job guarantee

Fully Automated Luxury Socialism: The Case for a New Public Sector

Published by Anonymous (not verified) on Mon, 12/02/2018 - 7:15pm in

With ever more job-killing robots on the horizon, it’s time to demand a new public sphere: one that guarantees not just jobs but leisure too.

It’s Time to Guarantee Jobs

Published by Anonymous (not verified) on Sat, 10/02/2018 - 4:00am in

The first half of the twentieth century was a challenging time for economics. The Great Depression wiped out incomes, investments, and most importantly, optimism. But when the traditional laissez-faire approach proved ineffective, the work of Keynes and FDR showed that there was another way. The New Deal employed American workers directly and restored confidence among business owners. Today, we could benefit from a similar program. It’s time for a new New Deal, or a Job Guarantee Program, that secures employment to all who are able and willing to work. We’ve done it before, and we can do it again. By Johnny Fulfer.

What We Learned from the Great Depression

According to the National Bureau of Economic Research, the U.S. economy was in a recession just over 48 percent of the time between 1871 and 1900. But none were as bad as the crisis that followed The Great Crash of 1929.  Nevertheless, orthodox economic theorists urged policymakers to maintain the status quo and argued the economy would return to normal as long as it was left alone. This perspective was influential and often framed the ways in which political leaders such as Herbert Hoover understood the crisis. Hoover was not only politically committed to free-market ideas, he was psychologically invested in them, urging Americans to show thrift and self-reliance, practices which later resulted in more turmoil.

Elected president in 1932, Franklin Roosevelt did not have an all-embracing theory that would solve all America’s problems. Rather, he employed a wide range of policies, some of which failed, while others were successful in getting people to work. Perhaps the greatest impact Roosevelt’s New Deal had on American society was the change in perspective policymakers had toward government intervention. Earlier leaders like Theodore Roosevelt and Woodrow Wilson had had only moderate success producing government initiatives to restrain the predatory nature of American capitalism. But after the Great Depression, FDR helped policymakers and citizens markedly change their views in favor of government assistance, temporarily pushing the conservative opposition to the margins.

As such, FDR’s  New Deal momentarily ended the ‘rugged individualism’ of the Hoover era and demonstrated that free-market economics could not be relied upon in a time of crisis. When the economy falls into a slump, the government must be used as a source of relief.

This, too, is the argument that John Maynard Keynes makes in his influential 1936 book, The General Theory of Employment, Interest, and Money. Keynes challenged the neoclassical principle that the market naturally adjusts itself to full employment. Along with the two held theories of unemployment—voluntary and frictional—Keynes wrote, there is also the involuntary, which was the result of a shortfall in aggregate demand.

The volatility of investment, Keynes argued, is dependent on our expectations of the future. The only way entrepreneurs would invest is if they expect sufficient demand for goods and services. This was a problem during the Depression—spending money was scarce. When people are unemployed, or fearful of losing their jobs, they are likely to reduce spending. This creates a cycle of insufficient demand, bringing profit-expectations down. Increasing savings, Keynes showed, would only make things worse. A rise in savings would reduce spending, and thus bring down the total level of employment and income. Surplus inventories with nobody to buy commercial products would force firms to contract operations and lay off even more workers.

Therefore, Keynes concluded, there is no automatic recovery from depression; supply does not create its own demand. The only solution is for the government to heavily invest in public works, creating jobs and increasing demand to rebuild confidence in the business community.

Roosevelt’s New Deal did exactly this. It produced nearly 13 million jobs, over 60 percent of which came from the Works Progress Administration, an organization which hired a wide range of individuals, from artists and writers to laborers who constructed roads, bridges, and schools. An incredible number of public goods were provided through these programs, and money was placed in the hands of the workers, whose purchasing power gave business owners’ profit expectations the much needed boost.


Why We Need a new New Deal

The U.S. Bureau of Labor Statistics recently published a report examining the current employment conditions in the United States. The unemployment rate stands at 4.1 percent, the BLS reports, which is roughly 6.6 million people in the labor force. While the unemployment rate is relatively low from a conventional perspective, Dantas and Wray argue that this does not consider the falling participation rate for prime-age workers and wide-spread income stagnation.

Moreover, we often gauge the economy based on the unemployment rate, although, this economic indicator does not consider the fact that 40.6 million Americans remain in poverty. A job paying the current federal minimum wage doesn’t mean a worker will make enough money to live without relying on various forms of welfare. In order to turn this around, we need a new New Deal.

While the New Deal of the 1930s was a centralized program, controlled by the federal government, Dantas and Wray propose that a “new New Deal” would be more efficient by creating a more decentralized workforce, hired by state and local governments to meet the needs of the local communities, with wages paid by the federal government. They propose a Job Guarantee program.

The idea behind this policy is that those who are involuntarily unemployed don’t have to be if the government supplied them with a job. Economist Carlos Maciel further argues that the Job Guarantee program would cost around 1 percent of the U.S. GDP, providing additional jobs through the multiplier effect. When the government invests $1, it multiplies through consumer spending, turning into $2 or $3 in the real economy. In his General Theory, Keynes estimated the multiplier to be somewhere between 2 ½ and 3.

Employment works in the same manner. If one new job is created from the initial government investment, the consumption created by the additional worker will produce more jobs in other industries, whose consumption will take the process further, until the multiplier is reached. Moreover, this program would redistribute money from current welfare programs toward the Job Guarantee program. Those who are currently under the poverty line will not need traditional welfare benefits if they have jobs that pay a living wage.

Perhaps the reason U.S. policymakers are hesitant towards a Job Guarantee program has less to do with economics, and more about an investment in the status quo, whether politically or psychologically. Many Americans are invested in the idea of ‘free markets’, whatever they envision that to be, pushing rational economic discourse and the notion of social justice to the margins, and elevating the politically constructed parallel between self-interest and the partial idea of the American Dream. We must move beyond the free-market ideology, which views everything as profit or loss, win or lose. Only time will tell how this polarized form of reasoning will impact the American people, especially the 40.6 million Americans that are currently below the poverty line, who stand to suffer the most.

About the AuthorJohnny Fulfer received a B.S. in Economics and a B.S. in History from Eastern Oregon University. He is currently pursuing an M.A. in History at the University of South Florida and has an interest in political economy, the history of economic thought, intellectual and cultural history, and the history of the human sciences and their relation to the power in society. 

The post It’s Time to Guarantee Jobs appeared first on The Minskys.

Planning public works – history has a lot to say if we listen properly

Published by Anonymous (not verified) on Tue, 30/01/2018 - 7:55am in

A few weeks ago, in my three part series answering questions about Modern Monetary Theory (MMT), I addressed the issue often raised about the fiscal policy emphasis in MMT, that it is difficult to time government spending injections to match the cyclical need. These criticisms go back a long way and were used by the likes of Milton Friedman to build up his case against discretionary fiscal activism in favour of monetary rules. Of course, that was an ideological preference, given the Monetarists wanted ‘small’ government and technocrats implementing economic policy. The basic precepts of Monetarism have not stood the test of time and the GFC and its aftermath have showed, beyond doubt, that monetary policy is an ineffective means of stimulating aggregate spending and that fiscal policy is the best way to counter non-government spending collapses. In those blogs, I outlined several ways in which fiscal policy could overcome ‘timing’ issues and deliver prompt stimulus when needed and be able to contract the stimulus in a timely manner once non-government confidence and spending had recovered. The points I raised are not new and have been discussed and made operational many times in the past. A tweet from my MMT colleague Stephanie Kelton last week reminded us of this again when the US National Resources Planning Board (NPP) was mentioned with a link to the The Internet Archive is a “non-profit library of millions of free books, movies, software, music, websites, and more” and is a fabulous resource for researchers. Reading the Report from the NPP is like music to the ears! History has a lot to say if we listen properly.

The Internet Archive “pays particular attention to books”, and make books that are not commonly available in local libraries available to Internet users.

They “scan 1000 books per day in 28 locations around the World” and that gives us access to material that goes way back in time.

History tells us is that ideas cycle through time according to ideological preferences at different points in time.

The neoliberal period in economic thinking is really just a hyped-up version of the pre-Great Depression thinking that John Maynard Keynes and others so categorically demolished in the 1930s to create a new orthodoxy.

The resurgence of Monetarism and its microeconomic ‘free market’ narratives (which I lump together and call ‘neoliberal’ for want of a better title) were not new ideas nor based on new evidence.

They became dominant again only because the vested interests (corporate money, conservative thinkers) found a way to usurp the broad appeal of social democratic movements that were the political vehicles for the ideas of Keynes and others to become the mainstream policy framework.

The errors in pre-Keynesian economics, that were exposed in the 1930s, were not fixed or amended by the neoliberals. They were just ‘swept under the carpet’ in an exercise in Groupthink denial.

For example, I asked a group of academic economists last year in Europe who I was presenting to – how many knew about and understood the implications of the Cambridge Controversies in the 1960s. Hardly any admitted any knowledge of this literature.

The fact is that the conclusions from that debate meant that orthodox neoliberal distribution theory (marginal productivity theory) is inconsistent and, basically, fake knowledge.

Yet it still is taught in universities as if nothing ever happened in the 1960s. And you will still hear economists tell you that real wage increases will cause unemployment if they exceed the marginal product of labour.

And you will still read that the distribution of income broadly conforms to the ‘contribution’ of different income recipients to production (measured by marginal products).

All shown in the 1960s to be logically inconsistent and unsustainable assertions.

But Groupthink denial is a powerful force as I have written about many times.

Fiscal policy primacy

My three part series, which included a discussion of the primacy of fiscal policy was:

1. An MMT response to Jared Bernstein – Part 1.

2. An MMT response to Jared Bernstein – Part 2.

3. An MMT response to Jared Bernstein – Part 3.

I noted that significant forward planning is required to ensure that the fiscal policy can be relatively responsive to the cycle.

MMT economists are fully aware of the technical, legislative and implementations lags that can accompany large-scale public spending.

But well thought out preparation and well planned projects can allow the government to turn on spending fairly quickly in a downturn and turn it off (or restrict it) in times of high pressure.

For example, the decision by Norwegian authorities to fast-track the construction of Oslo Airport at Gardermoen was a highly effective fiscal intervention to ease the pain of the 1992 recession.

While the location of the airport was controversial, the intervention was effective and finite. It also carried scale such that components could be expanded or restricted at fairly short notice to meet with the changing cyclical conditions.

Another good example is the highway projects in Japan. The Japanese government has a well-designed infrastructure plan in place that allows it to expand and contract government spending to extend the highway and related infrastructure (bridges, waterways etc) to suit cyclical conditions.

This type of spending can be highly responsive with minimal lags.

These insights have been known about for a long time and it is only the imposition of ideological blinkers that have led to them being discouraged in the public debate.

The neo-liberal era has also been marked by a major reduction in Departmental capacity to design and implement fiscal policy – given the obsession with monetary policy and the major outsourcing of “fiscal-type” government services to the private sector.

Many of the major government policy departments in the advanced nations are now just contract managers for outsourced service delivery.

So this diminution in the overall capacity of the government machine to implement efficiently and speedily complicated nation-wide infrastructure programs has to be addressed as a matter of urgency by progressive politicians.

As a result of what we learned during the GFC, we can no longer deny that fiscal policy is required to address serious swings in non-government spending.

Monetary policy has been proven – categorically – to be ineffective in dealing with aggregate demand failures of the sort we have witnessed in that crisis.

In that context, governments must develop forward-looking capacity to ensure that it has project implementation skills when they are required.

That was exactly what the US National Resources Planning Board concluded in 1941. The wheel turns.

The US National Resources Planning Board

In 1933, the Committee on Recent Social Trends (chaired by economist Wesley Clair Mitchell), established by the then US President Herbert Hoover released a report – Recent Social Trends in the United States.

Wesley Clair Mitchell was awarded a PhD from the University of Chicago but his work not was anything like what emerged from that institution when Milton Friedman and his ‘boys’ ruled a bit later. Mitchell’s mentors there were strongly opposed to the Classical doctrines (such as the Quantity Theory of Money), which later became the building blocks of Monetarism.

For one thing, Mitchell was “one of the founders of the New School of Social Research” in New York, hardly a neoliberal institution.

One of its recommendations in the 1934 government publication – A Plan for Planning (National Planning Board) was that Committee was that the nation could benefit from the creation of a “National Advisory Council”, which really was a proposal to make its own work more permanent.

The National Planning Board was established in July 1933.

There is an excellent article in The American Political Science Review (Vol 38(6), December 1944, pp.1075-1088) describing the operations of the National Resources Planning Board by one of its founding members, Charles E. Merriam – The National Resources Planning Board; A Chapter in American Planning Experience.

The link is to JSTOR if you have library access.

Hoover had established the Committee using emergency legislation to meet the meltdown associated with the Great Depression.

Its “primary function … was that of advice to the President on problems of long-range planning” (p.1076).

Merriam is clear that “I do not recall any instance of partisan politics entering into any of the many conferences and discussion”.

Planning was not a dirty word in those days. It was understood that if the government was to use its spending capacity, which would have impacts over many generations (in the case of infrastructure) then it should be done in a considered manner.

Merriam writes that (pp.1079-1080):

The underlying philosophy of the Board was expressed in wha was called “A New Bill of Rights,” supplementing earlier and existing rights already accepted … (1) the right to work usefully a creatively through the productive years; (2) the right to fair play adequate to command the necessities and amenities of life in exchange for work, ideas, thrift, and other socially valuable service; (3) the right to adequate food, clothing, shelter, and medical care; (4) the right to security, with freedom from fear of old age, want, dependency, sickness, unemployment, and accident; (5) the right to live in a system of free enterprise, free from compulsory labor, irresponsible private power, arbitrary public authority, and regulated monopolies; (6) the right to come and go, to speak or be silent, free from the spyings of secret political police; (7) right to equality before the law, with equal access to justice in fact; (8) the right to education for work, for citizenship, and for personal growth and happiness; and (9) the right to rest, recreation, adventure, the opportunity to enjoy life and take part in an advancing civilisation.

That was the vision for the US … something has gone horribly wrong in recent times, no?

The Board recognised that the US government was responsible (p.1080):

(1) to underwrite full employment for employables; (2) to guarantee a job for every man released from the armed forces and the war industries at the close of the war, with fair pay and working conditions; and (3) to guarantee and, when necessary, underwrite access to security, equal access to education for all, equal access to health and nutrition for all, and wholesome housing conditions for all.

Merriam goes on to describe the way in which the National Resources Planning Board would achieve these objectives that were considered at the time to be uncontroversial and intrinsic to the conduct of government.

He countered the claim – that is common these days – that “planning will interfere with the development of free industrial society”.

He called those fears “groundless” (pp.1086-1087):

The very purpose of planning is to release human abilities, to broaden the field of opportunity, and to enlarge human liberty. We plan primarily for freedom; the ways and means and instruments are secondary to the main purpose. The right kind of planning – democratic planning – is a guaranty of liberty and theonly real assurance in our times that men can be free to make a wide range of choices. Every progressive nation is now actively engaged in plannning for the development of its natural nad human resources, on the highest and best level.

The Board’s first major report was A Plan for Planning made its intent clear (pp.36-37):

… a general staff gathering and analyzing facts, observing the interelation and administration of broad policies, proposing from time to time alternative lines of national procedure, based upon inquiry and mature consideration.

How different is that from the sort of rubbish that emanates from politicians these days about leaving it to the markets and deregulation etc?

The US government was not exceptional in this regard. Many governments during the Depression and afterwards knew they had the fiscal capacity to create full employment but wanted to ensure their spending capacity could be used effectively, which required some sort of planning across sectors, regions and labour types.

These planning agencies were very focused on ‘evidence’. They used the statistical tools of the day combined with solid research to advised the governments who bore ultimate responsibility.

If you applied the standards that were common in those days to the development of the Eurozone, then it is clear that the Delors Report would have been rejected as poorly reasoned and empirically deficient analysis.

The National Resources Planning Board were linked in closely with the major research communities like the Social Science Research Council, the Public Administration Clearing House and the National Bureau of Economic Research (which Mitchell had founded).

Compare that to the Delors Committee, which was deliberately constructed to ensure its membership was of the one mind and that outside ‘difficult’ views would not get aired.

In the 1934 Report A Plan for Planning we read that (page 32):

… the cooperation of scientists … should make possible a wiser and sounder adaptation of technology to economic and social advancement, while the cooperation of the social scientists with their research in the field of human behavior should correspondingly facilitate the making and perfecting of social inventions.

The NRPB 1941 Report

The National Resources Planning Board released another major report in January 1941 which encapsulated the way that governments were working on the implications of the theoretical ideas from Keynes and others.

The 432-page Report – Development of resources and stabilization of employment in the United States – has many beautiful pieces of analysis and reasoning, which buttress the core MMT propositions with respect to the primacy of fiscal policy.

A reading of that Report will leave you in no doubt as to how a national currency-issuing government can implement effective fiscal policy to meet both longer-term needs of its people but also counter-cyclical responses in a time when recession threated as non-government spending was in retreat.

Exactly an answer to the concerns that people have that fiscal policy cannot be implemented in a timely manner.

I will leave it to your interest to read or study the entire Report.

But I draw your attention to ‘Chapter C. Public Works for Employment Stabilization’ commenting on Page 14, which outlines how government spending can be planned over time to meet longer-term objectives and ensure cyclical stabilisation functions are served.

We read:

1. “The provision of the physical facilities needed for the service of the community as a whole has traditionally been considered a proper responsibility for government finance and administration” – they even cite Adam Smith in this regard.

It is interesting that the Right consistently quote Smith as an authoritative reference for their ‘free market’ babble, but do so selectively and miss the broader message of his work which clearly assumes a major role for the state in providing public infrastructure and using public works to generate employment.

2. It is recognised that US economic development would not have occurred without the activities “by government since our earliest days”.

3. “It was recognized long ago that activities such as these presented opportunities for job creation during recurring periods of widespread unemployment.”

4. Most importantly:

Jurisdiction over the work is wholly in the hands of public bodies, a large proportion of the labor required needs no special skills, and the work is widely spread geographically.

This is a basic principle of the Job Guarantee.

It also underpinned my introduction of the term ‘Spatial Keynesian” in a paper I published in 2007 with James Juniper – Towards a Spatial Keynesian economics’.

The Job Guarantee is a spatially-consistent policy in that it provides jobs (economic settlement) to accord with the social settlement (where people live).

It also enhances the capacity of people to move regions should they desire that.

5. After notating a series of projects that have delivered long-standing benefits to US cities, regions etc, the Report says:

All these efforts were largely in terms of providing jobs for needy people, rather than in terms of attempting to influence the forces that had caused the unemployment in the first place.

You cannot solve unemployment unless you create jobs.

The current obsession with supply-side activation (training, CV preparation, threats to cut income support, etc) all miss the point – mass unemployment is about a systemic lack of jobs.

To solve it you – repeat 100 times – have to create work for people.

That is what the Job Guarantee ensures – there will always be enough jobs as a base case for the nation.

The Report then continued to discuss the idea of “Public Works for Cyclical Stabilization”.

We read:

… proposals had been made by legislators, business men, publicists, and economists that the downswing of the business cycle be subjected to some degree of control by adjustments in the level of pubUc construction activity.

They discuss “precisely how that control should be exercised” and conclude that:

1. “in general the proposals focused on the normal construction operations of government and contemplated timing of activities so that expenditures would be low during periods of business prosperity and high during depressions”.

Oslo airport! Japan’s highway system! Australia’s Great Ocean Road! etc

2. They quote a 1905 report from the British Poor Law Commission that this timing requires:

… scheduling of regular public works and regular government purchases in such a way that a larger amount would be done when private business was less active and a smaller amount when private business was more active, with the idea that this would serve as a regulator and stabilizer of the total economic activity of the nation.

Pretty basic really.

3. They document how the US government already had in place cooperative arrangements with State and local agencies to accomplish such scheduling “in times of depression”.

4. They note that these plans “provided for advance preparation of engineering plans by the various departments of the Federal Government and gave broad powers to the President in retarding or expediting projects.”

Forward thinking and action – “advance plans”.

Not waiting for the ‘market’ to solve all problems but setting in place all the required planning to allow government spending to be turned on and off when required yet providing for socially beneficial output.

6. Public infrastructure spending was always understood in this way. Apart from large projects that allowed for technological shifts – such as telephony, etc – governments knew that they could:

… arrange the construction of public works so far as practicable in such manner as will assist in the stabilization of industry and employment through the proper timing of such construction, and that to further this object there shall be advance planning, including preparation of detailed construction plans, of public works by the construction agencies and the board.

7. In that regard, “six-year programs” should be prepared “of their construction projects, which the President would be empowered to accelerate or retard to meet the cyclical situation encountered.

The objective “to aid in preventing unemployment”.

The Report then documented how this sort of thinking was used to combat the Great Depression – the creation of the Federal Emergency Administration of Public Works (PWA), which initially was constrained by politics but by 1936 was in full swing.

The Board reflects on “What 10 Years of Experience Have Shown” (remember it was published in 1941).

They conclude that:

1. All levels of government must coordinate closely in the area of public works – which is an essential principle of the design of the Job Guarantee.

2. Local projects should not be hampered by federal political stoushes about ‘federal finances’.

3. It was only when the Federal government realised that its “expenditure … [represented] … entirely a net addition to what such expenditures otherwise would have been” that the PWA started to function effectively to generate jobs.

4. “Emergency programs of public works construction may be self-defeating in achieving the aim of employment stabilization” because they lack the administrative and planning experience and capacity.

They also led meant that, often “community value had to take second place” as politicians scrambled to quickly solve rising unemployment with ill-thought out projects.

The lesson is that:

A continuing policy … would have made it possible to plan a public works program for a considerable period in advance, projects could have been made ready with the care that important undertakings require, they could have been chosen in accordance with the community values represented by their completion, administration could have functioned smoothly, and the deflationary effects of periodic work curtailment could have been avoided.

Forward thinking.

The Job Guarantee is not a temporary ‘make work’ program but rather part of the basic, on-going policy infrastructure that a currency-issuing government implements.

It is a permanent capacity and is supported by appropriate administrative and technical experience and capacity within the operational government departments.

5. Projects should not seek to ‘pay for themselves’ with user charges, tolls etc. The public benefit is the goal not revenue generation.

6. What about delay? There are inevitable delays in operationalising projects – but “it is possible to shorten or telescope some of these time elements”.


The Report lists how a forward-looking government can prepare many aspects of a project in advance to minimise delays – for example land can be pre-purchased if it is known that highway or train developments, or new drainage systems etc will be required over time.

Technical skills within the government avoid delays in tendering.

Further, “It is entirely possible to reduce to a minimum the delays that so far have been caused by the necessity of carrying our preliminary surveys, studies, and investigations and in making detailed plans and specifications” notwithstanding the prospect of technology changes etc.

Many of the delays noted relate to ‘funding’ and the politics surrounding that. The Report recommends that governments have “advance provision of funds” to ensure preliminary work is accomplished even if a Project is not implemented in the immediate period ahead.

And, in terms of the MMT Job Guarantee, the principle is that the wage flows as soon as the person seeks work with the relevant JG agency, whether they are put to work immediately or not.

So the major part of the counterstabilisation occurs even if there are delays in actual productive activity.

7. Finally, the Report considered “Flexibility and Commitments” in terms of “difficulty of bringing … [projects] … to a close.”

This is another oft-heard criticism – that capture by various vested interests make it hard for governments to withdraw spending at appropriate times (in the cycle).

This particularly relates to large projects which involve many different interests.

In part, this is a problem of indivisibility.

In the Report’s words:

Once a large and important public improvement is put under way, there is usually a virtual commitment to carry it through to completion. It is entirely possible, even, that the level of operation on big projects would be in an increasing stage at the time when general policy would demand program curtailment.

In other words, fiscal policy would overshoot the cycle and become pro-cyclical – stimulating when non-government spending had recovered and was booming.

The Board recommended a “well-balanced program” should be maintained in this regard so that the stimulus does not rely exclusively on some large project.

Highway construction is also noted as a good example of a series of sequential, smaller projects that can be used to advantage in cyclical episodes.

This is exactly what the Japanese government has done over a long period.


History tells us that ideas come in and out of favour as ideological shifts occur.

At present, the thoughts embodied in this Report are seen as the anathema of the ruling elite.

But that will change.

Progressives have to familiarise themselves with these sorts of ideas to ensure they are prepared for government when the political sentiment shifts.

The last thing that they should be doing is playing the ball with the neoliberals and buying all their arguments that fiscal policy is ineffective or should be disciplined by balanced fiscal rules etc.

MMT University Logo competition

I am launching a competition among budding graphical designers out there to design a logo and branding for the MMT University, which we hope will start offering courses in October 2018.

The prize for the best logo will be personal status only and the knowledge that you are helping a worthwhile (not-for-profit) endeavour.

The conditions are simple.

Submit your design to me via E-mail.

A small group of unnamed panelists will select the preferred logo. We might not select any of those submitted.

It should be predominantly blue in colour scheme. It should include a stand-alone logo and a banner to head the WWW presence.

By submitting it you forgo any commercial rights to the logo and branding. In turn, we will only use the work for the MMT University initiative. It will be a truly open source contribution.

The contest closes at the end of March 2018.

That is enough for today!

Professor argues for job guarantee over basic income

Published by Anonymous (not verified) on Wed, 17/01/2018 - 9:28am in

Philip Harvey, a professor of law at Rutgers, argues that a job guarantee could eliminate poverty for a fraction of the cost of UBI.

The post Professor argues for job guarantee over basic income appeared first on BIEN.

US labour market reality debunks mainstream view about structural impediments

Published by Anonymous (not verified) on Mon, 15/01/2018 - 8:57am in

An enduring myth among mainstream economists is that so-called ‘structural’ impediments in the labour market prevent aggregate spending initiatives from government being an effective solution to mass unemployment. According to this view, if the government attempts to reduce the unemployment rate below some ‘natural rate’ then accelerating inflation will be the only outcome. The ‘natural rate’ can, in turn, only be reduced by structural policies – attacks on trade unions, welfare state retrenchment, cutting the minimum wage, and the rest of the litany of neoliberal policies. And, in this view, the unemployed are to blame for their own state – a lack of effort on their part to adequately present themselves to the labour market. The prior view that mass unemployment is a systemic failure to create enough jobs is rejected. A piece of this fiction is that one of long-term unemployed (and other disadvantaged workers) are not capable of being absorbed into employment without extensive re-training and other personal rehabilitation and this also prevents the unemployment rate from falling quickly. The problem with all of these related propositions is that reality interferes and generates outcomes that contradict the assertions. It is quite obvious that if the economy is run at high pressure then firms are forced to scrap prejudice for disadvantaged groups and offer on-the-job training to them to ensure they can maintain market share. In other words, the long-term unemployed do not present an impediment to growth. Events in the US labour market at present are demonstrating this reality.

To begin, I sometimes provide this quote from Michael Piore (1979: 10) as a reminder of the cant that mainstream economists dish up when talking about unemployment:

Presumably, there is an irreducible residual level of unemployment composed of people who don’t want to work, who are moving between jobs, or who are unqualified. If there is in fact some such residual level of unemployment, it is not one we have encountered in the United States. Never in the post war period has the government been unsuccessful when it has made a sustained effort to reduce unemployment. (emphasis in original) [Unemployment and Inflation, Institutionalist and Structuralist Views, M.E. Sharpe, Inc.: White Plains.]

The mainstream position is in contradiction with the reality that Piore notes.

As unemployment started rising in the 1970s and then persisted, the economics profession was obsessed with unemployment as a ‘supply-side’ phenomenon.

This was part of the rise of the ‘free market’ or neoliberal dominance, which rejected the standard consensus that had created full employment in all advanced nations in the Post World War 2 period.

That consensus made it clear that employment was dependent on the state of aggregate spending.

Modern Monetary Theory (MMT) expresses this view by saying that once the non-government sector has made its saving and spending decisions, then the presence of mass unemployment indicates that the fiscal deficit of the government is too low – either taxes are too high and/or public spending too low.

The MMT view is thus that the government chooses the national unemployment rate (and all the sub-national cohort unemployment rates).

As Piore noted, there was never a time when the government has “been unsuccessful when it has made a sustained effort to reduce unemployment”.

But the neoliberal shifted the emphasis to the supply-side because they could then argue that the government was powerless to reduce unemployment.

And, that the unemployed were thus to blame for their own state – a lack of effort on their part to adequately present themselves to the labour market.

Blame the victim of the systemic failure to create sufficient jobs became the dominant approach of my profession – much to its everlasting shame.

As part of the mainstream story, they asserted that full employment should be redefined to occur at much higher unemployment rates than in the past become some unemployed cohorts were effectively ‘unemployable’ – structurally unable to compete in the labour market.

The mainstream approach asserted that long-term unemployment was a constraint on a person’s chances of getting a job and on the extent to which a government could introduce a fiscal stimulus without incurring inflation.

These economists claim that the long-term unemployed, which are overwhelmingly composed of workers with low education levels and other disadvantages, do not seek work effectively, are lazy, and employers steer clear of them for those reasons.

In addition, this line of reasoning argues that the provision of income support benefits exacerbates these negative factors.

And when the economy recovers from a downturn, it is asserted that the long-term unemployed exhibit a lower re-employment probability than short-term jobless.

However, despite a lack of evidence, the entire logic of the 1994 OECD Jobs Study, which marked the beginning of the so-called supply-side agenda defined by active labour market programs, was based on this idea.

The OECD Jobs Study agenda has been the principle policy framework since the early 1990s and has promoted privatisation, deregulation and massive welfare changes all aimed at weakening trade unions and making the most disadvantaged workers more desperate.

The OECD Jobs Study agenda was the blueprint for labour market deregulation since the early 1990s and underpinned the pernicious welfare-to-work policies that governments have introduced.

The OECD has also been constantly pressuring governments to abandon the hard-won labour protections which provide job security and fair pay and working conditions for citizens.

Their endorsement of inflation-first macroeconomic policies where monetary policy plays the prominent role and uses unemployment to discipline the inflation generating process and fiscal policy is largely contractionary has left a legacy of persistently weak growth, entrenched high unemployment and rising underemployment.

The OECD and the lackey economists that provided them cover with flawed research advanced the so-called so-called ‘irreversibility hypothesis’.

This claim asserted that long-term unemployment represents a constraint on growth and therefore needs supply-side programs rather than direct job creation.

To establish that assertion one would have to find that during periods of economic growth, long-term unemployment was inertia prone.

However, once you examine the dynamics of the data for any nation you might choose, you quickly realise that short-term unemployment rates do not behave in a qualitatively different way to long-term unemployment rates. The so-called ‘irreversibility hypothesis’ is unfounded.

The relationship between long-term unemployment and the unemployment rate is in fact very close.

As unemployment rises (falls), the proportion of long-term unemployment in total unemployment rises (falls) with a lag. Several studies have formally examined this relationship.

My earlier academic work found that a rising proportion of long-term unemployed is not a separate problem from that of the general rise in unemployment.

This casts doubt on the supply-side policy emphasis that OECD governments have adopted over the last two decades.

While the mainstream economics profession may claim search effectiveness declines and this contributes to rising unemployment rates, the overwhelming evidence is that both are caused by insufficient aggregate spending in the economy.

The policy response then is entirely different and supports fiscal stimulus measures being used to create jobs growth.

Please read my blog – Long-term unemployment – stats and myths – for more discussion on this point.

This brings the ideas of the late US economist Arthur Okun into the discussion.

He outlined his upgrading hypothesis (in the 1960s and 1970s) and the related high-pressure economy model, which provided a coherent rationale for Keynesian demand-stimulus policy positions.

Two references are Okun, A.M. (1973) ‘Upward Mobility in a High-Pressure Economy’, Brookings Papers on Economic Activity, 1: 207-252 and Okun, A.M. (1983) Economics for Policymaking, Cambridge, MIT Press.

Okun (1983: 171) believed that:

… unemployment was merely the tip of the iceberg that forms in a cold economy. The difference between unemployment rates of 5 percent and 4 percent extends far beyond the creation of jobs for 1 percent of the labor force. The submerged part of the iceberg includes (a) additional jobs for people who do not actively seek work in a slack labor market but nonetheless take jobs when they become available; (b) a longer workweek reflecting less part-time and more overtime employment; and (c) extra productivity – more output per man-hour – from fuller and more efficient use of labor and capital.

The positive side of this thinking is that disadvantaged groups in the economy were considered to achieve upward mobility as a result of higher economic activity. The saying that was attached to this line of reasoning was “all boats (large or small) rise on the high tide”.

Okun’s (1973) results are summarised as follows:

  • The most cyclically sensitive industries have large employment gaps, and were dominated by prime-age males, offered high-paying jobs, offered other remuneration characteristics (fringes) which encouraged long-term attachments between employers and employees, and displayed above-average output per person hour.
  • In demographic terms, when the employment gap is closed in aggregate, prime-age males exit low-paying industries and take jobs in other higher paying sectors and their jobs are taken mainly by young people.
  • In the advantaged industries, adult males gain large numbers of jobs but less than would occur if the demographic composition of industry employment remained unchanged following the gap closure. As a consequence, other demographic groups enter these ‘good’ jobs.
  • The demographic composition of industry employment is cyclically sensitive. The shift effects are in total estimated (in 1970) to be of the same magnitude as the scale effects (the proportional increases in employment across demographic groups assuming constant shares). This indicates that a large number of labour market changes (the shifts) are generally of the ladder climbing type within demographic groups from low-pay to higher-pay industries.

The evidence is that when the economy is maintained at high levels of employment, workers in low paying sectors (or occupations) also receive income boosts because employers seeking to meet their strong labour demand offer employment and training opportunities to the most disadvantaged in the population.

If the economy falters, these groups are the most severely hit in terms of lost income opportunities.

Upgrading also focuses on the mapping of different demographic groups into good and bad jobs. The groups who experience the greatest relative employment gains when economic activity is high are those who are stuck in the secondary labour market, typically, teenagers and women.

While these groups are proportionately favoured by the employment growth, the industries with the largest relative employment growth are typically high-wage and high-productivity and employ mostly prime-age males.

Expansion is therefore equated with ladder climbing whereby males in low-pay jobs (as a result of downgrading in the recession) climb into better jobs and make space for disadvantaged workers to resume employment in their usual sectors. In addition, favourable share effects in predominantly male industries provide better jobs for teenagers and women.

So there are many benefits from growth which spread out across rising participation, rising wages, rising hours of work, rising employment and falling unemployment.

But the downside is that the iceberg takes a long time to melt if (a) it is large; and (b) if the recovery is not robust enough. Recovery alone is not sufficient.

Real GDP growth has to be consistently strong for some years before the iceberg melts and the upgrading bonuses accrue.

This is the prima facie reason why governments have to do everything they can to prevent a recession from occurring and quickly moving to stimulate an economy where non-government spending is faltering.

This also relates to the concept of a skills shortage and structural mismatch, where the requirements of available unfilled jobs do not match the available skills of the unemployed.

Unsurprisingly, analyses of skills shortages by industry and governments invariably consider the issue from the perspective of business and profitability, which places the emphasis on containment of labour costs both in terms of wages and conditions, and hence, whenever possible, externalising the costs associated with developing the skills firms require in their workers.

Within this context the notion of structural unemployment arising from so-called ‘skills mismatch’ can be understood as implying an unwillingness of firms to offer jobs (with attached training opportunities) to unemployed workers that they deem to have undesirable characteristics.

Indulging in prejudices against this and that cohort is easier when there is mass unemployment. There are plenty of idle workers to choose from and firms can pick and choose at will.

When labour underutilisation is high, firms can easily increase their hiring standards (broaden the desired characteristics they demand from workers) and the training dynamism driven by labour shortages is lost.

Then we observe, in a static sense, ‘skill mismatches’ which are really symptoms of a ‘low pressure’ economy.

But, when the labour market is tight, the willingness of firms to indulge in their prejudices is more costly. If vacancies run ahead of the available labour, then firms have to scramble to get labour and offer training with job slots to keep their enterprises functioning.

Thus, one of the advantages of maintaining full employment is that it introduces a dynamic efficiency into the economy.

Firms have to be continually offering training and skills development as they create new jobs because otherwise they will not maintain market share.

Workers are molded to the needs of the job with appropriate skills on an on-going basis.

Firms cannot afford to indulge in irrational prejudice. Disadvantaged groups rise with the tide.

With mass unemployment, firms get lazy and refuse to offer on-going training. They then cry out that there are skills shortages when, in fact, all they are saying is that they cannot be bothered laying out the resources to train their workers in job-specific skills.

And finally, this also bears on the advantages of introducing a Job Guarantee.

While conservatives are continually extolling the primacy of market forces, they actually express a fear of letting market forces work when it comes to providing advantages and opportunities to the most disadvantaged workers in our communities.

The critics prefer to keep this disadvantaged cohort suspended in a void of joblessness and cycle them through clearly irrelevant training programs.

They seemed to distrust the ability of the private sector to structure interesting and attractive jobs to lure workers away from Job Guarantee positions.

Remember, that the Job Guarantee, which forms an integral part of Modern Monetary Theory (MMT), provides buffer stock employment to anyone who wants such a job at any time at any fraction of a working week.

It is an unconditional fixed wage offer to anyone by the Government. That is a very powerful aspect of the proposal as it means the Government ‘hires off the bottom’ rather than the top and can never be a source of inflationary pressure.

Further, the private sector can employ the JG workers any time they choose. All they have to do is provide a better ‘market’ opportunity.

That would encourage dynamic efficiencies because the incentives would be there in the private sector to improve productivity and on-the-job training to ensure that the wages paid were profitable.

Others argue that the JG workers might never want to leave the Job Guarantee despite the fact that the private sector has complete scope to hire out of the Job Guarantee workforce by simply offering attractive employment conditions.

To think that the workers would never be lured out of the Job Guarantee is to display a staggering lack of confidence in market forces.

Moreover, what a shocking thing it would be that the workers who have been unable to find work because the economy has failed to produce enough jobs (due to deficient macroeconomic policy) might actually enjoy working for the safety net wage.

Wouldn’t that be something to regret!

I note that commentators on my blog still occasionally think that we can separate MMT from the Job Guarantee and should do so because the Job Guarantee component is unattractive and turns people off MMT.

Well, that just reflects a failure to understand the role of the Job Guarantee in the macroeconomic stability framework that MMT offers.

The Job Guarantee is an intrinsic part of the macroeconomic policy structure. If we cut it out where would the inflation anchor come from?

Where would the dynamic labour market efficiency come from?

Where would the income support with inclusion come from?

New York Times article on prisoners

Bearing on this topic – and what motivated me to write on it again – was a recent New York Times article (January 13, 2018) – As Labor Pool Shrinks, Prison Time Is Less of a Hiring Hurdle – which provides a clear example of how real world mechanisms as opposed to mainstream ‘textbook’ models operate.

The article notes that:

A rapidly tightening labor market is forcing companies across the country to consider workers they once would have turned away. That is providing opportunities to people who have long faced barriers to employment, such as criminal records, disabilities or prolonged bouts of joblessness.

It notes that in some areas where the unemployment rate is now down to 2 per cent, “manufacturers are taking their recruiting a step further: hiring inmates at full wages to work in factories even while they serve their prison sentences.”

A case study from the article concludes that the manufacturer:

… has raised pay, offered referral bonuses and expanded its in-house training program. But it has still struggled to fill dozens of positions.

So they started offering ‘market wages’ and skill development to prisoners.

The trend is now spreading as the unemployment pool contracts – the “surge in demand for … workers, creating opportunities for people who might have struggled to find work earlier in the economic recovery.”

Hiring standards are falling:

Two years ago .. companies required warehouse workers to have high school diplomas and experience with the scanners used to track merchandise. Now, increasingly, they require neither …

Further, some of the workers who were recruited while serving time in prison are now “thinking bigger”.

We read that for one such worker:

Other jobs in the area pay higher wages, and his freedom has opened up more options. He has been talking to another local company, which is interested in training him to become an estimator — a salaried job that would pay more and offer room for advancement.

Upgrading, high pressure, dynamic efficiency, demand side dominance.

I had a look at the data and the following graph shows the evolution of the unemployment rate in the US for all workers and those with ‘Less than a High School Diploma, 25 yrs. & over’ from January 1992 to December 2017.

Three points are interesting:

1. The unemployment rate for the least skilled is consistently higher than the overall unemployment rate but cycles closely with it.

2. Low-skill workers endure disproportionate rises in unemployment in downturns, particularly during the GFC period.

3. The drop in the low-skill unemployment rate has been faster than the overall fall in US unemployment, which rejects the ‘irreversibility hypothesis’.

Another angle on this issue is to examine the Employment-Population ratios. The aggregate ratio for the US has fallen from a peak of 63.4 per cent in December 2006 to its current rate (December 2017) of 60.1 per cent.

This is one of the reasons I maintain my position that despite the official unemployment rate having fallen to relatively low levels in recent months, the US economy remains well below full employment.

But the interesting question for today’s blog is what has been going on with the ratios for the education-level cohorts?

The facts are:

1. The Employment-Population ratios for the four Bureau of Labor Statistics educational cohorts in December 2007 were 42.8 per cent (Less than a High School Diploma, 25 yrs. & over), 59.6 per cent (High School Graduates, No College, 25 yrs. & over), 76.4 per cent (Bachelor’s degree and higher, 25 yrs. & over), and 69.5 per cent (Some College or Associate Degree, 25 yrs. & over).

2. The ratios in December 2017 were, 42 per cent; 55.4 per cent; 71.9 per cent; 63.8 per cent, respectively.

The following graph tells the story in a simple way by indexing the respective Employment-Population ratios at 100 in December 2007 and then tracing their evolution until December 2017.

The data shows that the above 25 years group that has improved its position the most in the recovery has been those with the least education.


More detailed research is needed to understand this result more fully but is consistent with my earlier research that the current recovery in the US is biased (just) towards low paid jobs.

But, it is clear that the least skilled can enjoy jobs growth in a labour market that is expanding. They are not a constraint on growth.

Firms relax their prejudices (it is too costly not to) and lower their hiring standards and have more relaxed screening mechanisms.

All the boats rise!

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

An MMT response to Jared Bernstein – Part 3

Published by Anonymous (not verified) on Wed, 10/01/2018 - 6:37pm in

This is the third and final part of my response to an article posted by American political analyst Jared Berstein (January 7, 2018) – Questions for the MMTers. In this blog I deal with the last question that he poses to Modern Monetary Theory (MMT) economists, which relates to whether currency issuing governments have to raise revenue in order to “pay for public goods” and whether prudent policy requires the cyclically-adjusted fiscal balance to be zero at full employment to ensure “social insurance programs” are protected. The answer to both queries is a firm No! But there are nuances that need to be explained in some detail. While Jared Bernstein represents a typical ‘progressive’ view of macroeconomics and is sympathetic to some of the core propositions of MMT, this three-part series has shown that the gap between that (neoliberal oriented) view and Modern Monetary Theory (MMT) is wide. I hope this three-part series might help the (neoliberal) progressives to abandon some of these erroneous macroeconomic notions and move towards the MMT position, which will give them much more latitude to actually implement their progressive policy agenda. For space reasons, I have decided to make this a three-part response. I also hope the three-part series have helped those who already embrace the core body of MMT to deepen their knowledge and render them more powerful advocates in the struggle against the destructive dominant macroeconomics of neoliberalism.
The final question that Jared Bernstein posed was couched in these terms:

A theme of my work, to which MMTers often object, I think, is that we need to raise more revenues to pay for public goods. I recently wrote, for example, that, given our aging population, it will take something like 3% more of GDP to meet our obligations to Social Security and Medicare/Medicaid by 2035. MMTers push back that as long as we’re below potential, we can print the money to support government spending, so stop getting so wound up about “payfors.”

But while assuming full employment is a mistake, so is assuming a) enough slack to warrant all that printing, and b) even more so, the political will to do so. Though we should always be willing to deficit spend in the near term when economic conditions warrant it, should we not structure long-term fiscal policy to avoid structural deficits (a structural deficit is one that persists even at full employment)? At least in a political sense of protecting vital social insurance programs, isn’t the prudent approach, as difficult politically as it may be, to try to lock in a level of revenue collection that meets our future obligations?

I have covered this question several times in the past – to counter the almost innate view held by progressives (deficit doves) who think that it might be acceptable to run fiscal deficits in a downturn but then want to run fiscal surpluses on the other side of the cycle to ‘pay back’ the deficits.

Various rules are proposed but they all amount to ‘balancing the fiscal position over the course of the economic cycle’ if not pushing for small net surpluses over the cycle.

It is a position that is embedded deeply among these ‘deficit doves’ yet essentially reflects an elemental misunderstanding of a range of issues.

The most complete account of my treatment of this issue is in this blog – The full employment fiscal deficit condition – which outlines the ‘rule’ that MMT economists consider appropriate for a currency-issuing government intent on advancing well-being, of which, full employment is a necessary condition.

Full employment?

To begin, the definition of what constitutes full employment has long been use as an ideological tool to cover poor policy.

There have been two striking developments in economics over the last thirty years. First, a major theoretical revolution occurred in macroeconomics (from Keynesianism to Monetarism and beyond). Second, unemployment and broader labour underutilisation rates have persisted at high levels.

In past work I have written about the development of the concept of full employment since the 1940s starting with the debate in the 1940s which emphasised the need to create enough jobs to absorb the available labour force.

In the 1950s, economists quickly shifted the focus and debated the magnitude of unemployment associated with full employment based on some spurious notion that if unemployment was too low then inflation would occur.

This led to the so-called Phillips curve era which was marked by policy makers contriving to achieve a politically acceptable trade-off between inflation and unemployment.

The Phillips curve is “god-like” in economics and represents the relationship between unemployment and inflation as a smooth inverse curve.

The underlying statistics that were used to get that curve (and since) are highly dubious. Anyway, in this period, fortuitous circumstances meant that unemployment remained low but the focus had clearly changed from generating a given quantity of jobs to being concerned about inflation.

Full employment as genuine policy goal was abandoned with the introduction of the so-called natural rate hypothesis (NRH) and its assertion that there is only one unemployment rate consistent with stable inflation.

In the NRH, there is no discretionary role for aggregate demand management and only microeconomic changes can reduce the natural rate of unemployment.

Accordingly, the policy debate became increasingly concentrated on deregulation, privatisation, and reductions in the provisions of the Welfare State with tight monetary and fiscal regimes instituted.

High unemployment persisted. The fact that quits were strongly pro-cyclical made the natural rate hypothesis untenable but that reality was overlooked because it was inconvenient to the ideologues in mainstream macroeconomics.

The idea of a cyclically-invariant steady-state unemployment rate persisted in the form of the NAIRU concept, first introduced in the mid-1970s.

The NAIRU was constructed as meaning that when unemployment is above it then inflation should decelerate and vice-versa.

While various theoretical structures have been used to justify the NAIRU as a viable concept, the conclusion from each is simple: there is only one cyclically-invariant unemployment rate associated with stable price inflation.

The NAIRU concept has dominated macroeconomic policy making in most OECD countries since the late 1970s and the ‘fight-inflation-first’ strategies have exacted a harsh toll in the form of persistently high unemployment and broader labour underutilisation.

Under the sway of the NAIRU, policy makers around the World abandoned the pursuit of full employment as initially conceived.

Of-course they couldn’t admit that so they started redefining what full employment meant.

So if you read this literature you will quickly realise that the neo-liberals define full employment as being the NAIRU which is divorced from any notion that there has to be enough jobs available to meet the desires of the available labour force.

So in one small change in taxonomy governments have been able to turn their failure to provide enough jobs into a success – well we are at full employment now because we are at the NAIRU.

The NAIRU is a pernicious concept indeed.

And we should not forget that the estimates of NAIRUs from time to time in most nations border on the ludicrous.

In other words, they are useless for determining whether an economy is at full employment and as a basis for policy interventions.

I found this article – Is Low Unemployment Inflationary? – very interesting when it first came out in 1997. It appeared in the Economic Review (82(1)) published by the Federal Reserve Bank of Atlanta.

The author, Roberto Chang, concluded that:

In practice, the concept of a nonaccelerating inflation rate of unemployment is not useful for policy purposes. First, the NAIRU moves around. Second, uncertainty about where the NAIRU is at any point of time is considerable. Third, even if we knew where the NAIRU were, it would be sub optimal to predict inflation solely on the basis of the comparison of unemployment against the NAIRU. A policy of raising the fed funds rate when unemployment falls below the NAIRU may be ineffective…even if the NAIRU were constant, its location were known and all shocks to the economy were to come from the demand side. Implementing such policy would likely induce changes in the expectations and behavior of the private sector an important additional reason to be skeptical about using the NAIRU for policy.

Please read my blogs (among others) for more discussion on this topic:

1. The dreaded NAIRU is still about! (April 16, 2009).

2. Full employment = mass idle labour – detaching language from meaning (June 20, 2016).

3. Full employment is still low unemployment and zero underemployment (June 17, 2013).

4. Full employment definition (December 21, 2012).

5. Redefining full employment … again! (May 5, 2009).

6. Why did unemployment and inflation fall in the 1990s? (October 3, 2013).

Full employment will always be defined as 1-2 per cent unemployment (to allow for movements between jobs and regions etc) and zero underemployment.

Modern Monetary Theory (MMT) offers a much better way of determining how much slack there is in the labour market.

By offering a Job Guarantee – the government knows the minimal volume of net spending that is required to provide jobs at a fixed wage for all workers that want to work but cannot find a job offer for their services.

The government knows that when the last worker enters the Job Guarantee office to apply for a job then it has achieved full employment.

At that point the policy intervention creates, by definition, ‘loose’ full employment. Why ‘loose’?

Because while it ensures everyone who wants to work can find a job at a socially-acceptable base income and can find the hours of work they desire (thus eliminating what we call ‘time-based’ underemployment), there would still be some ‘skills-based’ underemployment in the system.

That means that the Job Guarantee might employ a brain surgeon who is out of work due to cuts in health funding and that person might not be doing brain surgery within the public guaranteed jobs.

That person would be considered to be underemployed on the basis of their skills.

True (‘tight’ or ‘high pressure’) full employment would occur when all ‘skills-based’ underemployment is also eliminated.

My estimate is that in a strong economy which offers a buffer stock of jobs via a Job Guarantee, those in the guaranteed pool would not be highly skilled and so the extent of ‘skills-based’ underemployment would be very low.

But the point is that the fluctuations in the Job Guarantee pool provide a very reliable daily guide to the state of the overall labour market.

When the buffer stock Job Guarantee pool shrinks to historic low levels then it is likely that the labour market is approaching true full employment.

That observation would be buttressed by examining wage and price movements.

While I will analyse this in more detail tomorrow, the US Bureau of Labor Statistics yesterday (January 9, 2018) released their latest – Job Openings and Labor Turnover – November 2017 – data.

In Paul Krugman’s latest New York Times column (January 9, 2017) – Deficits Matter Again – he claimed that the US labour was close to full employment.

He made that claim as a posturing device to support his view that the current (low) fiscal deficits in the US were dangerous and hyperinflation was a risk.

He wrote:

How do we know that we’re close to full employment? The low official unemployment rate is just one indicator. What I find more compelling are two facts: Wages are finally rising reasonably fast, showing that workers have bargaining power again, and the rate at which workers are quitting their jobs, an indication of how confident they are of finding new jobs, is back to pre-crisis levels.

This bears on the discussion of what actually constitutes full employment.

Well, the latest JOLTS data does not really support Krugman’s assertions.

The following graph (and I will have more analysis of the US labour market situation tomorrow) shows the Non-farm hiring and quit rate for the US from December 2000 (the beginning of the JOLTS dataset) to November 2017 (the most recent data).

Both the hires rate and the quit rate are still below the pre-GFC levels and certainly well below the levels at the turn of the century.

Just those indicators alone, tell us that the US labour market has some slack left to absorb. More tomorrow on the data.

Taxes create fiscal space

Jared Bernstein thinks that the US government needs:

… to raise more revenues to pay for public goods … given our aging population, it will take something like 3% more of GDP to meet our obligations to Social Security and Medicare/Medicaid by 2035

He then thinks that if the economy is at full employment (or close to that state), this need to raise revenue becomes imperative.

Firstly, the belief that the US government or any currency-issuing government needs “to raise more revenues to pay for public goods” is patently false.

The government might have elaborate accounting rules and smokescreens that make it look like they are putting tax receipts into a ‘spending’ account prior to the government withdrawing from that account when they spend but those arrangements are just disguising the intrinsic capacity of the currency-issuer.

The underlying reality is that a sovereign government is never revenue constrained because it is the monopoly issuer of the currency.

It could change the accounting rules any time it wanted – and, for example, require the US President to stand on his head for a minute before a public dollar can be spent each day.

But everyone would know that was stupid and unnecessary.

Well the same thing applies to the accounting arrangements and rules subject to tax revenue and spending.

A currency-issuing government does not need “to raise more revenues to pay for public goods”.

Secondly, that doesn’t mean that the imposition of taxes is not functionally related to public spending.

Not being ‘revenue-constrained’ means that a currency-issuing government can always purchase goods and services available for sale in that currency, which may include all idle labour resources.

The latter observation provides the capacity to run a Job Guarantee.

But, we need to be cautious.

Saying the government can always purchase goods and services available for sale in the currency it issues, is not the same thing as saying the government can always spend without concern for other dimensions in the aggregate economy.

For example, if the economy was at full capacity and the government tried to undertake a major nation building exercise with large expenditure to improve infrastructure then it might hit inflationary problems – it would have to compete at market prices for resources and bid them away from their existing uses.

In those circumstances, the government may – if it thought it was politically reasonable to build the infrastructure – quell demand for those resources elsewhere – that is, create some unemployment.

How? By increasing taxes and/or cutting spending.

Please read my blog – An MMT response to Jared Bernstein – Part 1 – for more discussion on this point.

This statement requires that we understand the role that taxes can play in a fiat currency system.

In a fiat monetary system the currency has no intrinsic worth. Further the government has no intrinsic financial constraint.

The starting point of this new understanding is that taxation functions to promote offers from private individuals to government of goods and services in return for the necessary funds to extinguish the tax liabilities that the government has the legal capacity to impose.

In this way, it is clear that the imposition of taxes creates unemployment (people seeking paid work) in the non-government sector and allows a transfer of real goods and services from the non-government to the government sector, which in turn, facilitates the government’s economic and social program.

The crucial point is that the funds necessary to pay the tax liabilities are provided to the non-government sector by government spending.

Accordingly, government spending provides the paid work which eliminates the unemployment created by the taxes.

This allows us to see why mass unemployment arises.

It is the introduction of State Money (government taxing and spending) into a non-monetary economics that raises the spectre of involuntary unemployment.

As a matter of accounting, for aggregate output to be sold, total spending must equal total income (whether actual income generated in production is fully spent or not each period).

Involuntary unemployment is idle labour offered for sale with no buyers at current prices (wages).

Unemployment occurs when the private sector, in aggregate, desires to earn the monetary unit of account, but doesn’t desire to spend all it earns, other things equal.

As a result, involuntary inventory accumulation among sellers of goods and services translates into decreased output and employment.

In this situation, nominal (or real) wage cuts per se do not clear the labour market, unless those cuts somehow eliminate the private sector desire to net save, and thereby increase spending.

The obvious conclusion is that unemployment occurs when net government spending is too low to accommodate the need to pay taxes and the desire to net save.

This analysis also sets the limits on government spending. It is clear that government spending has to be sufficient to allow taxes to be paid. In addition, net government spending is required to meet the private desire to save (accumulate net financial assets).

From the previous paragraph it is also clear that if the Government doesn’t spend enough to cover taxes and desire to save the manifestation of this deficiency will be unemployment.

This analysis also allows for a further insight that goes to the heart of Jared Bernstein’s concern.

Government spending absorbs real resources that are owned within the non-government sector.

The transfer of the use of these resources from the latter to the government sector allows the government to run its socio-economic mandate (programs).

A government does not really ‘own’ real resources. It has to extract services from the non-government sector.

In doing so it has to deprive the non-government sector of the use of those resources.

Taxation, then, can be seen as the vehicle that a sovereign government uses to ‘free up productive resources’ held in the non-sector, so that it can use them itself.

By depriving the non-government sector of purchasing power, the government creates the ‘fiscal space’ to use the idle real resources for its own purposes.

If you think about that, while taxation has nothing to do with ‘funding’ the government spending, it still allows governments to spend without inflationary consequences.

Once an economy is at (or near) full capacity, then increases in nominal spending growth will be inflationary.

If the government is satisfied with its claim on the available real resources at that point then the current tax revenue is sufficient.

However, if the government wants to increase its relative size in the economy it must reduce the non-government sector’s claim on the available real resources, to avoid inflationary pressures mounting.

That political decision – to increase its relative size – would mean it would have to increase its tax take (at full employment) to provide the extra real resource space to expand its real resource claim.

So in that sense, Jared Bernstein’s idea that revenue has to rise with spending has some coherence.

The full employment fiscal balance

Finally, we can briefly address the issue of the appropriate fiscal balance at full employment. The bottom line is that context is everything.

Governments cannot appraise the appropriateness of a particular fiscal position by looking at financial ratios or comparing one deficit to a past deficit.

As noted above, the most complete account of my treatment of this issue is in this blog – The full employment fiscal deficit condition.

What follows is a brief summary.

The basic point is that there is no necessity for balancing a fiscal position of a currency-issuing government at any point or over any span of an economic cycle.

Many progressives claim that once the economy reaches full capacity, the government has to raise taxes and/or cut spending to ensure a balanced fiscal outcome – or else face inflationary consequences.

This is an argument that so-called ‘deficit doves’ make and it is a position that is representative of the mainstream Post Keynesian position.

There is no question that if nominal spending continues to grow at a rate that outstrips the capacity of the productive sector to meet that spending with real output then firms will move to price-adjustment and inflation will result.

MMT puts that generally accepted observation at front and centre of its analysis.

In part, it helps us to understand the previous discussion over the role of taxes. For there to be real space in the economy for the government to spend, the non-government sector has to be deprived of its capacity to utilise the real resources the government seeks to command.

The – full employment fiscal deficit condition – is a core MMT ‘fiscal rule’ that allows us to appreciate the appropriate fiscal balance at any point in time.

At full employment there is no necessity for the fiscal balance to be zero. Under some conditions, a fiscal surplus might be appropriate. In other situations, which will be more often encountered by nations, continuous fiscal deficits will be required.

In an open economy, if there was no government spending or taxation (so a fiscal balance of zero) the level of economic activity (output) will be determined by private domestic spending (consumption plus investment) and net external spending (exports minus imports). If one or more of those spending sources declines, then activity will decline.

A spending gap is defined as the spending required to create demand sufficient to elicit output levels which at current productivity levels 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.

The role of government fiscal policy is obvious – to ensure no spending gaps persist.

It becomes obvious (and incontestable) that if the non-government spending sources decline from a given position of full employment – due to a preference for more saving (less consumption) or lower levels of capital formation (investment) or higher imports, then the only way that the spending gap can be filled is via a fiscal intervention.

That is direct government spending and/or a tax cut (to increase private disposable income and stimulate subsequent private spending).

What about the maintenance of full employment?

The fiscal position (deficit or surplus) must fill the gap between the savings minus investment minus the gap between exports minus imports (with net income transfers included).

That relationship can be easily satisfied at levels of economic activity that are associated with persistently high levels of unemployment.

Keynes’ General Theory was important in history because it showed how market economies could get stuck in these sort of high unemployment steady-states.

But, to maintain a full employment level of national income, which is generated when all resources are fully utilised according to the preferences of workers and owners of land and capital etc, the fiscal deficit has to be sufficient to offset the saving and imports that occurs at that level of income, less the sum of private capital formation and export revenue that is forthcoming at that level of income.

In simple algebra:

Full-employment fiscal deficit condition: (G – T) = S(Yf) + M(Yf) – I(Yf) – X

Where G is government spending, T is total taxes, M are imports, I is private investment and X is exports.

Yf is the full employment level of income and the sum of the terms S(Yf) and M(Yf) represent drains on aggregate spending when the economy is at full employment and the sum of the terms I(Yf) and X represents spending injections at full employment.

Either way, the point is clear:

If the drains outweigh the injections then for national income to remain stable, there has to be a fiscal deficit (G – T) sufficient to offset that gap in aggregate demand.

If the fiscal deficit is not sufficient, then national income will fall and full employment will be lost.

If the government tries to expand the fiscal deficit beyond the full employment limit (G – T)(Yf) then nominal spending will outstrip the capacity of the economy to respond by increasing real output and while income will rise it will be all due to price effects (that is, inflation would occur).

In this sense, MMT specifies a strict discipline on fiscal policy. It is not a free-for-all. If the goal is full employment and price stability then the Full-employment fiscal deficit condition has to be met.

But also note that the right-hand side of the full-employment fiscal deficit condition will typically not solve out to be zero.

If it did, then at full employment, the appropriate fiscal position would be a balance.

If it solved to a negative outcome, then the appropriate fiscal position at full employment would be a surplus.

But there is nothing necessary for those outcomes to occur and as history tells us, they usually will not happen.

So the spending and saving conditions of the external and private domestic sectors provide the context for appraising the appropriateness of the fiscal outcome at the benchmark of full employment.

This benchmark is what Jared Bernstein terms the “structural” fiscal balance.

At full employment, a continuous fiscal deficit will be likely to satisfy the overall saving desires of the non-government sector. History tells us that.

That continuity of net government spending will not be inflationary because it is filling a spending gap.

It is the normal condition we would expect.

Context is everything.


I hope this three-part series has been of use both to Jared Bernstein (given he asked the questions in the first place) and the broader MMT audience who would like to deepen their knowledge of our approach.

And remember, just as Jared Bernstein noted in his blog – this three-part series is a ‘peaceful’ offering.

There was no martial intent in my three-part response.

So a week after I said I would not write detailed blogs each Wednesday I have written one. But I did say I would do so if it was to maintain continuity in a multi-part blog post. So my ‘Wednesday rule’ is intact :-).

That is enough for today!

(c) Copyright 2018 William Mitchell. All Rights Reserved.

The path out of the low wage trap is limited by fiscal austerity

Published by Anonymous (not verified) on Thu, 28/12/2017 - 12:57pm in

During my postgraduate study years I read a 1954 article by American economist Clark Kerr entitled – The Balkanization of Labor Markets – which attacked the mainstream labour market views that there was mobility within labour markets such that poverty arising from low-pay was a function of workers’ preferences for low education and more leisure (that is, unemployment). As such, there was no reason for the government to intervene to improve wages or job security. Kerr’s thesis was that there was not a ‘single’ labour market accessible to all, where individual mobility would result from personal investment in education and skill development. Instead, he argued that the US labour market was “segmented” by institutional arrangements, which trapped some demographic cohorts into low-pay and insecure jobs. Poverty could arise from these traps. The idea morphed into the segmented labour market literature of the late 1960s and early 1970s. The applications were mostly Anglo because in non-Anglo countries there appeared to be more resistance to institutional arrangements that undermined the chance for workers to enjoy job security with decent pay. However, in recent years (decade) the trend towards precarious work where certain groups (women, youth, migrants) are trapped in low pay and frequent spells of unemployment has spread, with devastating consequences. The largest European economies – Germany and France – are now bedevilled with this issue and with a bias towards fiscal austerity, the path for workers out of the trap is limited.

As an aside, during the McCarthy era, Clark Kerr signed the so-called – University of California Loyality Oath – disavowing Communism.

Many staff members refused to sign and were sacked, only to be reinstated a few years later when they sued the University. They were the brave ones.

Kerr was critical of their dismissal but still signed.

Soon after, Clark Kerr moved into University administration and became chancellor at UC Berkeley.

He was also severely criticised by conservative UC bosses for refusing to expel radical students protesting as part of the Civil Rights and Vietnam movements.

For his liberal beliefs (Ronald Reagan called him a ‘dangerous liberal’ in his campaign for California governor), Kerr was on the FBI blacklist.

The FBI “campaigned to destroy” Kerr’s career. See –
Reagan, Hoover and the UC Red Scare
– for more detail on the FBI and the purge of UC academics and other workers.

Among other things, Kerr was a Presidential nomination (LBJ) to the influential position of Secretary of Health, Education and Welfare but that invitation was withdrawn once the FBI (Hoover) intervened. Their allegations against him for “subversise views” were later shown to be false.

Kerr was ultimated dismissed from his position on the UC Board of Regents in 1967 “three weeks after Reagan took office” (Source).

Such is America.

Balkanisation of labour markets

Clark Kerr built on the work of the early institutionalist economists and industrial relations researchers in the US who argued that institutional arrangements were a permanent feature of economic life in contrast to the mainstream view that posited that they were just ‘imperfections’ that could be eliminated through deregulation to expose the true competitive nature of markets.

For example, in 1874, Irish economist John Elliot Cairnes had written (pp. 67-68):

No doubt the various ranks and classes fade into each other by imperceptible gradations, and individuals from all classes are constantly passing up or down; but while this is so, it is nevertheless true that the average workman, from whatever rank he be taken, finds his power of competition limited for practical purposes to a certain range of occupations, so that, however high the rates of remuneration in those which lie beyond may rise, he is excluded from sharing them. We are thus compelled to recognize the existence of non-competing industrial groups as a feature of our social economy.

[Reference: Cairnes, J.E. (1874) Political Economy, New York, Harper.]

Kerr noted that “Institutional rules put added structure into labor markets” and compared these arrangements with so-called “structuralist markets”, such as for agricultural harvest labour, which had been proffered by orthodox economists as the norm.

These markets were characterised by five elements:

1. “there are no unions with seniority and other rules”.

2. “the relation between employee and the employer is a transitory, impersonal one”.

3. “the workers around skilled”.

4. “payment is by unit of product”.

5. “little capital or machinery is employed”.

In these arrangements, workers are considered ‘homogeneous’ and employers select on who will accept the lowest wage. Anyone can get a job in these type of markets if labour demand is strong enough.

However these type of labour markets are the exception rather than the rule.

Kerr noted that even “without institutional rules”, “most jobs … belong to single workers or to small groups of workers” as a result of skill differences.

But overlying those obvious differences are ” institutional rules … [which] … add new rights and new preferences and strengthen the old ties”.

“Market forces … give way to personnel rules which may seem exceedingly impersonal when applied to specific workers”.

Such arrangements as “bureaucratic rules take the place of individual judgements”.

Kerr wrote that:

These rules accept or reject classes of people, instead of the single individuals who met or failed to meet the tests of judgement order prejudices a small employer or the foreman can. Workers have organised into unions would seek to establish sovereignty over a ‘job territory’. Within this job territory work the citizens who belong to this private government; outside are the non-citizens without rights. The demand of all citizens will be met before the petitions of the aliens are considered. The institutionalization of labor markets is one aspect of the general trend from the atomistic to the pluralistic, and from the largely open to the partially closed society.

Segmentation of labour markets

Kerr’s work was a precursor to a burgeoning literature from the 1950s onwards, which described the manner in which labour markets are organised and adjust to economic cycles.

Central in this respect is so-called Segmented Labour Market (SLM) or dual labour market theory, which was developed by a range of economists, industrial relations practitioners, sociologists, and others to describe the relationship between employment, wages, poverty, discrimination, and social mobility.

Dual Labour Market theory – or Segmented Labour Market theory which was pioneered by Peter Doeringer and Michael Piore and others provided a reasonable description of the structure of labour markets in many countries.

The seminal text was Doeringer and Piore, Internal Labor Markets and Manpower Analysis (Lexington, MA:
D.C. Heath Co., 1971).

SLM theory argues that the labour market is segmented into two separate labour markets each with different processes for allocation and reward. These segments resist transitions from each others.

The most basic demarcation is between the Primary Labour Market (PLM) and the Secondary Labour Market (SLM). PLM workers are typically employed in a tight internal labour market structure which provides for career advancement and tend to search for jobs within the firm while already employed. The jobs are secure and relatively well-paid.

The SLM is characterised by low-paid, insecure ‘dead-end’ jobs which have high turnover rates. The jobs do not have well-defined career ladders and offer very little training for higher productivity

While the PLM worker searches for new ways in which to climb the career ladder, the SLM worker usually searches to avoid being sacked.

Given the lack of mobility between the ‘segments’, a SLM worker will typically not make the transition into the PLM. Workers thus become ‘trapped’ in poor jobs with spells of unemployment intervening periods of low paid work.

I have done a lot of work in this area in the past including during my postgraduate years.

One area of work I became interested in was the question of mobility. The mainstream economists tried to refute the SLM ideas by arguing that mobility impediments were largely due to human capital differences.

So via education, training and experience, a worker could move from low-skill jobs into well-paid jobs. The wage differences were due to productivity differences, inherent in the individual.

An aspect of this literature was the defense of the increased casualisation of labour markets. I wrote about this increasing trend in this blog (May 25, 2015) – The rise of non-standard work undermines growth and increases inequality.

Moreover, while the SLM theories applied to labour market structures in Anglo nations, European labour markets were less well described by the theories in the past. Spain was the first nation to really move to increased casualisation. However, that trend is now spreading – see below.

While segmentation is becoming more apparent in most labour markets, mainstream economists have tried to claim that individuals are not trapped in poor jobs but rather use them as a “stepping stone” to better work.

In Australia, for example, these economists use flawed data to make these claims. Their ‘mobility’ datasets usually do not exclude students who combine school/study and casual work.

This biases the results in favour of the stepping stone argument. Why? Because students who engage in casual work to support them while studying and then upon graduation enter a professional occupation are not representative examples.

In the case of students, the successful transition from casual work to full-time work has nothing to do with the casual work experience. The casual work has nothing much to do with the skills they subsequently garner in their professional capacity which requires only a university qualification for entry. Further, the casual employment undertaken typically bears no relationship to the industry or occupation that they enter after finishing their studies.

I have written about this in the past. Please read my blog – Casual work traps workers into low-pay and precarious jobs – for more discussion on this point.

The evidence is overwhelming. Casual work traps workers into a life of precarious employment with low-pay.

The progressive side of the debate also didn’t fully understand the SLM message.

Initially, it was argued that the solution to the segments and the poverty trap that arose from low-paid work was for the public sector to create jobs in the primary labour market and offer transitions to disadvantaged workers.

The problem is that they didn’t fully understand the ‘functional’ relationship between the two segments. The ability of workers in primary labour markets to earn higher wages in stable jobs was directly related to the fact that employers could push all the flux and uncertainty of aggregate spending shifts onto the secondary workers.

The latter could be easily dismissed when sales fell, which then gave the firms leeway to ‘carry’ primary workers in slow times.

The interesting aspect of all this is that in the Anglo countries, capital has increased lobbied governments to break down the sort of institutional protections that workers in primary labour markets enjoyed, which is another story again.

Meanwhile, in European labour markets, segmentation is on the rise.

Another aspect of the SLM theory was the role of migrants in reinforcing labour market structures.

Michael Piore’s – Birds of Passage: Migrant Labor and Industrial Societies – published in 1979 by Cambridge University Press, analysed immigration flows in terms of the dual or segmented labour market theory, which Piore had helped develop in the late 1960s and early 1970s.

He considered the impact of migration to advanced urban industrial nations from less developed rural societies.

His thesis was that in most economies there are jobs that the locals do not particularly want to do. These are secondary labour market jobs that pay poorly, are precarious and are typically boring, dangerous, dirty or in some other way, unattractive.

Firms might struggle to attract local labour and in that regard, “migration seems to be an almost perfect solution … The migrants want the jobs; national workers do not. What makes such migration a perfect solution, however, is its temporary character, and migrations of this kind virtually never remain temporary”.

Piore’s analysis, although in the context of pull-factors (employers seeking workers) rather than push-factors (refugees fleeing unviable situations), was prescient.

He said that:

Many migrants stay longer than originally intended, develop permanent attachments, have children, or bring their families. Once permanent communities develop, the mi-grants are no longer satisfied with the jobs for whicb they were originally recruited. They instead aspire to the same kinds of employment opportunities as nationals, but there is nothing in the process that assures that there will be enough of these other employment opportunities to go around. In fact, history suggests that second-generation migrant communities have difficulty meeting their aspirations, eitber because the jobs to which they aspire are limited or because the workers are not trained to move into them.

Some years ago, I read a report – The Labour Market Integration of Immigrants in Germany – written by Thomas Liebig and traced the fortunes of migrants in the German labour market.

[Reference: Liebig, T. (2007) ‘The Labour Market Integration of Immigrants in Germany’, OECD Social, Employment and Migration Working Papers, No. 47, OECD Publishing, Paris].

Germany has a tradition since the 1950s of large-scale net immigration. Immigration into Germany was initially concentrated on “low-skilled foreign labour” and many “of these ‘guest worker’ immigrants settled and were joined by their foreign spouses, which has given rise to a second generation of persons with an immigrant background”.

Subsequently (from late 1980s), “Germany received massive immigration flows of ethnic Germans from Eastern Europe”, partly due to reunification.

Data from the German federal statistics office (DeStatis) for Migration from the 1950s was used to produce this graph, which shows the annual flows of net migration and the cumulative effect of those flows up until 2016.


The humanitarian flows are considerably less

The Report found that, even though these workers had “low educational attainment … the the labour market integration of immigrant men is relatively favourable in international comparison. However, immigrant women, and particularly those of Turkish origin, have very low employment rates”.

But the problems emerge when the “second generation” of these workers are considered. They children of the first generation migrants are found to have:

… very low educational outcomes. This hampers their access to vocational training, which appears to have an even stronger impact on their employment prospects than on those of natives. The low educational attainment of the second generation seems to be at least partly attributable to structural features in the German education system, such as the early streaming which puts migrants’ children in a lower track. Especially problematic is the relatively late starting age for kindergarten and the prevalence of half-day education in kindergarten and school, which limits exposure to the German language at a crucial age. Immigrants’ access to self- employment is hampered by legal obstacles and a lack of information and subsequent access to financial credits.

The Report found that when German was not spoken at home, the second-generation were more disadvantaged – “it seems that the language spoken at home has a much stronger impact on the second generation’s educational outcomes than in other countries.”

The overall conclusion is that “the second generation does not reach the same attainment as natives, not even as those with a similar socio-economic background, contrary to what is observed in other OECD countries.”

The neo-liberal apologists claim the minijobs satisfy the preferences of workers for flexible casual work. But the reality is different.

This ‘preference’ argument is used universally by mainstream economists to make it seem like the outcomes from the labour market are the choice of the workers.

But the reality is that these disadvantaged jobs are just another rationing device when aggregate spending is too low and lead to rising inequality and diminished investment in human capital.

Segmented labour markets in France

All of this came to mind as I was reading a recent Banque de France research report (December 19, 2017) – The duality of the French labour market – by researcher Clémence Berson.

She documents the classic SLM structure for France, where:

… flexibility in the labour market relies mainly on fixed-term and temporary workers. These workers are less well paid, receive less training and find it difficult to obtain permanent employment.

The problems that arise are that secondary workers, with low, insecure pay and no entitlements such as superannuation are at constant risk of poverty and disadvantage.

Their capacity to plan for the future is minimal if non-existent.

The Banque de France study documents how the share in temporary and short-term contracts in total employment has risen substantially in recent years (more than doubled since 1982), replicating trends that Anglo countries have endured for several decades.

The study shows that:

… fixed-term contracts (CDD) and temporary contracts account for a small proportion of existing contracts but represent the majority of hires

The secondary jobs account for around 12 per cent of the total but around 85 to 87 per cent of total hirings, a phenomenon that transcends small and large firms.

Further, these secondary jobs have an increasing “turnover rate … the average length of a fixed-term contract being of 14 days in 2014”.

Which means that the vast burden of adjustment in the French labour market is being borne by these “fixed-term and temporary workers”.

This increases inequality trends and institutionalises poverty.

Apropos of my introduction above, the two interesting results of the study related to the ‘stepping stone’ hypothesis and the role of migrants.

First, the study finds that “Fixed-term and temporary jobs … lead more often to unemployment than to a permanent job for this population”.

In other words, the French labour market experience rejects the “stepping stone” claim by mainstream economists.

The Banque de France study concludes:

… the rate of transition to a permanent contract is relatively low …

This shows that the French labour market is segmented: workers on fixed-term and temporary contracts tend to continue on these types of contracts for several years and find it difficult to obtain permanent employment.

Who are these workers?

1. “women and people from an immigrant background”.

2. “The average age of these workers is relatively young”.

3. “Blue-collar workers represent 34% of fixed-term and temporary contracts compared with 23% of permanent contracts, low-skilled white-collar workers represent 36% versus 32% in CDI while the proportion of intermediate and managerial occupations is 7 points higher in CDI than in fixed-term or temporary contracts.” CDI stands for “Contrat à durée indéterminée” or a permanent contract.

How uncertain is the workers’ experience?

The study finds that:

1. “Workers employed under fixed-term and temporary contracts are also more vulnerable to the economic conditions than other workers”.

2. “people employed under fixed-term or temporary contracts are less likely to be trained during their employment”.

3. “fixed-term or temporary contract reduces wages earned by 5%, all other characteristics being equal.”

Is this a problem?

The lack of mobility means that these workers are locked into a low-wage, precarious future. The diminished opportunity to receive training and the lack of incentive to invest private funds in education means that poverty is always staring these workers in the face.

Further, with increasing social trends towards single-parent families and the over-representation of women in these secondary jobs means that family disadvantage becomes entrenched.

The children from these families inherit the disadvantage of their parent(s).

Further, the over-representation of younger workers who have low skill and little prospect for advancement means that the problems will intensify as they age and require state support into their retirement years.

The Banque de France study notes also that:

Firstly, the people who obtain only fixed-term or temporary employment experience frequent periods of unemployment. Secondly, the consequences can be felt in other markets due, for example, to difficulties in obtaining housing or credit.

What can be done?

See also – What policy to reduce labour market segmentation? – which is co-authored by the author of the Banque de France study I cited above.

The Banque de France study suggests that:

First, “reducing the protection gap between the two types of contract would be one way of reducing labour market segmentation”.

However, these are likely to be rejected by permanent workers especially in times of economic downturn. This goes back to the point I made earlier about the functional relationship between the segments.

If you reduce the protection of the permanent workers then a ‘race to the bottom’ begins. And while unions are in decline everywhere, there would still be massive social unrest as a result of the increased job insecurity for the majority of workers.

Similarly, if you increase the protection of the contract workers in the secondary jobs then you undermine their ‘function’ – to absorb the flux and uncertainty of aggregate spending movements.

In that case, the employers would seek to undermine the general conditions enjoyed by the permanent workers.

The clue is to reduce the overall variations in aggregate spending, which is a role that fiscal policy (government spending and taxation) should play within a full employment objective.

Second, “Incentive schemes have also been examined to increase hires under permanent contracts and encourage the transformation of fixed-term and temporary contracts into permanent ones.”

These are ‘market-based’ attempts to make it profitable for firms to reduce segmentation.

One proposal is to ‘tax’ the firms who offer insecure work or taxing “dismissals”.

The author(s) realises that “By financially penalising hiring on fixed-term contracts, the reform reduces the flexibility of the labour market”, which once again goes to the functionality of these jobs in reducing profit uncertainty.

That is the problem.

The policy response should not be biased towards reducing profit uncertainty but rather advancing the well-being of workers.

The government can always ensure that the workers it hires receive secure jobs with socially-acceptable pay levels and enjoy other entitlements such as provision for superannuation, sick and holiday pay and other benefits.

The government labour market, which includes the introduction of a Job Guarantee, should set the benchmark that the non-government labour market has to match.

Various attempts by the government to water down the conditions in its own domain – such as outsourcing, privatisation, casualisation, etc – have only given incentives to non-government employers to do further erode conditions for their own workforces.

Most of the retreat in public employment has come about because of flawed notions of fiscal responsibility.

The goal of government is not to reduce the fiscal deficit or produce any particular fiscal balance. That balance should ebb and flow with the conditions in the non-government sector such that full employment can always be maintained.

In that environment, faced with increased scarcity of workers, the incentive to undermine workers conditions and offer low pay is reduced.

And firms would have a better understanding that the policy environment was biased towards maintaining economic activity rather than undermining it.


The segmentation of labour markets has long been a problem that Anglo nations have been dealing with. The solution is not easy in a capitalist world where profit prioritised above the interests of people.

But, now these trends are being entrenched in Europe, which had historically offered more secure employment to more workers than the Anglo nations.

The austerity bias in Europe exacerbates those trends.

The Weekend Quiz – the last for 2017 – will be back tomorrow.

On Monday, I am travelling a lot and the blog will go into holiday mode again until Tuesday.

Happy New Year to all.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

Unemployment is miserable and doesn’t spawn an upsurge in personal creativity

Published by Anonymous (not verified) on Tue, 21/11/2017 - 1:14pm in


job guarantee

Here is a summary of another interesting study I read last week (published March 30, 2017) – Happiness at Work – from academic researchers Jan‐Emmanuel De Neve and George Ward. It explores the relationship between happiness and labour force status, including whether an individual is employed or not and the types of jobs they are doing. The results reinforce a long literature, which emphatically concludes that people are devastated when they lose their jobs and do not adapt to unemployment as its duration increases. The unemployed are miserable and remain so even as they become entrenched in long-term unemployment. Further, they do not seem to sense (or exploit) a freedom to release some inner sense of creativity and purpose. The overwhelming proportion continually seek work – and relate their social status and life happiness to gaining a job, rather than living without a job on income support. The overwhelming conclusion is that “work makes up such an important part of our lives” and that result is robust across different countries and cultures. Being employed leads to much higher evaluations of the quality of life relative to being unemployed. And, nothing much has changed in this regard over the last 80 or so years. These results were well-known in the 1930s, for example. They have a strong bearing on the debate between income guarantees versus employment guarantees. The UBI proponents have produced no robust literature to refute these long-held findings.

While the ‘Happiness Study’ notes that “the relationship between happiness and employment is a complex and dynamic interaction that runs in both directions” the authors are unequivocal:

The overwhelming importance of having a job for happiness is evident throughout the analysis, and holds across all of the world’s regions. When considering the world’s population as a whole, people with a job evaluate the quality of their lives much more favorably than those who are unemployed. The importance of having a job extends far beyond the salary attached to it, with non-pecuniary aspects of employment such as social status, social relations, daily structure, and goals all exerting a strong influence on people’s happiness.

And, the inverse:

The importance of employment for people’s subjective wellbeing shines a spotlight on the misery and unhappiness associated with being unemployed.

There is a burgeoning literature on ‘happiness’, which the authors aim to contribute to.

They define happiness as “subjective well-being”, which is “measured along multiple dimensions”:

… life evaluation (by way of the Cantril “ladder of life”), positive and negative affect to measure respondents’ experienced positive and negative wellbeing, as well as the more domain-specific items of job satisfaction and employee engagement. We find that these diverse measures of subjective wellbeing correlate strongly with each other …

Cantril’s ‘Ladder of Life Scale’ (or “Cantril Ladder”) is used by polling organisations to assess well-being. It was developed by social researcher Hadley Cantril (1965) and documented in his book The pattern of human concerns.

You can learn more about the use of the ‘Cantril Ladder’ HERE.

As we read, the “Cantril Self-Anchoring Scale … consists of the following”:

  • Please imagine a ladder with steps numbered from zero at the bottom to 10 at the top.
  • The top of the ladder represents the best possible life for you and the bottom of the ladder represents the worst possible life for you.
  • On which step of the ladder would you say you personally feel you stand at this time? (ladder-present)
  • On which step do you think you will stand about five years from now? (ladder-future)

[Reference: Cantril, H. (1965) The pattern of human concerns, New Brunswick, Rutgers University Press.]

Christian Bjørnskov’s 2010 article – How Comparable are the Gallup World Poll Life Satisfaction Data? – also describes how it works.

[Reference: Bjørnskov, C. (2010) ‘How Comparable are the Gallup World Poll Life Satisfaction Data?’, Journal of Happiness Studies, 11 (1), 41-60.]

The Cantril scale is usually reported as values between 0 and 10.

The authors in the happiness study use poll data from 150 nations which they say “is representative of 98% of the world’s population”. This survey data is available on a mostly annual basis since 2006.

The following graph (Figure 1 from the Study) shows “the self-reported wellbeing of individuals around the world according to whether or not they are employed.”

The “bars measure the subjective wellbeing of individuals of working age” by employment status .

The results show the differences between having a job and being unemployed are “very large indeed” on the three well-being measures (life evaluation, positive and negative affective states).

People employed “evaluate the quality of their lives around 0.6 points higher on average as compared to the unemployed on a scale from 0 to 10.”

The authors also conduct more sophisticated (and searching) statistical analysis (multivariate regression) which control for a range of characteristics (gender, age, education, marital status, composition of household) as well as to “account for the many political, economic, and cultural differences between countries as well as year-to-year variation”.

The conclusion they reach is simple:

… the unemployed evaluate the overall state of their lives less highly on the Cantril ladder and experience more negative emotions in their day-to-day lives as well as fewer positive ones. These are among the most widely accepted and replicated findings in the science of happiness … Here, income is being held constant along with a number of other relevant covariates, showing that these unemployment effects go well beyond the income loss associated with losing one’s job.

These results are not surprising.

The earliest study of this sort of outcome was from the famous study published by Philip Eisenberg and Paul Lazersfeld in 1938.

[Reference: Eisenberg, P. and Lazarsfeld, P. (1938) ‘The psychological effects of unemployment’, Psychological Bulletin, 35(6), 358-390.]

They explore four dimensions of unemployment:

I. The Effects of Unemployment on Personality.

II. Socio-Political Attitudes Affected by Unemployment.

III. Differing Attitudes Produced by Unemployment and Related Factors.

IV. The Effects of Unemployment on Children and Youth.

On the first dimension, they conclude that:

1. “unemployment tends to make people more emotionally unstable than they were previous to unemployment”.

2. The unemployed experience feelings of “personal threat”; “fear”; “sense of proportion is shattered”; loss of “common sense of values”; “prestige … lost … in … own eyes … and as he imagines, in the eyes of his fellow men”; “feelings of inferiority”; loss of “self-confidence” and a general loss of “morale”.

Devastation, in other words.

They were not surprised because they note that:

… in the light of the structure of our society where the job one holds is the prime indicator of … status and prestige.

This is a crucial point that UBI advocates often ignore. There is a deeply entrenched cultural bias towards associating our work status with our general status and prestige and feelings of these standings.

That hasn’t changed since Eisenberg and Lazersfeld wrote up the findings of their study in 1938.

It might change over time but that will take a long process of re-education and cultural shift. Trying to dump a set of new cultural values that only a small minority might currently hold to onto a society that clearly still values work is only going to create major social tensions.

Eisenberg and Lazarsfeld also considered an earlier 1937 study by Cantril who explored whether “the unemployed tend to evolve more imaginative schemes than the employed”.

[Reference: Cantril, H. (1934) ‘The Social Psychology of Everyday Life’, Psychological Bulletin, 31, 297-330.]

The proposition was (is) that once unemployed, do people then explore new options that were not possible while working, which deliver them with the satisfaction that they lose when they become jobless.

The specific question asked in the research was: “Have there been any changes of interests and habits among the unemployed?”

Related studies found that the “unemployed become so apathetic that they rarely read anything”. Other activities, such as attending movies etc were seen as being motivated by the need to “kill time” – “a minimal indication of the increased desire for such attendance”.

On the third dimension, Eisenberg and Lazersfeld examine the questions – “Are there unemployed who don’t want to work? Is the relief situation likely to increase this number?”, which are still a central issue today – the bludger being subsidised by income support.

They concluded that:

… the number is few. In spite of hopeless attempts the unemployed continually look for work, often going back again and again to their last place of work. Other writers reiterate this point.

So for decades, researchers in this area, as opposed to bloggers who wax lyrical on their own opinions, have known that the importance of work in our lives goes well beyond the income we earn.

The non-pecuniary effects of not having a job are significant in terms of lost status, social alienation, abandonment of daily structure etc, and that has not changed much over history.

The happiness paper did explore “how short-lived is the misery associated with being out of work” in the current cultural settings.

The proposition examined was that:

If the pain is only fleeting and people quickly get used to being unemployed, then we might see joblessness as less of a key public policy priority in terms of happiness.

They conclude that:

… a number of studies have demonstrated that people do not adapt much, if at all, to being unemployed … there is a large initial shock to becoming unemployed, and then as people stay unemployed over time their levels of life satisfaction remain low …. several studies have shown that even once a person becomes re-employed, the prior experience of unemployment leaves a mark on his or her happiness.

So there is no sudden or even medium-term realisation that being jobless endows the individual with a new sense of freedom to become their creative selves, freed from the yoke of work. To bloom into musicians, artists, or whatever.

The reality is that there is an on-going malaise – a deeply entrenched sense of failure is overwhelming, which stifles happiness and creativity, even after the individual is able to return to work.

This negativity, borne heavily by the individual, however, also impacts on society in general.

The paper recognises that:

A further canonical finding in the literature on unemployment and subjective wellbeing is that there are so-called “spillover” effects.

High levels of unemployment “increase fear and heighten the sense of job insecurity”. Who will lose their job next type questions?

The researchers found in their data that the higher is the unemployment rate the greater the anxiety among those who remain employed.


The overwhelming conclusion is that “work makes up such an important part of our lives” and that result is robust across different countries and cultures.

Being employed leads to much higher evaluations of the quality of life relative to being unemployed.

The unemployed are miserable and remain so even as they become entrenched in long-term unemployment. They do not seem to sense (or exploit) a freedom to release some inner sense of creativity and purpose.

The overwhelming proportion continually seek work – and relate their social status and life happiness to gaining a job, rather than living without a job on income support.

Modern Monetary Theory (MMT) allows us to understand that it is the government that chooses the unemployment rate – it is a political choice.

For currency-issuing governments it means their deficits are too low relative to the spending and saving decisions of the non-government sector.

For Eurozone-type nations, it means that in surrendering their currencies and adopting a foreign currency, they are unable to guarantee sufficient work in the face of negative shifts in non-government spending. Again, a political choice.

The Job Guarantee can be used as a vehicle to not only ensure their are sufficient jobs available at all times but also to start a process of wiping out the worst jobs in the non-government sector.

That can be done by using the JG wage to ensure low-paid private employers have to restructure their workplaces and pay higher wages and achieve higher productivity in order to attract labour from the Job Guarantee pool.

The series so far

This is a further part of a series I am writing as background to my next book with Joan Muysken analysing the Future of Work. More instalments will come as the research process unfolds.

The series so far:

1. When Austrians ate dogs.

2. Employment as a human right.

3. The rise of the “private government.

4. The evolution of full employment legislation in the US.

5. Automation and full employment – back to the 1960s.

6. Countering the march of the robots narrative.

7. Unemployment is miserable and does not spawn an upsurge in personal creativity.

The blogs in these series should be considered working notes rather than self-contained topics. Ultimately, they will be edited into the final manuscript of my next book due in 2018. The book will likely be published by Edward Elgar (UK).

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.

Automation and full employment – back to the 1960s

Published by Anonymous (not verified) on Tue, 14/11/2017 - 8:13pm in

On August 19, 1964, the then US President Lyndon B. Johnson established the – National Commission on Technology, Automation, and Economic Progress. He established the Commission in response to growing concern during the deep 1960-61 recession that the unemployment had been created by the pace of technological change. Ring a bell! He wanted to an inquiry to explore this issue and come up with recommendations on how to deal with the possibility that automation was wiping out jobs and the future would be bleak. Before the Commission had reported, the Federal government had reversed its fiscal austerity and the resulting stimulus had driven the unemployment back down to relatively low levels. The Commission noted that unemployment was largely the result of inadequate total spending and that the Government had the tools at its disposal to eliminate it. They considered that there would be workers (low-skill etc) who would suffer more displacement from technology than those with more skill etc, but that ultimately even those workers would be able to get jobs if the public deficit was large enough. In this regard, they eschewed pointless training programs that did not provide immediate access to jobs. Instead, they recommended (among other things) the introduction of a Job Guarantee (Public Service Employment) financed by the Federal government but administered at all levels of government. It would pay the Federal minimum wage and be available on demand. This is the preferred Modern Monetary Theory (MMT) approach and rejects solutions that rely on the provision of a basic income guarantee to resolve the problems created by unemployment.

The following graph sets the scene and shows the official US unemployment rate from January 1948 to December 1967.

When Johnson took over as President after Kennedy’s assassination on November 22, 1963, the unemployment rate was at the elevated level of 5.7 per cent as the US economy was still struggling to shake off the major recession that began in April 1960 and lasted for 10 months (the trough being recorded in February 1961).

Interestingly, the recession was provoked by the central bank hiking interest rates in 1959, but the real damage came when the Federal government shifted from a 2.6 per cent of GDP deficit in 1959 to a 0.1 per cent of GDP surplus in 1960.

That surplus was recorded after the Government cut spending (in real terms) by 1.5 per cent cutting spending from 18.2 per cent of GDP to 17.2 per cent of GDP in on fiscal year. Any reasonable person would have known that would have created a recession and it did.

In 1962 the deficit was 0.6 per cent of GDP and rose to 1.2 per cent of GDP in 1963, which stimulated growth. By 1962, Federal expenditure was back to 18.2 per cent of GDP, and, surprise, surprise, tax revenue rose on the back of higher economic activity.

As the US Congressional Research Service (CRS) reported to the US Congress on January 10, 2002 – The Current Economic Recession: How Long, How Deep, and How Different From the Past?:

A tightening of monetary policy in 1959 and the first half of 1960 was followed by an easing of policy in the second half of 1960. There was no fiscal stimulus undertaken. In fact, fiscal policy was tightened at the time, negating the system’s automatic stabilizers and exacerbating the recession.

Once the fiscal position was reversed, the US economy entered its second longest period of growth (92 months) in its history.

During the 1960-61 recession, it was claimed – as a diversion from the obvious fiscal austerity – that the rising unemployment was the result of new technologies.

On February 24, 1961, as the unemployment rate hovered around 6.9 per cent (and would rise the peak of 7.1 per cent in May of that year), the conservative Time Magazine published an article – Business: THE AUTOMATION JOBLESS – which carried the sub-heading “Not Fired, Just Not Hired”.

It as a scaremongering exercise which suggested that “automation” was driving “the rise in unemployment”.

It said that:

… many a labor expert tends to put much of the blame on automation … automation is reaching into so many fields so fast that it has become “the nation’s second most important problem.”

The claims were twofold:

1. “The number of jobs lost to more efficient machines”.

2. “automation may prevent the economy from creating enough new jobs.”

Ring a bell (hint: ‘the robots are coming’).

This was 1961 remember.

The article made the obvious point that with productivity growth, “the trend has been to bigger production with a smaller work force”. And it listed the sectors where automation had increased output and reduced the number of workers provided.

It also claimed that service sector jobs would be eliminated by automation:

Many of the losses in factory jobs have been countered by an increase in the service industries or in office jobs. But automation is beginning to move in and eliminate office jobs too.

It hypothesised that while “In the past, new industries hired far more people than those they put out of business … this is not true of many of today’s new industries.”

It suggested that:

Other experts talk of massive Government-and industry-supported retraining programs as a cureall. But Max Horton, Michigan’s director of employment security, is skeptical of this oft-repeated panacea: “I suppose that is as good as any way for getting rid of the unemployed—just keep them in retraining … But most important, is there a job waiting for them when they have been retrained?”

Oh, how times have changed.

Here was an explicit recognition that engaging in supply-side policies was futile if the demand-side (“a job waiting for them”) was the problem.

We now churn unemployed workers, as part of the new industry of mass unemployment created under neoliberalism, through useless and soul-destroying training and compliance programs without any real hope that they will come out the other side with a job.

When they do not find work (due to a shortage of overall employment opportunities), the unemployed are further admonished and forced into further ‘programs’.

Johnson thus came to office as the recovery was underway but with the on-going automation debate influencing policy discussions (Kennedy had announced widespread re-training policies in his – Special message to Congress on urgent national needs, 25 May 1961.

Johnson determined on August 19, 1964 that:

The disturbing trend of the 1950’s has been reversed. Unemployment is no longer growing 10 percent a year as it did from 1952 to 1960. Instead, unemployment is shrinking at an average annual rate of 6.2 percent since 1961. Unemployment is below the 5 percent level because, in the last 4 years, our economy has created more than 4 million new jobs.

[Reference: Johnson, L.B. (1964) Remarks Upon Signing Bill Creating the National Commission on Technology, Automation, and Economic Progress, August 19, 1964 – Archive Link.]

Note he didn’t talk about unemployment falling because of supply-side measures such as cutting welfare and income support, forcing unemployed workers to run on training treadmill going nowhere and all the other stuff that we hear about endlessly in the current period.

This was before Monetarism took hold and, thus, before the neoliberal death grip became dominant.

Policy makers knew that if you wanted to reduce unemployment you had to create jobs and that required an increase in aggregate spending from whatever source.

What was on Johnson’s mind at the time (among other things) was that structural shifts were occuring in the US economy, which he considered may isolate some workers from the benefits of progress.

He explicitly noted, in creating the National Commission on Technology, Automation, and Economic Progress that:

Technology is creating both new opportunities and new obligations for us-opportunity for greater productivity and progress 0 obligation to be sure that no workingman, no family must pay an unjust price for progress.

Automation is not our enemy. Our enemies are ignorance, indifference, and inertia. Automation can be the ally of our prosperity if we will just look ahead, if we will understand what is to come, and if we will set our course wisely after proper planning for the future.

Note the reference to ensuring inclusion for all (gender specifics – to wit, “workingman” – being an artifact of the times).

That progress via productivity growth was on-going but the task of government was to ensure that everybody had a share in that.

Compare that to the neoliberal era.

This graph shows how stark the shift to the neoliberal has been. It shows average real hourly wages in the US (BLS series CES0600000008 deflated by CPIAUCSL) and Labour productivity (output per hour) (BLS series PRS84006093) from the March-quarter 1947 to the June-quarter 2017, with both series indexed to 100 in the March-quarter 1970.

The base year is around the time that Monetarism started to gain prominence in the US and elsewhere and also coincided with the publication of the so-called ‘new labor economics’ literature (Phelps, Lucas etc) that spearheaded the neoliberal putsch.

As you can see, it also coincided with the break in the relationship between real wages and labour productivity as legislative and other changes made it harder for workers to share in the growth of labour productivity.

Prior to the 1970s, real wages and labour productivity typically moved together. As the attacks on the capacity of workers to secure wage increases intensified, a gap between the two opened and widened.

The wage share in national income, which can be calculated from this data, was more or less constant for a long time in many countries during the Post Second World War period and this constancy was so marked that Nicholas Kaldor (the Cambridge economist) termed it one of the great “stylised” facts.

It meant that real wages grew in line with productivity growth which was the source of increasing living standards for workers and allowed them to maintain growth in consumption expenditure commensurate with the growing output of the economy.

The productivity growth also provided the ‘room’ in the distribution system for workers to enjoy a greater command over real production and thus higher living standards without threatening inflation.

To understand the relationship between real wages, productivity growth and the wage share, please read my blog – Declining wage shares undermine growth – for more discussion.

In this blog from February 16, 2009 – The origins of the economic crisis – I argued that this break, which was replicated around the world as neoliberal policies gained ascendancy, was one of the early warnings of the GFC.

LBJ was clearly operating in the period before this divergence started and knew that real wages growth would track productivity growth and that workers would thus share in the output efficiency gains made possible by new technology.

On automation, LBJ wrote that:

Automation is not our enemy. Our enemies are ignorance, indifference, and inertia. Automation can be the ally of our prosperity if we will just look ahead, if we will understand what is to come, and if we will set our course wisely after proper planning for the future …

The techniques of automation are already permitting us to do many things that we simply could not do otherwise …

If we understand it, if we plan for it, if we apply it well, automation will not be a job destroyer or a family displaced. Instead, it can remove dullness from the work of man and provide him with more than man has ever had before.

So rather than spinning the ‘robots are coming to take your jobs’ and therefore we must have a basic income policy, LBJ governed in a time when planning ahead was not a dirty word and everything was not left in the hands of the amorphous market.

The National Commission on Technology, Automation, and Economic Progress presented their final report to the President and the US Congress in February 1966 – so it met in “monthly 2-day sessions” from January 1965.

You can access Volume 1 of the Report Technology and the American EconomyHERE.

By the time the Commission delivered its Report, the US unemployment rate had fallen to 3.8 per cent on the back of the fiscal stimulus making a mockery of the ‘national emergency’ discussions that arose in relation to automation during the 1960-61 recession.

It was evident that automation was not the problem that had created the unemployment at the beginning of the decade.

The Report correctly noted that (p.xii) that:

The relatively high postwar labor productivity, much of it due to technological change, combined with the current and future high rate of labor force growth increases dramatically the number of jobs which must be created continually to achieve and maintain full employment.

This is in contradistinction with the current period where labour productivity growth does not appear to be fast enough to justify the hypothesis that there is widespread robot innovation replacing jobs.

Further, labour force growth around the world (advanced nations) is much slower than it was in the early 1960s.

Taken together, it is much easier to maintain full employment now than it was then.

The Report also noted that (p.xiii):

Technology is not a vessel people are to be poured and to which they must be molded. It is something to be adapted to the needs of man and to the furtherance of human ends, including the enrichment personality and environment.

Once again, stressing that these issues/challenges are choices that we make and there are always alternative paths to take. The best path is the one that advances the well-being of society rather than feathers the nest of the capitalist class.

This was a different time indeed.

The Report recognised that technology meant that “Human resources will be released and available for new activities beyond those that are required for mere subsistence. The great need is to discover the nature of this new kind of work, to plan it, and to do it.”

No basic income sell out envisaged here!

Chapter Two considered “Technological Change and Unemployment”.

In addressing the “possibility of persistent technological unemployment”, the Report said that (p.9):

We believe that the general level of unemployment must be distinguished from the displacement of particular workers at particular time and places, if the relation between technological change and unemployment is to be clearly understood. The persistence of a high general level of unemployment in the years following the Korean war was not the result of accelerated technological progress. Its cause was interaction between rising productivity, labor force growth, and an inadequate response of aggregate demand. This is firmly supported by the response of the economy to the expansionary fiscal policy of the last 5 years. Technological change on the other hand, has been a major factor in the displacement and temporary unemployment of particular workers. Thus technological change (along with other forms of economic change) is an important determinant of the precise places, industries, and people affected by unemployment. But the general level of demand for goods and services is by far the most important factor determining how many are affected, how long they stay unemployed, and how hard it is for new entrants to the labor market to find jobs. The basic fact is that technology eliminates jobs, not work. It is the continuous obligation of economic policy to match increases in productive potential with increases in purchasing power and demand. Otherwise the potential created by technical progress runs to waste in idle capacity, unemployment, and deprivation.

Which sums up the Modern Monetary Theory (MMT) approach to this question and to the ‘robots are coming’ ruses.

The currency-issuing government has the responsibility of maintaining aggregate spending at a level sufficient to generate sufficient jobs overall.

This level changes as the pace of labour force growth and productivity changes. But the fact remains – the government can always purchase anything that is for sale in the currency it issues, including all idle labour.

There is never a reason for persistent mass unemployment. Mass unemployment is a political choice not a financial necessity.

Please read my blog – The full employment fiscal deficit condition – for more discussion on this point.

Technological change will alter the type of jobs and the sectors and regions in which they are created by the non-government sector (in particular).

The clear relation between spending, income and job creation is emphasised.

Proponents of basic income guarantees conflate the concept of jobs with work. They claim that robots etc will eliminate work, when in fact, as the Report noted “technology eliminates jobs, not work”.

As the nature and type of jobs change, as they have done since we have been keeping records, the need for productive work remains.

That insight is important in understanding why MMTers advocate the Job Guarantee, which rewards work rather than a basic income guarantee (BIG).

The Report provided a detailed sector-by-sector analysis of the impact of technological change on productivity and employment shifts. It concluded that despite on-going technological change, “Most industries … have registered substantial increases in employment” as a result of bouyant aggregate demand conditions.

Technology shifted where the jobs were and was a “major source of occupational displacement” (p.20) but overall spending was strong enough to more than offset those effects.

Chapter 3 was entitled Creating and Environment for Adjustment to Change: Employment and Income and discussed ways in which (p.33):

… all levels of government … [could] … facilitate occupational adjustment and geographical mobility … and to … share the costs and help prevent and alleviate the adverse impact of change on displaced workers.

They emphasise that the “accompanying burdens and benefit should be distributed fairly” (p.33).

The range of recommendations included:

2. For those less able to compete in the labor market, productive employment opportunities adapted to their abilities should be publicly provided.

3. Under the best of circumstances, there will be some who cannot or should not participate in the job economy. For them, we believe there should be an adequate system of income maintenance, guaranteeing a floor of income at an acceptable level.

In other words, a Job Guarantee system for workers who are unable to find a job but are willing and able to work. And ongoing income support for those who are unable to work.

This is the MMT position expressed in 1966.

The Report said that:

… the most important condition for a successful adjustment to technological change is an adequate level of total income and employment. We recognise this is not the end of economic policy, but we are confident it is the beginning … 1964 has clearly demonstrated that Federal fiscal and monetary policy can bridge the gap between the current level of private spending and the level of total demand needed to reduce unemployment. During the life of the Commission the very groups disproportionately burdened by unemployment – the young and inexperienced, the undereducated, the unskilled, Negroes, production workers – have profited more than proportionally from the healthy growth of total employment.

And, “the toleration of unnecessary unemployment is a very costly way to police inflation”.

Again, this is the MMT position – using unemployed buffer stocks is a vastly inferior way to maintain price stability when compared to the use of employment buffer stocks.

The former method of maintaining price level stability is the current dominant orthodoxy. It has delivered massive costs and few benefits.

In addition to aggregate demand management, the Report said that the US federal government should limit:

… unemployment to the minimum amount necessary for the smooth functioning of the … labor market.

They were “not impressed with a 4-percent unemployment rate, or a 3-percent, or any other unemployment rate, as an ultimate goal of economic policy (p.35).

They wanted governments to push to the irreducible minimum unemployment rate consistent with people moving between jobs only.

In this regard they recognised (p.36):

… The anomaly of excessive unemployment in the society confronted with a huge backlog of public service needs in its parks, its streets, its slums, its countryside, its school and colleges, its libraries, its hospitals, its rest homes, its public buildings, and throughout the public and nonprofit sectors of the economy. They recognize that employing the unemployed is, in an important sense, almost costless … much of the work that needs doing calls for only limited skills and minor amounts of training …

And this was the justification for recommending “public service employment”, for which the “major resources must come from the Federal Government but the jobs need not”.

They railed against fiscal austerity saying that:

Were it not for the endemic financial stringency at those levels of government, the employment might already have been provided.

They then described in some detail how these jobs could be designed, the need to “treat the new employees as regular employees”, the need to pay the “Federal minimum wage” and the possibility of including training ladders as part of the public sector jobs.

The principle conclusions and recommendations of the Report are provided in Chapter Ten.

By way of summary, the Report notes that (109-111):

1. “The excessive unemployment following the Korean War … was the result of an economic growth rate too slow to offset the combined impact of productivity increase … and a growing labor force” – that is, deficient aggregate spending.

2. “There will be a continuing need for aggressive fiscal and monetary policies to stimulate growth.”

3. “Education … determines the employability and productivity of the individual, the adaptability of the labor force, the growth and vitality of the economy, and the quality of society. But we need not await the slow process of education to solve the problem of unemployment”.

4. “The more adequate fiscal policies of the past two years have proven their ability to lower unemployment despite continued technological change in labor force growth.”

5. “The needs of our society provide ample opportunities to fulfil the promise of the Employment Act of 1946: ‘a job for all those able, willing, and seeking to work’. We recommend a program of public service employment, providing, in effect, that government be an employer of last resort, providing work for the ‘hard-core unemployed’ in useful community enterprises” – in other words, a Job Guarantee.

6. “We recommend the now federally financed but State-administered employment services be made wholly Federal”.

They went on to discuss education strategies and other types of assistance.

But their key recommendation was that a Job Guarantee could always improve the circumstances of workers unable to get work while longer term policies that expanded skills via education and training had time to work.


This is a very interesting Report.

The obvious retort from those who continue to think there will not be enough jobs is that the Report was written in the 1960s and the type and pace of technological change now is vastly different.

I beg to disagree and I will write more about that another day.

And, a Job Guarantee can always provide productive jobs to the most disadvantaged worker who has been displaced.

And, finally, on automation and robots, I thought this article in The Atlantic was interesting (January 30, 2017) – The Booming Demand for Commercial Drone Pilots.

That is enough for today!

(c) Copyright 2017 William Mitchell. All Rights Reserved.