BEE Partner, South Africa Economy Watch

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.

What about the behavior of workers in Sector A? Wendell Gordon (1997: 833) said, ‘If there is a Job Guarantee program, the employees can simply quit an obnoxious employer with assurance that they can find alternative employment.’ With the Job Guarantee policy, wage bargaining is freed from the general threat of unemployment. However it is unclear whether this freedom will lead to higher wage demands than otherwise. In professional occupational markets, it is likely that some wait unemployment will remain. Skilled workers who are laid off are likely to receive payouts that forestall their need to get immediate work. They have a disincentive to immediately take a Job Guarantee job, which is a low-wage and possibly stigmatized option. Wait unemployment disciplines wage demands in Sector A. The demand pressures, however, may eventually exhaust this stock, and wage—price pressures may develop.

At first blush it might appear that the BER would have to be greater than the NAIRU for an equivalent amount of inflation control. This is because the Job Guarantee workers will have higher incomes and so a switch to this policy would see demand levels higher than in a NAIRU world. But the Job Guarantee provides better inflation proofing than does a NAIRU approach because the Job Guarantee workers represent a more credible threat to the current private sector employees. In other words, the Job Guarantee pool is a more effective excess supply of labor.

The Job Guarantee employees are more attractive than when they were unemployed, not the least because they will have basic work skills, such as punctuality, in place. This reduces hiring costs for firms in tight labor markets who would have lowered hiring standards and provided on-the-job training. They can now pay higher wages to attract workers or accept lower costs that would ease the wage—price pressures. The Job Guarantee policy thus reduces the ‘hysteretic inertia’ embodied in the long-term unemployed and, with growth bottlenecks reduced, allows for a smoother private sector expansion.

A further source of cost pressure comes via the exchange rate for small trading economies like Australia. Under a fixed exchange rate regime, unless there is a coordinated fiscal policy among countries, it would be difficult for a small open economy to pursue its own full employment strategy. With higher spending on imports arising from domestic expansion, the stimulus would spread throughout the fixed exchange rate bloc and the small country would face a borrowing crisis negating its full employment ambitions. It is easy to see that a Job Guarantee model, to be effective, requires a flexible exchange rate. We can identify two external effects. First, given the higher disposable incomes of Job Guarantee workers compared to wages of the unemployed, imports would likely rise. With a flexible exchange rate, the increase in imports would promote depreciation in the exchange rate. The current account could be expected to improve, net exports increasing their contribution to local employment. Final outcomes would depend on estimates of export and import price elasticities. Recent work by Dwyer and Kent (1993) finds that import elasticities are small (around —0.5). Thus, following depreciation, import spending will actually rise because we are paying disproportionately more for fewer imported goods and services. Improvement in the current account thus depends on the estimate of the export elasticity. State of Play 8 (Indecs, 1995: 125) says, ‘Fortunately, this seems to be the case. . . . [T]he supply responses to higher prices are thought to be strong in both agriculture and mining, and the numbers for manufactures are . . . embarrassingly high. . . . There is little objective reason to be worried by elasticity pessimism’ (see also Bullock et al., 1993). Vickrey (1996) said, ‘The danger of world speculative gyrations under freely floating conditions would be greatly diminished under a well-established full-employment policy, especially if combined with a third dimension of direct control over the overall domestic price level.’

Direct control to allow the depreciation to be insulated from the wage—price system could be an income policy. If the increased spending led to depreciation through rising imports, a comprehensive incomes policy would be required to reduce inflationary pressures. Workers and firms would have to agree to allow real depreciation to stick, as part of the return to the collective will. For everyone to have jobs, those who are currently employed would have to sacrifice some real income to permit others to increase their claim on it. The scheme itself would not force up labor costs

The Job Guarantee wage provides a floor that prevents serious deflation from occurring and defines the private sector wage structure. However, if the private labor market is tight, the non-buffer stock wage will rise relative to the Job Guarantee wage, draining the buffer stock pool. The smaller this pool, the less influence the Job Guarantee wage has on wage patterning. Unless the government stifles demand, the economy will then enter an inflationary episode, depending on the behavior of labor and capital in the bargaining environment.

Possibly related posts: (automatically generated)
THE JOB GUARANTEE AND INFLATION Part 2

• THE JOB GUARANTEE AND INFLATION Part 3
• THE JOB GUARANTEE AND INFLATION Part 1
• THE DEVELOPMENT OF THE JOB GUARANTEE APPROACH
• The Link Between Inflation and Unemployment continue…
• The Link Between Inflation and Unemployment
• THE JOB GUARANTEE AND THE BUDGET DEFICIT
• The Monetary System and the Government continue…
• South Africa and Globatisation: Quo Vadis? (Scenario No. 2 3 4)
• THE JOB GUARANTEE AND THE BUDGET DEFICIT continue...
• Black Economy Empowerment Employment Equity part 4