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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Illustration of Dynamic Adjustment with a Job Guarantee

In some recent posts, a job guarantee has been considered within the income-expenditure framework. One post in particular suggested a possible conceptualization of the dynamics of the model. It was shown that these dynamics are consistent with the model’s steady state requirements. Demonstrating this took a fair bit of algebra, which may have obscured for some readers the simplicity of the actual model. Much of the algebra was only needed for the specific purpose of verifying that the suggested dynamics are valid. At least for the version of the model presently under consideration, this task has now been accomplished. It is justifiable just to focus on the basic model which is really quite simple while still allowing for somewhat complicated behavior. Below, an example of this behavior is provided. First, though, it seems worth putting things into context with a quick summary of the key variables and parameters.

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Quantity Dynamics with a Job Guarantee

A job guarantee would be a standing offer of a publicly funded job, with spending on the program adjusting automatically and countercyclically in response to take-up of positions. The likely feedback between spending on the program and activity in general is interesting and can be considered within the income-expenditure framework. In what follows, the standard model is modified to find the steady state levels and compositions of income and employment and other key variables. Attention then turns to how the system might behave outside a steady state. A way of conceptualizing the dynamics of the system is suggested and formulas developed to describe that behavior. The suggested dynamics are shown to be consistent with steady state requirements.

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Job Guarantee as Nominal Price Anchor

I’ve been thinking about the job guarantee as it is envisaged by proponents of Modern Monetary Theory (MMT). My focus has been on various quantity effects of the policy that can be considered using the standard income-expenditure model as a base (for preliminary posts along these lines, see here and here.) Since the income-expenditure model takes the general price level as given, it does not directly shed light on the aspects of a job guarantee that would pertain to price stability. To provide some context for a possible future discussion of quantity effects, it is perhaps worth summarizing how the job guarantee would moderate price pressures. Clear statements of the MMT position on the topic can be found in a billy blog post (here) and closely related academic articles by Bill Mitchell (here) and Warren Mosler (here).

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Some Macro Effects of a Job Guarantee

A recent post considered one way of including a job guarantee in the income-expenditure model. Doing so makes it possible to represent various macro effects of a job guarantee within the model. An obvious effect is that the program would deliver a degree of demand stabilization. An effect that is perhaps not quite so obvious is the way in which a job guarantee would ensure supply-side changes in the economy automatically impact on demand, actual output and employment. Before illustrating a few of these effects, the modified income-expenditure model will be briefly outlined and tailored to present purposes. A fuller discussion of the model is provided in the earlier post.

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The Income-Expenditure Model with a Job Guarantee

Under a job guarantee, there would be a standing job offer at a living wage for anyone who wanted such a position. Anyone without employment in the broader economy, or unhappy with their present employment, could opt for a position in the job-guarantee program. Similarly, individuals with less hours of employment than desired could top up their hours by working part-time in the job-guarantee program. In principle, the program might be locally or centrally administered. But, irrespective of administrative details, it will be assumed that a currency-issuing government funds the program.

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Technology Paves the Way for Basic Income More than a Job Guarantee

Regular readers will be aware that I would support either a basic income guarantee (BIG) or job guarantee (JG) as standalone programs, whichever happened to be on the policy agenda, but ideally would prefer a program that combined the positive elements of both into some form of ‘job or income guarantee‘. Much of my reasoning to date has been outlined in previous posts archived under the category Job & Income Guarantee. I won’t revisit those considerations in this post. The present focus is instead on which of the two programs — a BIG or JG — should be seen as primary.

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