BEE Partner, South Africa Economy Watch

In the face of wage—price pressures, the Job Guarantee approach maintains inflation control by choking aggregate demand and inducing slack in the non- buffer stock sector. As the slack does not reveal itself as unemployment, the Job Guarantee may be referred to as a ‘loose’ full employment. This leads to the definition of a new concept, the NAIBER, which, in the buffer stock economy, replaces the NAIRU/MRU as an inflation control mechanism. The BER is the ratio of buffer stock employment to total employment.

As the BER rises, due to an increase in interest rates and/or a fiscal tightening, resources are transferred from the inflating non-buffer stock sector into the buffer stock sector at the fixed buffer stock wage. Read the rest of this entry »

What would happen if the Job Guarantee were introduced to solve the problem of unemployment in this economy? For simplicity of argument, we assume the Job Guarantee wage is set at the bottom of the private sector wage structure although not low enough to enforce poverty on full-time workers. If there were poverty level wages being paid in Sector B, then there would be pressure on Sector B employers to restructure their jobs in order to maintain a workforce. The Job Guarantee wage sets a floor in the economy’s cost structure for given productivity levels. The dynamics of the economy change significantly. The elimination of all but wait unemployment in Sector A and frictional unemployment does not distort the relative wage structure so that the wage—wage pressures that were prominent in the upturn in the NAIRU economy are now reduced. But the rising demand softens the product market, and demand for labor rises in Sector A. The Job Guarantee introduces no new problems faced by employers who wish to hire labor to meet higher sales levels. They must pay the going rate, which is still preferable to appropriately skilled workers than the Job Guarantee wage level. The rising demand per se does not invoke inflationary pressures as firms increase capacity utilization to meet higher sales volumes. Read the rest of this entry »

In this section we focus on inflation control and show that the Job Guarantee, able to simultaneously generate full employment and price stability, is superior to the current NAIRU approach, which uses unemployment to maintain inflation control. Broadly, there are three options available to an economy that desires price stability. First, as in the NAIRU approach, it can use unemployment as a tool to suppress price pressures. Second, it can introduce a Job Guarantee and use movements in the Buffer Employment Ratio (BER) to control inflation. Third, it can introduce the Job Guarantee policy and augment it with an incomes policy. We do not consider this third option.

The Role of Unemployment in Inflation Control

The OECD experience of the 1990s shows that high and prolonged unemployment eventually results in low inflation (Mitchell, 1996). There are several observationally equivalent theoretical explanations for the inflation—unemployment trade-off. Read the rest of this entry »