BEE Partner, South Africa Economy Watch

The application of functional finance to the operation of the labor market in the form of the payment of wage subsidies to employers to encourage the hiring of disadvantaged workers is a means for altering the mix of employment in their favor while also improving the inflation/unemployment trade-off. One proposal, which related specifically to teenage workers, suggested giving all teenagers vouchers that can be used either for schooling or to subsidize employers who hire them (Feldstein, 1973). This proposal has not been translated into policy. However, under the now phased-out Concentrated Employment Program (CEP), employers were reimbursed for the costs of job training to encourage them to hire workers they would otherwise not consider. Reimbursement of training costs incurred by firms that locate plants in or near slum areas is provided for under the Jobs Opportunities in the Business Sector (JOBS) program.

The Revenue Act of 1978 also provided for tax credits of up to 50 per cent of the wages paid to individuals who are members of ‘targeted groups.’ These groups included persons receiving vocational rehabilitation, economically disadvantaged youths, economically disadvantaged Vietnam veterans, SSI recipients, general-assistance recipients, youths participating in cooperative- education programs and economically disadvantaged ex-convicts. Tax credits are not (and should not) be made available to employers receiving federally funded payments to provide on-the-job training for such persons.

From the standpoint of the employee, a wage-subsidy scheme is intended to have essentially the same effect as direct-job creation. That is, the intent of the subsidy would be to change the relative wage paid by firms for secondary as compared with primary labor. Primary workers become relatively more expensive to employ if, in effect, a subsidy reduces the relative cost of employing secondary workers. Thus, the unemployment rate of secondary workers would tend to decline as this group is substituted for primary workers in the private sector. However, it has been argued that wage subsidies do not promise the same reduction in unemployment as does direct-job creation. While there is an additional incentive to employers to hire disadvantaged workers, their job-search behavior may not be modified, because their relative wage is the same as it would be without the wage subsidy. The actual impact of wage subsidies on employment, as is the case with public-service employment, is an empirical question that requires further investigation in order to test the theoretical conclusions that have been reached about the effectiveness of alternative ways of changing the employment mix so that disadvantaged workers do not continuously bear the dual burden of unemployment and inflation disproportionately.

At present, relatively low rates of unemployment in the private sector have compromised the need for public service employment. Wage subsidies to the private sector have also been scaled back because of limited funding. Yet the ongoing creation of well-paid jobs remains a priority issue. Since the economy’s best-paid jobs have historically been in the manufacturing sector, manufacturing’s revival is being encouraged by a variety of measures, including the stimulus of export demand to create new employment opportunities. These policy measures are examined below.

Trade Policy as an Aspect of Functional Finance

Monetary and fiscal policy indirectly affect wage rates and prices by impacting interest rates and debt management as well as tax revenues and expenditures, which in turn impinge on the operation of market forces. The inadequacies of these policies, when the economy is experiencing inflation and/or a large public debt, have encouraged pursuit of a broader free trade policy in the US, stimulating export demand to create new employment opportunities. ‘Export-led growth‘ policies have long been favored by the less developed countries and the newly developed countries which regarded them as the policy measures of choice for propelling their economies rapidly into the twenty-first century. In contrast, the US has been far less active in pursuing trade as a vehicle for long-term growth and job creation. While the US has actively supported tariff reductions, the 1993 NAFTA, as a measure aimed at improving job growth, reflects an important change in the US policy mix. Nevertheless, worldwide productivity growth suggests a potential for a worldwide dearth of aggregate demand and greater competition for goods markets. Since Americans have a high propensity to consume imported goods, a relative decline in household spending bodes ill not only for the US economy, but also for the economies of its trading partners. In principle, therefore, assuming that the political climate would allow it, the introduction of public service employment as part of a functional finance program, while providing a degree of support for the economies of our trading partners — whose export expenditures (along with those of government) are implicit rather than explicit in our simplified systems model of the macroeconomy — would serve as a floor under the level of the American economy.

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