BEE Partner, South Africa Economy Watch

This rate has to be the target for which policy makers aim. If they try to reduce unemployment below this rate, they may temporarily succeed, but inflation will ultimately take off. If they raise unemployment above this rate, inflation will decline, but it will not stay lower, or even continue to fall, unless inflationary expectations are lowered. For this to happen, unemployment must stay high, but unnaturally high unemployment, coupled with lower than normal inflation, will lead employers to believe that real wages are exceptionally low. So they will begin to hire labor, and unemployment will move back to its natural level. Inflationary expectations are therefore unlikely to be lowered. Read the rest of this entry »

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. Read the rest of this entry »

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. Read the rest of this entry »

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 »