOYMENT AND INFLATION: THEORY AND POLICY

Measuring the costs of unemployment buffer stocks

Under inflation-targeting monetary policy regimes, central bankers use the persistent pool of unemployed (and

other forms of labour underutilisation such as underemployment) as a buffer stock to achieve a desirable infla-

tion outcome. If their inflation outlook rises albove their target rate, they will induce higher rates of unemploy-

ment by increases in interest rates until they are satisfied that their inflation target is being met (see Chapter 23)

While some extreme free market economists, who still consider rational expectations to be a reasonable

assumption, will deny any real output effects, most economists acknowledge that any disinflation engendered by

this approach will be accompanied by a period of reduced output and increased unemployment (and all its related

social costs) because a period of (temporary) slack in the economy is required to break inflationary expectations.

The real question then is how large are the output losses following a discretionary disinflation? There is over-

whelming evidence to suggest that the cumulative costs of this strategy in real terms have been substantial.

Research has been undertaken to calculate the sacrifice ratio associated with the implementation of the

unemployment buffer stock policy. This is defined as the ratio of the accumulated loss of output during a disinfla-

tion episode expressed as a percentage of initial output divided by the overall reduction in the inflation rate. For

example, if the sacrifice ratio were two, it would mean that a one-point reduction in the trend inflation rate is

associated with a cumulative GDP loss equivalent to two per cent of initial output.

Figure 19.1 is a simple graphical depiction of the sacrifice ratio concept. The total output loss resulting from

actual output falling below potential output is depicted by the shaded area. We have deliberately shown output

as resuming at its potential (long-run) level at the end of the disinflation period (defined as the period between

the peak inflation and the trough inflation). This is the normal assumption adopted in empirical studies.

On the other hand, the concept of persistence means that actual output remains below its potential level

after the disinflation period has finished. The longer this output gap exists, the longer is the persistence.

In this context, hysteresis refers to the permanent losses of potential output that arise as a consequence of the

disinflation policy. Thus the growth of potential output is permanently lowered due to the collateral damage of

low confidence among firms which curtails investment. This in turn limits the long-term growth of actual output.

The important point is that, in order to accurately estimate the sacrifice ratio, researchers must not only con-

sider the short-term losses, but also the longer-term losses arising from persistence and hysteresis.

Figure 19.2 stylises the impacts of persistence and hysteresis arising from the adoption of a disinflationary

policy. From the inflation peak, real output falls immediately as before. However after a time, the reduced levels of

economic activity erode confidence among consumers and firms. Consumers fearing even higher unemployment

restrict consumption spending and firms respond to the lack of sales by cutting investment plans.

Two impacts occur as a result: (a) the potential real output path falls (after Trough

Figure 19.2), reducing the growth capacity of the economy; and (b) actual real output deviates from its potential

path for much longer than otherwise would have been the case.

The real output losses are much greater than those shown in Figure 19.1. Eventually actual and potential out-

put paths may converge, but at that point there is less output and national income, and almost certainly persist-

ently higher unemployment.

Mass unemployment was initially caused by the deliberate cutting of aggregate demand due to the contraction-

ary policy stance of the government, but the subsequent expansion of output can become capacity-constrained

as a result of a slow growing or even falling potential output level due to the weak inducement to invest.

The fiscal austerity policies pursued by governments during the Global Financial Crisis also had this impact.

It would then be much harder to restore robust growth because it takes longer to ensure there is also potential

X quarters on

capacity to support it without triggering inflation.

Mitchell and Muysken (2008) drew on an extensive literature analysis and their own empirical work to con-

clude the following

Formal econometric analysis does not support the case that inflation targeting delivers superior economic out-

comes in terms of reducing the costs of disinflation. Both targeters and non-targeters enjoy variable outcomes,

and there is no credible evidence that inflation targeting improves performance as measured by the behaviour

of inflation, output, or interest rates.

19 Full Employment Policy

299

Figure 19.1

The sacrifice ratio and disinflation episode

There is no credible evidence that central

bank independence and the alleged cred-

ibility bonus that this brings lead to faster

adjustment of inflationary expectations to

the policy announcements. There is no evi-

dence that targeting affects inflation behav-

iour differently

Estimates of sacrifice ratios have confirmed

that disinflations are not costless. Signifi-

Real

output

Potential

output

cantly, the average estimated GDP sacri-

fice ratios increased over time, from 0.6 in

Actual output

the 1970s to 1.9 in the 1980s and to 3.4 in

the 1990s. That is, on average a reduction

of trend inflation by one percentage point

resulted in a 3.4 per cent cumulative loss in

real GDP in the 1990s.

Disinflation

episode

Australia, Canada, and the UK, which

Inflation

Time

announced formal policies of inflation tar-

geting in the 1990s, do not have substan-

tially lower sacrifice ratios compared to G7

countries that did not announce such poli

cies. Australia does appear to have recorded

a lower average ratio during the targeting

period than in the 1980s. However, this

figure is not lower than the average for all

previous periods. Canada recorded a higher

sacrifice ratio

rate

Peak

the 1990s of 3.6. The ratio

Trough

for the UK during inflation targeting was sig-

nificantly higher at 2.5 (relative to quite low

sacrifice ratios in previous periods). Italy

Germany, Japan and the US, averaged 0.6,

2.3, 2.9 and 5.8, respectively.

Time

The evidence is clear that inflation-targeting countries have failed to achieve superior macroeconomic outcomes

in terms of output growth, inflation variability and output variability. Moreover, there is no evidence that inflation

targeting has reduced the persistence of inflation.

Other factors have been more important than targeting per se in reducing inflation. Most governments

adopted fiscal austerity measures in the 1990s in the mistaken belief that fiscal surpluses are the exemplar of pru-

dent economic management and provide a supportive environment for monetary policy. The fiscal cutbacks had

adverse consequences for unemployment and created additional slack in the labour market. Labour underutilisa-

tion (defined more broadly to include among other things, underemployment) rose in these countries.

Further, other factors (the comprehensive shift to active labour market programmes, welfare-to-work reform,

dismantling of unions and privatisation of public enterprises) also helped to keep wage pressures down

It is clear from statements made by various central bankers (in addition to their formal obligations) that a

belief in the absence of a long- run trade-off between inflation and employment embodied in the NAIRU litera-

ture has led them to pursue an inflation-first strategy at the expense of unemployment.

Disinflations are not costless, irrespective of whether targeting is used or not. An average sacrifice ratio of 3.5

in the 1990s meant that any attempt to bring down inflation by one percentage point resulted in a cumulative

loss in GDP of 3.5 per cent on average. In terms of unemployment, the latter can be interpreted roughly speaking

as a cumulative increase by seven percentage points.

ーー

UNEMPLOYMENT AND INFLATION: THEORY AND POLICY

300

Sacrifice ratios with persistence and hysteresis

Figure 19.2

Real

GDP

growth

Long-lived effects: actual output is below potential output

because of the recessionary impact of monetary policy and the

added effects of persistence.

Long run

Short run

Potential output

Actual real GDP

Trough

Peak

Trough +

Actual =

Potential

Time

x quarters

The increase in the sacrifice ratio over time means that the Phillips curve has become flatter with a greater

increase in unemployment required for a given cut in the inflation rate. Thus a consequence of inflation targeting

is that the costs of disinflation have increased

Franco Modigliani (2000: 3), one of the economists who coined the term NAIRU, reflected on the legacy he

had created

Unemployment is primarily due to lack of aggregate demand. This is mainly the outcome of erroneous macro-

economic policies... [the decisions of Central Banks,] inspired by an obsessive fear of inflation, ... coupled with

a benign neglect for unemployment have resulted in systematically over-tight monetary policy decisions

apparently based on an objectionable use of the so-called NAIRU approach. The contractive effects of these

policies have been reinforced by common, very tight fiscal policies.

One of the major problems of inflation targeting as a policy paradigm is that it has been accompanied by a view

that fiscal policy must be passive and not compromise the inflation target. As a result, economies have tolerated

persistently high rates of labour underutilisation despite having achieved low inflation.

As noted earlier in the chapter, persistent unemployment results not only in massive losses of real output and

national income, but other real costs are also endured by the nation, including the depreciation of human capital,

family breakdown, increasing crime, and increasing medical costs.

19. Full Employment Policy

301

These additional costs, in particular the depreciation of human capital, also mean that the effectiveness of

the unemployed pool as a price anchor deteriorates over time, with ever-larger numbers of fresh unemployed or

underemployed being required to function as a price anchor that stabilises wages.

Given the scale of these costs, it is unlikely that using a persistent pool of unemployed or casualised underem-

ployed is the most effective way to achieve price stability.

19.5 Employment Buffer Stocks and Price Stability

Given the importance placed on access to employment for those of working age who want a job, a better alterna-

rive to an unemployment buffer stock to achieve price stability would be to utilise an employment buffer stock

as long as price stability is not comprom ised.

　　In this section, we outline an employment programme for these unemployed persons as an activity floor in

the real sector, which both anchors the general price level to the wage of this (currently unemployed) buffer stock

femployed labour but also can produce useful output with positive supply side effects.

REMINDER BOX

Recall that the MMT approach argues that the imposition of taxes by the currency-issuing

government generates a demand for the currency. The currency's value is determined

by what must be done to obtain it. The currency will be worth the amount of labour it can

buy on the margin, which is the wage paid in the JG programme. The wage and benefit

package in the JG programme sets a standard for what must be done to earn currency-

denominated income.

To be sure, the anchor is not tight. Some people earn a level of income, either from the private sector or from

the government, which is disproportionate to their level of endeavour. If everyone could get income while doing

nothing (if money grew on trees!) then the currency's value would approach zero. However, in the real world, the

government's currency does not grow on trees and most people have to do something to get it. For that reason,

at the margin, currency is valuable

     Between 1945 and the mid-1970s, Western governments realised that with deficit spending supplement-

ing private demand, they could ensure that all workers who wanted to work could find jobs. Although private

employment growth was relatively strong during this period, governments were important employers in their

own right, and also maintained a buffer of jobs for the least skilled workers. For example, jobs were avail-

able in the major utilities, the railways, local public services, the army, and major infrastructure functions of

government. By absorbing workers who lost jobs when private investment declined, governments acted as an

economic safety valve.

      British economist Paul Ormerod (1994: 203) noted that the economies that avoided high unemployment

in the 1970s maintained 

 a "sector of the economy which effectively functions as an employer of last resort, which absorbs the shocks which occur from time to time, and more generally makes employment available to the less skilled, the less qualified." 

He concluded that societies with a high degree of social cohesion (such

as Austria, Japan and Norway) were more willing to ensure that everyone had access to paid employment

opportunities.

    The employment buffer stock approach, which is more usually referred to in the literature as the Job

Guarantee (JG), defines a policy framework in which the government operates a buffer stock of jobs to absorb

workers who are unable to find employment in the private sector

Analogous to the central bank's function of lender of last resort, the JG functions as a buffer which

employs all job seekers who have not obtained regular public or private sector jobs at a socially acceptable

minimum wage. In this sense, the government acts as an employer of last resort. The jobs are available on

demand.

302

　While it is easy to characterise the JG as purely a public sector job creation strategy, it is important to appreci-

ate that it is actually a macroeconomic policy framework designed to deliver full employment and price stability

based on the principle of buffer stocks.

　　Under a JG, the government provides an unconditional, open-ended job offer at a given wage to anyone who

desires to work. Instead of a person becoming unemployed when aggregate demand falls below the level required

to maintain full employment, that person would enter the JG workforce.

　　This approach represents a shift from spending based on a quantity rule under the NAIRU approach to spend-

ing being underpinned by a price rule. Market forces determine the total quantity of government spending that

would be required to satisfy the demand for public sector jobs at the fixed wage under a JG.

　　Thus the JG pool expands(declines) when private sector activity declines (expands). Hence the JG fulfils an

absorption function that minimises the costs associated with the flux of economic activity when aggregate

demand fluctuates. If aggregate demand declines, total demand for non-JG workers declines according to the

employment requirements function we saw in Chapter 16. The workers displaced from their jobs would have a

choice: accept a JG position or wait for conditions to improve in the non-JG economy

　　The decisions made by these workers would be influenced by several factors. First, the government may

offer workers the choice between the JG wage and unemployment benefit, with the latter being lower. Second,

some workers, especially those in higher skilled positions, may receive redundancy (unemployment compensa-

tion) payments and use these to support themselves through the spell of unemployment. Economists call this

response 'wait unemployment'. These workers may feel that accepting a low-skill JG job would disadvantage

them professionally and thus wait for circumstances to improve. (We assume here that the JG policy does not

offer an unemployment benefit, and that most displaced workers will prefer a JG position over wait unemploy-

ment. These assumptions serve to simplify the analysis; relaxing them does not alter the basic dynamics of the

system).

　　When private economic activity picks up, workers would be bid for out of the JG pool by employers and the

buffer stock of jobs would contract. Government's spending on the programme would move countercyclically,

helping to stabilise aggregate employment, demand, income, and production.

　　The JG programme also helps to stabilise aggregate wages, because no worker's wage can fall below the JG

wage. For most of the working population, the wage is usually the most important source of income. Stable

aggregate wages in turn help to stabilise consumption. For that reason, this targeted approach to sustaining full

employment is a powerful stabilising force for aggregate demand, output, and prices. In particular, the variation

of non-JG spending will be smaller under a buffer stock employment model, which means that the stock of JG

employment can be kept relatively low, albeit subject to the impact of the business cycle.

The JG wage

The buffer stock employees would be paid a living wage, which would define the level of income necessary for a

full-time worker to enjoy an adequate social and material existen ce.

　　The nation's workforce would always remain fully employed, with the mix between private and public sector

employment fluctuating as it responds to the spending decisions of the private sector. Since the JG wage is opern

to everyone, it will effectively be the national minimum wage because private employers would have to meet it lin

order to retain workers (except in unusual circumstances).

　　While it is preferable to avoid disturbing the private sector wage structure when the IG is introduced, a case

can be made to offer the JG wage at a level higher than the existing private minimum if it is thought that product

ivity is too low in the economy. This is particularly relevant in developing economies where many market-based

jobs pay wages that are below the poverty line and provide no incentives for employers to invest in more productive capital, or for workers to invest in human capital. The government would supplement JG earnings with a wide

19 Full Employment Policy

303

range of social wage expenditures, including adequate levels of public education, health, childcare, and access to

legal aid

　The minimum wage should not be determined by the private sector's capacity to pay. It should be an expres-

sion of the aspiration of the society in terms of the lowest acceptable standard of living. Any private operators

who cannot afford to pay the minimum should exit the economy.

　Further, the JG policy does not replace the use offiscal policy to achieve social and economic outcomes. Typically

the JG would be accompanied by higher levels of public sector spending on public goods and infrastructure

These supplements would be in addition to the scheme but not essential for it to function effectively.

The JG as an automatic stabiliser

The JG wage thus defines the wage floor for the economy and serves as an automatic stabiliser, complementing

the tax system.

　　Recall that automatic stabilisation refers to the components of the government fiscal outlays and receipts

which rise and fall as the economic cycle fluctuates without any explicit change in government spending or tax

settings. They operate to stabilise the economic cycle by providing a floor following a fall in aggregate demand

during an economic downturn and a ceiling for aggregate demand as the economy grows. At full employment,

the automatic stabiliser component of aggregate demand is zero. Thus, when the economy is in decline, tax

revenue falls and welfare payments rise, which expands the fiscal deficit of the government automatically. The

introduction of the JG would have the same countercyclical impact. When the economy is faltering, the spending

associated with the JG would rise and vice-versa when times are good.

　　In this regard, the JG is a superior (more powerful) automatic stabiliser than a system of unemployment bene-

fits (under the unemployment buffer stock option) because aggregate demand slumps less and therefore the

positive impact on real output is greater than would be the case if the government merely paid unemployment

benefits. Further the operation of the JG sustains full employment, with all the personal and societal benefits of

full employment discussed earlier.

　　Automatic stabilisers have the desirable characteristic of providing immediate, countercyclical spending

injections (or withdrawals) when private activity fluctuates. They avoid the so-called policy lags, which relate to

the time delays between the government: (i) identifying thata significant shift in private demand has occurred

(i) designing a policy response to that shift; (ii) providing appropriate legislation to support an intervention; and

(iv) executing the intervention.

　　In some cases, these delays can result in the major part of a new policy intervention arriving too late and

operating to destabilise the cycle. For example, by the time the government has designed and implemented

a new discretionary spending injection, the private sector may have already resumed normal spending

growth so that the impetus provided by government spending might lead to the economy to overheat. This

economic destabilisation would not occur under a JG. Workers who have become unemployed following a

fall in aggregate demand can readily identify themselves to the appropriate government agency and secu re

a JG job.

　　The fixed wage offer that defines the JG policy also serves to stabilise the growth rate in money wages in the

economy and thus provides a nominal anchor against inflation.

　　By design, a JG programme is a complement to private sector employment and to other active labour market

policies, fiscal policies that aim to fine-tune total spending, and welfare or other social safety nets. A universal

JG programme, one which employs anyone who is ready and willing to work, is the only type of programme that

can ensure that the human right of full employment is continuously met. If the programme wage is a living wage

it also helps to ensure that other human rights are met by providing sufficient income. A properly designed pro-

gramme will not only produce socially useful goods and services, but it will also promote feelings of self-worth

and accomplishment among programme participants. Finally, the JG generates full employment and macroeco-

nomic stability with the least disruption to markets.

THEORY AND POLICY

304

UNEMPLOYMENT AND INFLATION

　The notion of a JG has a long history, and there are many examples of such programmes through history and

across the globe, although usually enacted on a small scale or temporary basis.

Inflation control and the JG

While introducing a public sector job creation capacity to the economy, the JG is better thought of as a macro-

economic policy framework designed to ensure that full employment and price stability are maintained over the

private sector economic cycle.

　　　What are the mechanics of inflation control under a JG? In Chapter 17, we examined the way in which incom-

patible claims over the available real income could cause wage-price pressures to escalate into an inflationary

episode as the claimants (labour and capital) attempt to defend their income shares.

　　　In an unemployment buffer stock system, unemployment is used to discipline wage demands by workers and

to soften the product market so as to discourage a profit margin push by firms as a means of curbing wage-price

pressures and maintaining stable inflation.

　　　We define the buffer employment ratio (BER) as:

(19.1)   BER = JGE/E

where JGE is total employment in the Job Guarantee buffer stock and E is total employment in the economy. The

BER rises when the JG pool expands and falls when the JG pool contracts.

　The JG approach stands in contradistinction to the NAIRU approach because instead of manipulating the

employment rate by creating unemployment when wage-price pressures develop, the government manipulates

　When the level of private sector activity and the distributional conflict is such that wage-price pressures form

as the precursor to an inflationary episode, the government manipulates fiscal and monetary policy settings

(preferably fiscal policy) to reduce the level of private sector demand.

　Labour is then transferred from the inflating private sector to the fixed wage JG sector and the BER rises. This

will eventually ease the inflationary pressures arising from the wage-price conflict.

　There can be no inflationary pressures arising directly from a policy where the government offers a fixed

wage to any labour not wanted by other employers. The JG sees the government buying labour off the

bottom, in the sense that employment at the minimum wage does not impose pressure on the market sector

wage structure. By definition, the unemployed have no market price because there is no market demand for

their services

　By not competing with the private market, the JG would avoid the inflationary tendencies of past Keynesian

policies, which attempted to maintain full capacity utilisation by 'hiring off the top' (that is, making purchases at

market prices and competing for resources with all other sources of spending in the economy). In practice, these

policies often focused spending on the most advanced sectors employing higher-skilled (usually unionised) work-

ers in the defence sector, for example.

　Would the incumbent workers use the decreased threat of unemployment to pursue higher wage demands?

That is unlikely. First, the JG lowers the cost of hiring for firms because the JG workers do not experience the dis-

location of unemployment and retain most, if not all, of their general and specific skills. Second, there might be

little perceived difference between unemployment and a JG job for a highly paid worker, which means that they

will still be cautious

　The BER conditions the overall rate of wage demands. When the BER is high, real wage demands wil

pondingly lower and the capacity of firms to push profit margins up is reduced, due to weaker product demand.

　So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the JG pol-

icy achieves this via compositional shifts in employment through transfers in and out of the JG pool. JG policy

anchors the general price level to the price of an employed labour buffer stock, and can produce useful output

with positive supply side effects.

making wage demands.

corres-

employment rate by creating une

the BER

19 Full Employment Policy

305

　Importantly, the JG can also deal with a supply shock (such as a rise in the price of a key non-labour raw

material) that generates incompatible claims on national income that ultimately cause inflation.

　The NAIRU defines the unemployment buffer stock associated with stable inflation. In a JG setting, we define

the non-accelerating inflation buffer employment ratio (NAIBER) as the BER that achieves stable inflation fol-

lowing the redistribution of workers from the inflating private sector to the fixed price JG sector.

　The NAIBER is a full employment steady-state JG level which is dependent on a range of factors, including the

historical path the economy has taken.

　An aim of govern ment is to minimise the NAIBER so that higher levels of non-JG employment can be sus-

tained with stable inflation. Initiatives that may reduce the value of the NAIBER include public education to stim-

ulate skill development and engender high productivity growth, institutional ised wage setting processes where

productivity growth is shared equitably across all income claimants, and restrictions on anti-competitive cartels

which should reduce pressures for profit margin push.

　However, while central banks and treasuries devote a lot of resources in trying to estimate the NAIRU, we con-

sider it would not be worth trying to estimate or target a particular NAIBER. The point is that the aim of policy is

to fully employ labour while maintaining price stability.

Open economy impacts

The JG requires a flexible exchange rate if it is to be effective. A one-off increase in import spending is

likely to occur when the policy is introduced because the JG workers will have higher disposable incomes

than before.

 In most nations, the impact would be modest. We would expect any depreciation in the exchange rate to have

low exchange rate pass-through effects on the price level via higher import prices and to provide a modest boost

to net exports and local employment, as will be explained in Chapter 24.

Would the NAIBER be higher than the NAIRU?

We have learned that the NAIRU defines the unemployment buffer stock associated with stable inflation whereas

in the employment buffer stock approach to price stability, the NAIBER is the BER that results in stable inflation

via the redistribution of workers from the inflating private sector to the fixed price JG sector.

The main principle of a buffer stock scheme like the JG is straightforward. It buys off the bottom at zero bid,

which means that the worker has no other employer bidding for their services and cannot put pressure on wages

that are above this floor. The choice of the wage floor (the JG wage) may have a one-off effect on the price level,

but does not cause wages or prices to continue to rise.

An interesting question to explore relates to the relative sizes of the NAIBER vis à vis the NAIRU. There are two

arguments that might be used to argue that the NAIBER would have to be larger than the NAIRU for an equiva-

lent amount of inflation control.

First, the intuitive but somewhat inexact view is that because JG workers will have higher incomes (than when

they were unemployed), a switch to this policy would always see demand levels higher than under a NAIRU world.

As a matter of logic then, if the NAIRU achieved output levels commensurate with price stability, other things

being equal, a higher demand level maintained through NAIBER would have to generate inflationary impulses. So

according to this view, the level of unemployment associated with the NAIRU is intrinsically tied to a unique level

of demand at which inflation stabilises.

It should be noted that while it is clear that JG workers will enjoy higher purchasing power under a JG com

pared to their outcomes under a NAIRU policy, it is not inevitable that aggregate demand overall would rise with

the introduction of JG. Indeed, government could engage in a limited austerity policy to lower aggregate demand

(cutting non-JG spending and raising tax rates) which would lower aggregate demand but could not increase

unemployment as workers shed by the non-government sector would find jobs in the JG. While it is not necessary

and probably not even desired that government do this, it is a policy option that is available should government

fear that a JG programme would otherwise increase aggregate demand excessively.

306

UNEMPLOYMENT AND INFLATION: THEORY AND POLICY

　But assuming aggregate demand is higher when the JG is introduced than that which prevailed in the NAIRU

economy, we might wonder why higher inflation is not inevitable as we replace unemployment with (higher pay-

ing) employment. Some worry that the budget deficit will be larger with the JG, but that does not necessarily

invoke inflationary pressures because by definition, if that occurs, the deficit is satisfying a net savings desire by

the private domestic sector (accumulated as net financial claims on government). That is, the extra government

spending on a JG programme results in a deficit that is matched by the non-government sector's net saving (and

accumulation of net financial claims on government).

　Additionally, in demand-constrained economies, firms are likely to increase capacity utilisation to meet the

higher sales volumes rather than risk losing market share by increasing prices. There would be no obvious cost

pressures forcing firms to increase prices.

　Further, the aggregate demand impulse required to return the economy to what we might call loose full

employment under the JG is less than would be required in a NAIRU economy, where the government would have

to pay market prices to bring the idle resources back into productive use. In that context,

was any demand pull inflation, it would be lower under the JG. So, there are no new problems faced by employers

who wish to hire labour to meet the higher sales levels.

　Finally, any initial rise in demand will stimulate private sector employment growth while reducing JG employ-

ment and spending.

　The second argument, which is related to the first point, claims that the introduction of the JG reduces the

threat of unemployment which serves to discipline the wage setting process. In the NAIRU logic, workers may

consider the JG to be a better option than unemployment because it reduces the fear of iob loss. Without the

threat of unemployment, wage-bargaining workers then may have less incentive to moderate their wage demands

notwithstanding the likely disciplining role of wait unemployment in skilled labour markets. However, the impact

on the price level by the introduction of the JG will depend in part, on qualitative aspects of the JG pool relative

to the NAIRU unemployment buffer

　The functioning and effectiveness of the buffer stock in question is critical to its operation as a price anchor

n an economy that uses unemployment buffer stocks to discipline the inflation process, there is overwhelming

evidence that long-term unemployment generates costs far

that the economy is not at full employment.

　It is clear that the more immediately employable are the unemployed, the better the unemployment

price anchor will function. After an extended downturn, the unemployment buffer stock will be com-

posed of a significant proportion of long-term unemployed, who are not effective as

unemployed.

　JG workers are far more likely to have retained higher levels of relevant skills than those who are forced to suc-

cumb to lengthy spells of unemployment. It is thus reasonable to assume that an employer would consider a JG

worker, who is already demonstrating a commitment to working, to be a superior training prospect relative to an

unemployed and/or hidden unemployed worker.

　The JG policy would thus reduce the hysteretic inertia embodied in the long-term unemployed and allow for

smoother private sector expansion. Therefore, JG workers would constitute a more credible threat to the current

private sector employees than say, the long-term unemployed.

　When wage pressures mount, an employer would be more likely to exercise resistance if they knew they could

hire from the fixed price JG pool. This changes the bargaining environ ment rather significantly because firms now

have reduced hiring costs. Previously, the same firms would have lowered their hiring standards and provided

on-the-job training and vestibule training (for example, controlled skill development outside the production

area) as the labour market tightened

　As a consequence, longer-term planning with cost control would be enhanced. So,

restraint exerted via the NAIBER is likely to be more effective than using a NAIRU strategy.

　In summary, the JG buffer stock is likely to be a qualitatively superior inflation-fighting pool than the unem-

ployed stock under a NAIRU. In that sense, the NAIBER will be lower than the NAIRU, which means that private

sector employment can be higher before the inflation barrier is reached.

is clear that if there

excess of the lost output that is sacrificed every day

reserve army of the

this sense, the inflation

19 Full Employment Policy

307

Another associated factor relates to the behaviour of professional occupational markets. In those markets

while any wait unemployment will discipline wage demands, the demand pressures may eventually exhaust this

stock and wage-price pressures may develop.

With a strong and responsive tertiary education sector, combined with strong firm training processes, skill

bottlenecks can be avoided more readily under the JG than with an unemployed buffer stock in place. The JG

workers would already be maintaining their general skills as a consequence of an ongoing attachment to the

employed worktorce. The qualitative aspects of the unemployed pool deteriorate with duration of unemploy

ment,making their transition back into the workforce more problematic. Thus, the long-term unemployed exert

very little downward pressure on wages growth because they are a less credible substitute.

Employment buffer stocks and responsible fiscal design

In an open economy, the level of economic activity (output) that is determined by private domestic spending

(consumption plus investment) and net external spending (exports minus imports) might not be sufficient to

generate full employment. Further, if one or more of those components of spending declines, then activity will

decline.

We have already defined a spending gap as the spending required to create sufficient demand to elicit an

output level which, at current levels of productivity, will provide enough jobs (measured in working hours) for all

the workers who desire to work

A zero spending gap occurs when there is full employment. We assume that there

unemployment where the level of capital stock is unable to support enough jobs to satisfy the available labour

supply at existing productivity levels.

In Chapter 22, we introduce the full employment fiscal deficit condition, which recognises that a currency-

issuing government should ensure that there is no spending gap which would cause the economy to depart from

full employment.

We show that because monetary policy changes are relatively ineffective as a counter-stabilisation policy tool,

then if private spending declines from a given position of full employment, the only way that the spending gap

can be filled is via a fiscal stimulus, directly through government spending and/or indirectly via a tax cut, which

will increase private disposable income and stimulate subsequent private spending.

The basic fiscal rule that government must satisfy to achieve full employment is that the discretionary fiscal

position (deficit or surplus) must fill the gap between the savings minus investment minus the gap between

exports net of imports at their full employment values (see Chapter 22 for more detail). If the fiscal deficit is

not sufficient, then national income will fall and full employment will not be achieved. If the government tries to

expand the fiscal deficit beyond the full employment limit, then nominal spending will outstrip the capacity of

the economy to respond by increasing output, and while nominal income will rise, it will be due to price effects

(that is, inflation would occur).

In this sense, MMT specifies a strict discipline on fiscal policy. If the goal is full employment and price stability,

then the full employment fiscal position condition must be met.

The question then arises: how do employment buffer stocks relate to this condition?

We used the term loose full employment in relation to the JG because the employment generated is at

minimum wages. The government expands the JG pool by purchasing off the bottom of the labour market. In

that context, the automatic stabiliser response associated with the conduct of the JG represents the minimum

fiscal shift that is required to maintain employment at its previous level in the face

demand.

no capacity-constrained

**

falling level of private

The maintenance of the level of employment, however, is achieved by raising the BER. That is, more workers are

Working at the programme's set wage and less above that at market wages when the JG pool expands.

The government may decide that it has non-inflationary room to then expand non-JG employment via direct

Job creation in the career section of the public sector or by a general fiscal stimulus designed to increase private

sector employment. In this case, the actual deficit spending that will satisfy the full employment fiscal deficit

condition varies according to the proportion of the deficit that is associated with JG employment.

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UNEMPLOYM ENT AND INFLATION: THEORY AND POLICY

A plausible adjustment path

A plausible story to show the dynamics of a JG economy compared to a NAIRU economy would begin with an

economy with two labour sub-markets: Sector A (primary) and Sector B (secondary) which broadly correspond

to the dual labour market depictions in the labour economics literature. A distinction is made between stable.

well-paid primary jobs and low-paid, precarious secondary jobs. Assume as before that firms set prices according

to mark-ups on unit costs in each sector

Wage setting in Sector A is contractual and responds in an inverse and lagged fashion to the ratio of sector

wages (Sector A/Sector B) and to the wait unemployment level that consists of displaced Sector A workers who

think they will be re-employed soon in Sector A.

Thus, when the ratio of Sector A wages to Sector B wages falls, workers in Sector A will eventually seek to

reinstate the past relativity, which reflects their sense of worth in the wage structure and their bargaining capacity

as skilled workers. Increasing numbers of workers who are waiting for work in Sector A instead of taking Sector B

jobs (wait unemployment), also depress wages growth in Sector A

Consider a carefully designed government stimulus that immediately increases output and employment in

both these sectors of a NAIRU economy. Wages are relatively flexible upwards in Sector B and respond immedi-

ately. The compression of the Sector A/Sector B wage relativity stimulates wage growth in Sector A after a time.

Wait unemployment falls due to the rising employment demand in Sector A, but also rises due to the increased

probability of getting a job in Sector A. That is, workers who had previously taken Sector B jobs in desperation, or

were classified as being outside the labour force, may leave their Sector B jobs or re-enter the labour force in the

expectation of obtaining a better-paying Sector A job which is more in line with their skill levels. The net effect

of these two movements is unclear at the conceptual level. The total unemployment rate falls after participation

effects are absorbed. The wage growth in both sectors may force firms to increase prices, although this will be

attenuated somewhat by rising productivity as utilisation increases.

A combination of wage-wage and wage-price mechan isms in a soft product market can then drive inflation.

These are the type of adjustments that are described in a Phillips curve economy

To stop inflation, the government must supress demand. The higher unemployment brings the real income

expectations of workers and firms into line with the available real income and the inflation stabilises. This is a

typical NAIRU story.

Now consider what would be different in a JG economy. Introducing the JG policy into the depressed economy

puts pressure on Sector B employers to restructure their jobs in order to maintain their workforces.

For given productivity levels, the JG wage constitutes a floor in the economy's cost structure. The dynamics of

this economy change significantly.

The elimination of all but wait unemployment in Sector A and frictional unemployment does not distort the

relative wage structu re, so that the wage-wage pressures arising from variations in the Sector A/Sector B relativity

which were prominent previously, are now reduced

The wages of JG workers (and hence their spending) represents a modest increment to nominal demand,

given that the state was typically already supporting them on unemployment and other social benefits. It is

possible that the rising aggregate demand tightens the product market, and the demand for labour rises in

Sector A

But there are no new problems faced by employers who wish to hire labour to meet the higher sales levels in

this environment. They must pay the going wage rate, which is still preferred to the lower JG wage by the appro-

priately skilled workers. The rising aggregate demand per se does not invoke inflationary pressures if firms can

increase capacity utilisation to meet the higher sales volumes

With respect to the behaviour of workers in Sector B, one might think that the provision of the JG would lead

to workers quitting bad private sector employers. It is clear that with a JG, wage bargaining in Sector B is freed

from the general threat of unemployment. However, it is unclear whether this will lead to higher wage demands

than otherwise. In professional occupational markets, some wait unemployment will remain. Skilled workers who

are laid off are likely to receive payouts that forestall their need to get immediate work. They have a disincentive to

immediately take a JG job, which is a low wage and possibly stigmatised option. Wait unemployment disciplines wage demands in Sector A. However, demand pressures may eventually exhaust this stock, and wage-price pres

sures may develop.

As noted earlier, a crucial point is that the JG does not rely on the government spending at market prices

which then exploits the expenditure multiplier to achieve full employment, as is characteristic of traditional

Keynesian pump priming. In this sense, traditional Keynesian remedies fail to provide an integrated full employ-

ment price anchor.

19.6 Impact on the Phillips Curve

We will now examine the impact of the introduction of a JG on the traditional Phillips curve trade-off.

Consider Figure 19.3. In a Phillips curve world, imagine that the unemployment rate was at UR, and the infla-

tion rate was /. The full employment unemployment rate is UR which denotes frictional unemployment.

The government is under pressure to reduce the excessive unemployment. If it increased aggregate demand,

wage-wage and wage-price pressures would drive the inflation rate up to , (a movement along the Phillips curve

from Point A to Point B) and achieve full employment.

However, there is no guarantee that the inflation rate would remain stable at I Certainly, the NAIRU model

would predict that bargaining agents would incorporate the new higher inflation rate into their expectations and

The JG and the Phillips curve

Figure 19.3

B

AG

URA

UR FULL

Unemployment rate (%)

Inflation rat

(o%) aje

UNEMPLOYMENT AND INFLATION: THEORY AND POLICY

310

the Phillips curve would start moving out. Whether that happens in reality is not relevant here (we considered

those issues

Chapter 18).

If the government initially responded to the excessive unemployment at Point A by introducing a JG it could

absorb workers in jobs commensurate with the difference between UR and UR although in reality as more

work became available, workers from outside the labour force (the hidden unemployed) would also take JG jobs

in preference to remaining without income.

But whatever the quantum of workers that would initially be absorbed in the JG pool, the economy would

move from A to A rather than from A to B.

In other words, the introduction of the JG eliminates the Phillips curve. The macroeconomic opportun-

ities facing the government are not dictated by a perceived unemployment and inflation trade-off which

might be unstable (as in a NAIRU world).

Rather, full employment and price stability go hand in hand.

Benjamin Graham wrote in the 1930s about the idea of stabilising prices and standards of living by surplus

storage. He documents how a government might deal with surplus production in the economy: "[The] State may

deal with actual or threatened surplus in one of four ways: (a) by preventing it; (b) by destroying it; (c) by dump-

ing it; or (d) by conserving it." Graham (1937: 18). In the context of an excess supply of labour, governments now

tend to choose the dumping strategy via the unemployment buffer stock approach (the NAIRU). However, it is

less wasteful to use the conservation approach, which is reflected in the JG framework. The JG approach is also

based on the maintenance of a variable buffer stock of jobs in line with fluctuations in private demand. However

the weaknesses of the agricultural scheme do not apply to a JG. First, if there is a price guarantee (the JG wage

below the prevailing market price, and a buffer stock of working hours which is designed to absorb the excess

supply of labour at the JG wage, then a form of full employment can be generated without tinkering with the

price structure.

Second, the incentives to overproduce in commodity buffer stock systems do not apply to maintenance of a

labour buffer stock because no one is concerned that employed workers would have more children than unem-

ployed workers.

BOX 19.1

BUFFER STOCKS IN AGRICULTURE

The JG bears many similarities to (and a significant difference from) agricultu ral price support

buffer stock schemes that governments have regularly used to stabilise prices and incomes in

the agricultural sector

For example, in November 1970, the Australian government introduced the Wool Floor Price

Scheme after hearing submissions from the Wool Council of Australia and the Austra lian Wool

Corporation (AWC). The government set a floor price for wool.

The aim of the system was to stabilise farm incomes and it led to an aqreed price for wool

being paid to the farmers. The government then stabilised the price at this quaranteed level by

using the AWC to purchase stocks of wool in the auction markets if demand was low and selling

it if demand was high.

By being prepared to hold buffer stocks of wool in times of low demand and to resell them in

times of high demand, the government was able to guarantee incomes for the farmers around

the stable price.

The programme thus stabilised wool prices and farmer incomes, and helped to stabilise the

consumption of these farmers. In all these ways, the buffer stock programme was stabilising.

19 Full Employment Policy

311

Note that the floor price was not inflationary because it simply guaranteed that wool prices could

not fall below the floor

The contention that ultimately led to the demise of the system was whether the guarantee

constituted a reasonable level of output in a time of declining demand. Farmers clearly had an

incentive to overproduce wool knowing that the government would buy any excess not demanded

by the auction markets at the floor price.

Conclusion

This chapter has contrasted the macroeconomic outcomes associated with the implementation of unemploy-

ment and employment buffer stock policies which are designed to achieve full employment and price stability. It

has demonstrated that only an employment buffer stock policy can achieve these macroeconomic targets.

There are many microeconomic factors that are relevant to a full understanding of how a JG would work in

practice. There are questions relating to the type of jobs, the levels of government involved in funding and oper-

ations, the relationship with the existing income support system, the integration of training pathways into the

policy, the role of trade unions, the choices available to workers for fractional employment, the capacity of the

government to sack workers and more.

While these are important factors, which have been dealt with in the literature, they lie outside of our macro-

economic focus in this textbook. More information and analysis can be found in the references that follow

References

Beveridge, W. (1945) "Full Employment in a Free Society: A Summary", New Statesman and Nation and Reynolds News

London. Available at: http://lib-161.Ise.ac.uk/archives/beveridge/9A 79_Full_employment_in_a_free_society.pdf,

accessed 25 February 2016.

Forstater, M. (2006) "Working for a Better World: The Social and Economic Benefits of Employment Guarantee Schemes",

Center for Full Employment and Price Stability, University of Missouri-Kansas City and the Levy Economics Institute

of Bard College, available at: http://www.economistsforfullemployment.org/knowledge/presentations/Session1_

Forstater.pdf, accessed 2 May 2017.

Graham, B. (1937) Storage and Stability, New York: McGraw Hill.

Kaboub (2008) "Employer of Last Resort Schemes" in P.A. O'Hara (ed.), International Encyclopedia of Public Policy:

Governance in a Global Age, Perth: GPERU.

Minsky, H. (1986) Stabilizing an Unstable Economy, New Haven, CT:Yale University Press

Mitchell, W.F. and Muysken, J. (2008) Full Employment Abandoned, Cheltenham and Northampton, MA: Edward Elgar

Modigliani, F. (2000) "Europe's Economic Problems", Carpe Oeconomiam Papers in Economics, 3rd Monetary and

Finance Lecture, Freiburg, 6 April.

Ormerod, P. (1994) The Death of Economics, London: Faber & Faber.

Petty, W. (1662) "A Treatise of Taxes and Contributions", in Murphy, A.E. (ed.) (1997) Monetary Theory 1601-1758, Vol.

2, London and New York: Routledge.

Pierson, John H.G. (1980) Full Employment without Inflation: Essays on the Economic Performance Insurance (EPI)

Proposal. Montclair, NJ: Allanheld, Osmun & Co.

Sen, A. (1997) "Inequality, Unemployment and Contemporary Europe." International Labour Review, 136(2), 155-172.

Wernette, J.P. (1945) Financing Full Employment. Cambridge, MA: Harvard University Press.

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UNEMPLOYM ENT AND INFLATION: THEORY AND POLICY

Endnotes

1. Strictly speaking the USA's central bank, the Fed, does not target inflation, which would not be consistent with

its dual mandate. However, as it has come to see low inflation as a precondition to robust GDP and employment

growth, it puts a lot of weight on pursuit of relative price stability

2. In view of the significance of underemployment in moderating wage inflation, it would be necessary to respecify the

so-called NAIRU

Visit the companion website at www.macmillanihe.com/mitchell-macro for additional resources

including author videos, an instructor's manual, worked examples, tutorial questions, additional

references, the data sets used in constructing various graphs in the text, and more.