Macro Dynamics with a Job Guarantee – Part 2: Keynesian Cross Diagram

As a preliminary exercise, it may be instructive to modify the familiar Keynesian cross diagram to include the effects of a job guarantee within a simple short-run framework. The diagram includes two key schedules. The first is a 45-degree line showing all points for which actual expenditure equals actual income. The second is a line with lesser slope depicting the level of planned expenditure (total demand) at each level of income. Under appropriate conditions, the two schedules intersect at a steady-state level of income.

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Macro Dynamics with a Job Guarantee – Part 1: Overview

The job guarantee as proposed by Modern Monetary Theorists would provide a publicly funded job with defined wage and benefits to anyone who desired one, with public spending on the program varying automatically and countercyclically in response to take-up of positions. In a downturn, workers who lost their jobs would have the option of accepting the job-guarantee offer. As the economy recovered, some workers would receive better offers elsewhere. By design, the job-guarantee provider would not compete on wages in an attempt to retain such workers. Rather, the program would provide a stable wage floor, serving as a nominal price anchor for the economy. Periodically it would be appropriate to revise the program wage, but these wage adjustments would reflect factors such as trend improvements in the economy’s average productivity or distributional considerations rather than fluctuations in demand. Earlier posts have considered various macro aspects of a job guarantee using a model developed within the familiar income-expenditure framework. The present post is the first in an open-ended series attempting a more systematic – and in some ways simpler – treatment of the topic. Results presented earlier continue to hold, as the basic model remains the same. The model itself is very simple but amenable to extension.

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