A job guarantee (JG) is an economic policy proposal aimed at providing a sustainable solution to the dual problems of inflation and unemployment. Its aim is to create full employment and price stability. It is related to the concept of employer of last resort (ELR).
The economic policy stance currently dominant around the world uses unemployment as a policy tool to control inflation; when cost pressures rise, the standard monetary policy carried out by the monetary authority (central bank) tightens interest rates, creating a buffer stock of unemployed people, which reduces wage demands, and ultimately inflation. When inflationary expectations subside, these people will get their jobs back. In Marxian terms, the unemployed serve as a reserve army of labour. By contrast, in a job guarantee program, a buffer stock of employed people (employed in the job guarantee program) provides the same protection against inflation without the social costs of unemployment, hence (it is argued) fulfilling the dual mandate of full employment and price stability.
The job guarantee proposal is particularly associated with certain post-Keynesian economists, particularly at the Centre of Full Employment and Equity (CofFEE) at the University of Newcastle, Australia and at the Kansas City School of economists and the Center for Full Employment and Price Stability, both of the University of Missouri Kansas City.
JG draws from a social justice tradition of right to work, such as the United Nations Universal Declaration of Human Rights and the US Employment Act of 1946, and an early form was proposed by Hyman Minsky.
The JG proposal was conceived independently by Mitchell (1998) and Mosler (1997 98). It has since been developed further by authors, including Wray (1998) and a comprehensive treatment of it appears in Mitchell and Muysken (2008)
The JG is based on a buffer stock principle whereby the public sector offers a fixed wage job to anyone willing and able to work thereby establishing and maintaining a buffer stock of employed workers. This buffer stock expands when private sector activity declines, and declines when private sector activity expands, much like today's unemployed buffer stocks.
The JG thus fulfils an absorption function to minimise the real costs associated with the flux of the private sector. When private sector employment declines, public sector employment will automatically react and increase its payrolls. So in a recession, the increase in public employment will increase net government spending, and stimulate aggregate demand and the economy. Conversely, in a boom, the decline of public sector employment and spending caused by workers leaving their JG jobs for higher paid private sector employment will lessen stimulation, so the JG functions as an automatic stabilizer controlling inflation. The nation always remains fully employed, with a changing mix between private and public sector employment. Since the JG wage is open to everyone, it will functionally become the national minimum wage. To avoid disturbing the private sector wage structure and to ensure the JG is consistent with price stability, the JG wage rate should probably be set at (or slightly below) the current legal minimum wage.
Under the JG, people of working age who are not in full-time education and have less than 35 hours per week of paid employment would be entitled to the balance of 35 hours paid employment, undertaking work of public benefit at the minimum wage. The aim is to replace unemployment and underemployment with paid employment (up to the hours desired by workers), so that those who are at any point in time surplus to the requirements of the private sector (and mainstream public sector) can earn a reasonable living rather than suffer the indignity and insecurity of underemployment, poverty, and social exclusion.
A range of income support arrangements, including a generic work-tested benefit payment, would also be available to unemployed people, depending on their circumstances, as an initial subsistence income while arrangements are made to employ them. This would rarely be necessary once the system was well established, because in most circumstances JG jobs would be immediately available and offered instead of income support.
The fixed JG wage provides an in-built inflation control mechanism. Mitchell (1998) called the ratio of JG employment to total employment the buffer employment ratio (BER). The BER conditions the overall rate of wage demands. When the BER is high, real wage demands will be correspondingly lower. If inflation exceeds the government s announced target, tighter fiscal and monetary policy would be triggered to increase the BER, which entails workers transferring from the inflating sector to the fixed price JG sector. Ultimately this attenuates the inflation spiral. So instead of a buffer stock of unemployed being used to discipline the distributional struggle, the JG policy achieves this via compositional shifts in employment. The BER that results in stable inflation is called the non-accelerating-inflation-buffer employment ratio (NAIBER) (Mitchell 1998). It is a full employment steady state JG level, which is dependent on a range of factors including the path of the economy. There is an issue about the validity of an unchanging nominal anchor in an inflationary environment. The JG wage would be adjusted in line with productivity growth to avoid changing real relativities. Its viability as a nominal anchor relies on the fiscal authorities reigning in any private wage-price pressures.
No relative wage effects
The JG introduces no relative wage effects and the rising demand per se does not necessarily invoke inflationary pressures because by definition it is satisfying the net savings desire of the private sector (see Mitchell and Muysken, 2008 for more details). Additionally, in today s demand constrained economies, firms are likely to increase capacity utilisation to meet the higher sales volumes. Given that the demand impulse is less than required in the NAIRU (Non-Accelerating Inflation Rate of Unemployment) economy, it is clear that if there were any demand-pull inflation it would be lower under the JG. There are no new problems faced by employers who wish to hire labour to meet the higher sales levels. Any initial rise in demand will stimulate private sector employment growth while reducing JG employment and spending. However, these demand pressures are unlikely to lead to accelerating inflation while the JG pool contains workers employable by the private sector.
While the JG policy frees wage bargaining from the general threat of unemployment, several factors offset this:
- In professional occupational markets, while any wait unemployment will discipline wage demands, demand pressures may eventually exhaust this stock and wage-price pressures may develop. With a strong and responsive tertiary education sector, skill bottlenecks can be avoided more readily than with an unemployed buffer stock;
- Private firms would still be required to train new workers in job-specific skills in the same way they would in a non-JG economy. However, JG workers are far more likely to have retained higher levels of skill than those who are forced to succumb to lengthy spells of unemployment. This changes the bargaining environment rather significantly because firms now have reduced hiring costs. Previously, the same firms would have lowered their hiring standards and provided on-the-job training and vestibule training in tight labour markets. The JG policy thus reduces the "hysteretic inertia" embodied in the long-term unemployed and allows for a smoother private sector expansion;
- With high long-term unemployment, the excess supply of labour poses a very weak threat to wage bargaining, compared to a JG environment (Mitchell, 1998).
Comparison with other policies
A crucial point is that the JG does not rely on the government spending at market prices and then exploiting multipliers to achieve full employment which characterizes traditional Keynesian aggregate demand management. The JG program differs in that it "would be targeted directly to households. It is a genuine bottom-up approach to economic recovery. It is a program that stabilizes the incomes and purchasing power of individuals at the bottom of the income distribution that trickles up and stabilizes the rest of economic activity. Strong and stable demand means strong and stable profit expectations. A program that stabilizes employment and purchasing power is a program that stabilizes cash flows and earnings. Stable incomes through employment also mean stable repayments of debts and greater overall balance sheet stability".
The JG seeks to reorient labour market policy away from the current OECD emphasis on full employability whereby governments engage in programs to prepare the unemployed for work without guaranteeing that work will be available towards a focus on creating enough work. The full employability agenda has come under fire from a number of sources in recent years (see, for example ILO, 2004).
In countries with a minimum wage, the Job Guarantee would provide a regular job with a minimum wage, which is not the case in some workfare schemes. Workfare schemes tend not to cover all of the unemployed.
There are now several countries which have implemented direct job creation schemes to counter the major problems associated with persistent unemployment. For example, the Argentine government introduced the Jefes de Hogar (Heads of Households) program in 2001 to combat the social malaise that followed the financial crisis in that year.
Similarly, the Indian Government introduced in 2005 a five-year plan called the National Rural Employment Guarantee Act (NREGA) to bridge the vast rural-urban income disparities inequality that have emerged as India s information technology and service sector has boomed. Hard-labour jobs that produce almost no outcomes are given to desperate rural citizens for $1.50/day.
Finally, the South African government has introduced the Expanded Public Works Program (EPWP) to overcome the extremely high unemployment and accompanying poverty in that country. The programs run against the full employability tide because they recognise that the solution to joblessness and the poverty that this brings is in the provision of employment opportunities rather than a focus on the victims. They also recognise that the state (whether at the level of federal or local government) has a major role to play in providing for employment guarantees.
Programs enacted but not implemented
In the United States, the Humphrey-Hawkins Full Employment Act of 1978 allows the government to create a "reservoir of public employment" in case private enterprise does not provide sufficient jobs. These jobs are required to be in the lower ranges of skill and pay so as to not draw the workforce away from the private sector. However, the act did not establish such a reservoir (it only authorized it), and no such program has been implemented in the United States, though the unemployment rate has generally been above the rate (3%) targeted by the act.
In 2011, the Institute for Public Policy Research, a UK think tank associated with the Labour Party, advocated a Job Guarantee - with compulsory takeup, on pain of loss of benefits - for the long-term unemployed only.