BEE Partner, South Africa Economy Watch

In Australia, despite the paradigm shift in macroeconomics from Keynesian demand management to the monetarist supply-side approach, empirical evidence still supported the use of expansionary fiscal and monetary policy and public sector job creation (for example, Mitchell, 1987a, 1987b, 1994, 1996; Mitchell et al., 1995). The solutions proposed, however, relied heavily on income policy guidelines and were not, in retrospect, comprehensive enough. Further, the stimulus that would be forthcoming was not conceived to be adequately focused to support environmental sustainability, a goal usually ignored in orthodox macroeconomics. In this context, the Job Guarantee reflects work that was conceived when this author was a fourth-year student at the University of Melbourne in the late 1970s.

The logic of the policy was suggested by a series of lectures on the Wool Floor Price Scheme introduced by the Commonwealth Government of Australia in November 1970. The relatively simple scheme worked through government hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC) to establish a floor price for wool. The government then guaranteed that the price would not fall below the level established. There was a lot of lobbying to get the floor price above the implied market price. The price was maintained by the AWC’s purchase of stocks of wool in the auction markets. The purchases were financed from a Market Support Fund (MSF) accumulated through small contributions from growers based on the value of its clip. Fund shortages were made up with government-guaranteed loans. For economists, the major controversy was an issue as to whether the ‘tinkering with the price mechanism’ was price stabilization or price maintenance (Throsby, 1972: 162). This was not unimportant in a time when prices were in sectoral decline and a minimum guaranteed floor price implied ever-increasing AWC stocks. Other problems included the pressure of substitutability from synthetic fibers and the maintenance of production levels, which by themselves would continue to depress prices. The debate over the scheme (adequately summarized by Parish, 1964; and Lloyd, 1965) focused on the price intervention.

By applying reverse logic, one could utilize the concept without encountering the problems of price tinkering. In effect, the Wool Floor Price Scheme generated ‘full employment‘ for wool production. Clearly, in the wool situation, there was an issue as to what constituted a reasonable level of output in a time of declining demand. But the same argument is not relevant when applied to available labor. We define full employment to be the state of no involuntary unemployment ensured by a sufficient number of available jobs in relation to the labor supply at current money wage rates. This amounts to a rejection of the notion that all unemployment is voluntary. It also contradicts the idea that full employment can be defined by market relations, the intersection of the labor demand and supply curves at some ‘equilibrium price‘ (for example, Phelps, 1967; Friedman, 1968). Accordingly mass unemployment is construed as a macroeconomic problem related to deficient demand, which in turn reflects a deficient budget deficit.

The reverse logic noted above implies that we should impose a price guarantee below the ‘prevailing market price‘ and generate a buffer stock of working hours to absorb the excess of working hours at the current market price. This will generate full employment without the problems of price tinkering.

That idea was the seed of the Job Guarantee mode1.

The work of Benjamin Graham (1937) is also instructive. He discusses the idea of stabilizing prices and standards of living by surplus storage. He documents the ways the government might deal with surplus production in the economy. Graham (1937: 18) says, ‘The State may deal with actual or threatened surplus in one of four ways: (a) by preventing it; (b) by destroying it; (c) by “dumping” it; or (d) by conserving it.’ In the context of an excess supply of labor, governments had adopted a ‘dumping’ strategy via the NAIRU. It made much better sense to use the conservation approach. Graham (1937: 34) notes:

The first conclusion is that wherever surplus has been conserved primarily for future use the plan has been sensible and successful, unless marred by glaring errors of administration. The second conclusion is that when the surplus has been acquired and held primarily for future sale the plan has been vulnerable to adverse developments.

The distinction is important in the development of the Job Guarantee model. The Wool Floor Price Scheme was an example of storage for future sale and was motivated not to help the consumer of wool, but the producer. The Job Guarantee policy is an example of storage for use where the ‘reserve is established to meet a future need which experience has taught us is likely to develop’ (Graham, 1937: 35). Graham also analysed and proposed a solution to the problem of interfering with the relative price structure when the government built up the surplus. In the context of the Job Guarantee policy, this means setting a buffer stock wage below the private market wage structure unless strategic policy, in addition to the meager elimination of the surplus, was being pursued. For example, the government may wish to combine the Job Guarantee policy with an industry policy designed to raise productivity. In such a case it may buy surplus labor at a wage above the current private market minimum. In the first instance, the basic Job Guarantee model with a wage floor below the private wage structure shows how full employment and price stability can be attained. While this is an eminently better outcome in terms of resource use and social equity, it is just the beginning of the matter.

Graham (1937: 42) considered that the surplus should ‘not be pressed for sale until an effective demand develops for it.’ In the context of the Job Guarantee policy, this translates into the provision of a government job for all labor, which is surplus to private demand until such time as private demand increases.

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