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).

At the present time, of course, there is no job guarantee in the comprehensive form articulated by its proponents. The job guarantee is a proposal rather than an existing policy. In today’s economies, some people are relegated to unemployment for the sake of containing inflation. So long as there is excess capacity and unemployment, it is possible to expand production through an increase in employment and the rate of capacity utilization. When appropriate, expansionary demand-side policies can be implemented to this end. At a certain point, however, bottlenecks are likely to emerge due to shortages of particular kinds of workers and raw materials. Although these bottlenecks are often possible to address through additional investment in capacity, this takes time. Meanwhile, the presence of bottlenecks can cause a bidding up of some wages and prices. Potentially, this could also intensify distributional conflict between workers and capitalists as both attempt to protect real income shares. In any case, as the economy gets closer to full employment, the proportion of sectors affected by bottlenecks is likely to rise, adding to the risk of inflation.

In the absence of an incomes policy involving direct wage and price controls, or a job guarantee, the likely government response to an inflation threat will be to adopt contractionary macroeconomic policies aimed at weakening demand in general, and with it, demand for labor-power and raw materials. Given time, this policy approach can succeed in eliminating inflationary pressure. But it comes at the considerable economic and social cost of unemployment. To the extent the policy approach works through a generalized slowdown in demand rather than attempting to address specific areas of the economy directly, it is likely to require more pronounced macroeconomic contraction and job loss than might be necessary under better designed policy.

The job guarantee is proposed as a way of making full employment compatible with price stability. Rather than sacrifice some employment as a means of moderating inflation, it is contended that price stability can be achieved without inflicting the costs of involuntary unemployment. Under a job guarantee, there would still be voluntary unemployment in cases where laid off skilled workers preferred to wait for a similar position to become available rather than accept a job guarantee position. But anybody who was willing and able to take a job at minimum wage (including defined benefits) would be employed. There would be zero involuntary unemployment: a situation described as ‘loose full employment’.

According to the logic of the proposal, the pay and conditions of job guarantee employment would serve as a floor under the economy’s relative wage structure and set the value of the currency in terms of simple labor. A minimum wage (with benefits factored in) of $w per hour would mean that one unit of the currency commanded 1/w hours of simple labor power. Other employers would need to offer pay and conditions that were competitive with the job guarantee as well as commensurate with the complexity of labor involved in the roles required to be performed. Given the economy’s average level of productivity and on an assumption that firms largely set prices as a mark up over wage and materials costs, the wage floor set by the job guarantee would act as a nominal price anchor for the economy’s wage and price structure.

It is argued that the anchoring effect will be strongest when job guarantee employment as a proportion of total employment (referred to as the ‘buffer employment ratio’ or BER) is at its highest. During booms, the BER will tend to decline as some job guarantee workers are attracted into better paying positions in the broader economy. As the job guarantee sector contracts, the nominal price anchor will lose some of its influence on the broader economy, and other wages and prices might rise relative to the job guarantee wage as employers compete for workers. Because government would not compete on wages in an attempt to retain job guarantee workers, these wage payments would not contribute to the inflationary pressures developing elsewhere in the economy. Even so, a boom that continued long enough might result in demand-side inflationary pressure.

Much like under the current policy approach, this situation would be addressed by contractionary policies to moderate activity. But importantly, these policies would not cause involuntary unemployment. The negative impact on employment in the broader economy would instead cause a net migration of workers into job guarantee employment. The consequent increase in the BER would reinforce the nominal price anchor and help to keep inflation in check.

In terms of the discretionary policy response to inflation, clearly there is a resemblance between the current policy approach and the way policy would be conducted in the presence of a job guarantee. Under the current regime, policymakers think in terms of a rate of unemployment (the ‘non-accelerating inflation rate of unemployment’ or NAIRU) at which inflationary pressures first become problematic. With a job guarantee in place, the focus would shift to the proportion of job guarantee employment in total employment (the BER) instead of the unemployment rate. In principle, reference could be made to a ‘non-accelerating inflation buffer employment ratio’ (NAIBER). The NAIBER would be the lowest level of the BER still consistent with stable inflation.

Although the notion of the NAIBER is conceptually clear, Modern Monetary Theorists do not propose attempting to pinpoint its actual value. In reality, and as is true of the NAIRU, its actual value would be difficult to determine. Structural changes, by affecting the likelihood and distribution of bottlenecks, would affect the value of the NAIBER. Institutional changes, by affecting whether bottlenecks were likely to initiate wage-price spirals, could also alter the NAIBER. For instance, combining a job guarantee with an incomes policy might lower the NAIBER by enabling overall demand to be kept stronger without causing inflation. Pronounced distributional changes, by altering the pattern of demand relative to the economy’s present structure, could also alter the likelihood of bottlenecks appearing. Rather than trying to identify the precise value of the NAIBER, the point of relevance to policy is simply that demand-side inflation would be taken as evidence that the BER was too low and that contractionary policies were required. Of course, in the reverse scenario of a generalized slump or deflation, discretionary expansionary policies would be appropriate.

Modern Monetary Theorists maintain that the introduction of a job guarantee would give the economy a more effective nominal price anchor than currently exists. In comparison to the current policy approach, they point out that:

  • Job guarantee spending would be highly targeted. Anyone wanting a job but unable to find one in the broader economy would be able to register for a job guarantee position. This individual act would automatically trigger the minimum level of government spending necessary to generate employment for the worker, given the fixed job guarantee wage. It would be the minimum necessary public expenditure to get the worker back in employment because other forms of spending would only generate the same employment, if at all, indirectly through a multiplier process in which, at each step of the process, some of the newly created income drained to taxes, saving and imports. Since the spending would be kept to a minimum, the inflation risk would likewise be minimized relative to less direct methods of generating the extra job. This argument is not about financial considerations, but demand pressure and potential for inflation.

  • Much job guarantee spending would be at a fixed price. In contrast to other spending, which is typically conducted at market prices, the hiring of job guarantee workers would occur at a fixed wage. This spending, unlike most other public and private spending, would not directly participate in any bidding up (or bidding down) of wages and prices that might occur elsewhere in the economy. This spending rule would provide a stable floor under other wages and, given the economy’s level of productivity and a prevalence of mark up pricing, influence prices in general. During booms, other wages might spread higher above the floor, but they would do so to a lesser degree than if government competed on wages to retain workers in the job guarantee program. In a slump, other wages might decline relative to the wage floor, but the floor would limit their fall. In this way, the fixed job guarantee wage would be a source of stability in the economy’s nominal wage and price structure. There would be some job guarantee spending undertaken at market prices. Most notably, materials used in the production processes of the job guarantee sector might mostly or entirely be purchased at market prices from the broader economy. But with wages being a substantial fraction of total job guarantee spending, the stability provided by the wage floor would still be significant.

  • A more job-ready labor force. Unemployment, especially when long term, can affect the employability of individuals due to skill atrophy and the loss of work habits, self-esteem and social networks. Employers, for their part, display a marked preference for hiring employed rather than unemployed individuals. It is likely that the job guarantee, by enabling people to maintain continuous employment, would make it easier for laid off workers to transition back into the broader economy as well as make the process more cost-efficient for firms. The relevance of this argument from the perspective of price stability is that job-guarantee workers would be more competitive in job applications than unemployed workers, and so exert more competitive pressure on wages in the broader economy. In other words, the nominal price anchor built in to the job guarantee would exert more influence on other wages and prices than if employers instead were hiring from a pool of unemployed workers.

A Simple Depiction of the Theory

The theory just described emphasizes two main sources of inflation. First, there are structural, institutional and supply-side factors (such as the skill profile of the workforce) that affect the likelihood and consequences of bottlenecks. These factors determine the NAIBER. Second, inflationary pressure is conceived as inversely related to the buffer employment ratio rather than the unemployment rate. When the BER gets too low, bottlenecks can arise, resulting in inflation.

A third potentially relevant factor, not touched on above, is a role for inflation expectations. These can conceivably influence the pricing behavior of firms and wage demands of workers. It is not clear, though, that expectations really play an independent causal role in the inflation story that has been outlined. Workers or firms might well expect inflation of five percent, but if they lack the capacity to raise their own wages and prices by five percent, prices in the end will not mirror their expectations. Conversely, if workers or firms find that they can raise their wages or prices by ten percent, they will hardly be constrained in their actions by an expectation that inflation will only be five percent. In either scenario, the critical factor will not actually be expectations. The critical factor will be whether workers and firms actually have the capacity to raise their wages or prices, and this capacity – in the theory briefly outlined – will depend on demand conditions (summarized as the value of the BER relative to the NAIBER) along with the structural, institutional and distributional aspects of the economy that influence the likelihood and consequences of bottlenecks.

The job guarantee would put an end to the inverse Phillips Curve relationship between inflation and unemployment for the simple reason that there would be no involuntary unemployment. Rather than accepting some unemployment as the price of containing inflation, loose full employment would be maintained at all times.

Although there would be no Phillips Curve, we could, if we wished, draw a similar curve to depict the situation with a job guarantee. I’m not sure if such an exercise would be exactly MMT kosher but it seems that we could define a function with inflation inversely related to the buffer employment ratio (BER) rather than the unemployment rate. A simple representation would be:

with πt the inflation rate of the current period, π0 exogenous inflation and f a function describing the sensitivity of inflation to excess or deficient demand.

With BER < NAIBER, there would be excess demand and inflationary pressure. Demand deficiency and decelerating inflation would occur with BER > NAIBER.

Graphically it might look something like this:

The curve gets flatter as the BER increases to reflect the view that the influence of the job guarantee’s nominal price anchor will be at its weakest when the BER is near zero and stronger when the BER is high.

During a boom, the economy would move along the curve, up and to the left, as the job guarantee program was deprived of workers and the BER decreased. If policymakers did nothing to constrain demand, the theory suggests inflation would rise. If, instead, policymakers implemented contractionary policy, as appropriate, this would help to bring the economy back down along the curve toward the NAIBER.

An increase in exogenous inflation emanating from the supply side of the economy (for instance, an oil shock) would cause an upward shift of the entire curve. For any given BER, there would then be a higher rate of inflation. Here, too, it might be necessary for policymakers to implement contractionary policy to compel a less inflationary resolution to conflict heightened by real income losses associated with the supply shock.

A significant change in the economy’s structure or institutions could cause the NAIBER to shift either left or right, depending on whether the structural change made the economy less or more prone to inflation.


10 thoughts on “Job Guarantee as Nominal Price Anchor

  1. ” Rather than trying to identify the precise value of the NAIBER, the point of relevance to policy is simply that demand-side inflation would be taken as evidence that the BER was too low and that contractionary policies were required. Of course, in the reverse scenario of a generalized slump or deflation, discretionary expansionary policies would be appropriate.”
    Thanks for this! I can’t believe they already linked you on Mike Norman.

  2. There would be some job guarantee spending undertaken at market prices. Most notably, materials used in the production processes of the job guarantee sector might mostly or entirely be purchased at market prices from the broader economy.

    Yes, but all “market” prices are just indirectly government-administered prices. The JG would probably have a limited budget for this spending, proportional to the size of the JG pool – and no more than what would be spent on such for comparable “private” sector work that the JG workers would do in the boom. So this materials spending would likely not be inflationary – it would result in no really new net demand – and could even provide an additional nice stabilizing buffer-stocky effect itself.

  3. Variations in materials spending, by being countercyclical, would definitely be stabilizing. When the BER declined during booms, the automatic withdrawal of materials spending would help to restore the influence of the nominal price anchor in the same way as discretionary contractionary policies would. By stockpiling materials during slumps, the countercyclical variations in materials spending could be even more pronounced and so more stabilizing.

  4. Willy, it was probably lucky timezone management. The kangaroos were asleep as this was posted, which probably meant the rest of the world was awake. (I’d have to check.)

  5. I’m baffled by Calagus’s claim that the price of goods and services are “indirectly government administered prices”. Fascinating. Does General Motors ask government’s permission before determining the price of it’s cars? If so, that’s news to me.

    Calagus then says in relation to materials, capital equipment etc used on JG schemes, “The JG would probably have a limited budget for this spending, proportional to the size of the JG pool – and no more than what would be spent on such for comparable “private” sector work that the JG workers would do in the boom.”

    Well if the amount spent on materials etc is “comparable” to the equivalent amount spent on materials etc in an equivalent regular job during a boom, then it’s a bit odd to describe the amount as “limited”!!!!!!!!

    In fact therein lies one of the big problems for JG (and this is ten miles above the head of 90% of JG advocates). If the economy is at NAIRU, then it is not possible to order up extra materials and capital equipment or indeed skilled permanent labour from the existing “regular job” section of the economy without reducing output of that sector. I.e. output from JG jobs is to some extent at the expense of less output from the regular sector, all of which makes it questionable as to whether JG is worthwhile.

  6. From a background of engineering and entrepreneurship, I’ve seen no JG program described that I believe would not turn into just another government boondoggle. So I outlined one I felt might stand a chance. Its essence (& any comments are welcome):

    1. Bottom-up administration. Local government knows what work the community can best benefit from — and this JG program offers a free labor pool for them to make best use of. Rather than “jobs” being defined by State or Federal (or Non-Profit) bureaucrats for people to fill, “work” is made available by the local government for people who need (and wish) work to choose from. Being local, the character and requirements of the work offered can evolve via interplay between the community and those in the local government. Some of that work may be helping local government employees do a better or more complete job, but other can be work the community perceives as needed yet is currently un- or haphazardly-done, for example, providing better care for the young or elderly in the community.

    2) Maximum automation. Program activity is via a National website, divided by State into Local government pages. Each Local government page displays the JG work available locally with communication tools that facilitate interviewing for the work with the applicable manager and payment for the work if hired. The National website is integrated with the existing consumer banking system so that payments are automatically credited to workers’ JG debit cards for spending as soon as the day following the work. Inflation fears are inapplicable as those choosing JG work will be spending, by necessity, with local businesses coincident with receipt of payments.

    3) Minimum overhead. No program costs are incurred by Local government as their participation is from self-interest and constitutes only an added duty for existing employees. No program costs are incurred by State government as their function is limited to deciding which Local governments are eligible for participation. Program costs incurred by the National government involve setting up and maintaining the National website and integrating it with the consumer banking system. This can be done internally or by contracting it out. I favor contracting it out through competitive bidding with preference given to a small entrepreneurial firm that can demonstrate the required level of security with an ability to work innovatively with Local governments.

    4) Orderly growth. Local governments choose whether and when to participate in the program. The most needy and daring Local governments will be the first to participate. This gives time to fine-tune the website display formats and communication tools to best fit the needs of the Local users as more Local governments choose to participate.

  7. Peter: Thanks for the agreement and additional observations.

    Ralph:I’m baffled by Calagus’s claim that the price of goods and services are “indirectly government administered prices”.

    Just saying the same as Mosler often does, that the prices of everything are largely a function of government purchases and sales, government spending and taxing. Multiply everything the government does by 10, other prices will soon reflect that. People overdistinguish between “public” and “private” these days as if there were a fundamental, drastic chasm between them. They’re just words about how featherless bipeds organize their foolish activities.

    As for the JG materials budget, what I meant was that it would be roughly proportional to the JG pool. The quotient Materials per worker would have some upper and lower bound “limit”.

    The MMT academics have written a lot refuting all objections to the JG. If the economy is in a boom, the JG would be small and have small effect. The materials budget would consciously avoid bottlenecks, and as Peter notes could rely on buffer stock stockpiles. It’s not going to attract skilled high wage workers in a boom, because they have better positions and offers, of course. At worst this criticism means that there could be a one-time burst of inflation from instituting a JG, something which the MMTers have always said. What this means is that the wage was set “too high”. Whoop-de-doo. So the poorer suddenly get a gooder deal at the expense of the richer. I’m heartbroken.

    After that, the point is that the SUM of JG spending on anything, including materials, PLUS non-JG (public or private) spending, will be, by design, stabler than either component. And this sum is what counts. Upshot is stabler prices, lower inflation.

    Or just read Peter’s comment above.

    Ed Zimmer: Of course the JG is a government boondoggle. The word “boondoggle” was invented to criticize the WPA. The question is whether it is a good idea or not. What’s wrong with government boondoggles? I have been saying for a long time that the JG is the norm – the idea of not having a JG is the product of diseased minds.

    Listed elsewhere those who have essentially made this observation, criticized the utter lunacy of non-JG with varying strength: Necker, Fichte, Marx, Tolstoy, Lincoln, Keynes, Wigforss, Herbert Stein & the 1962 US CEA, not to speak of Shakespeare and the Bible. I’d say Necker & Fichte, who hung out at Mme. de Stael’s, Necker’s daughter’s, place are the modern wellspring.

    All the criticisms of the JG are fundamentally insane, fantastically overblown. They are as realistic as saying you shouldn’t get out of bed in the morning because some monster, like an ant, might eat you when you got out the door.

    The stuff about local control is imho just bullshit. People think local control and decentralization and bottom up are touchy feely and wholesome compared to the big bad central government. It is just a buzzword appealing to the emotions. IMHO a JG would end up being rather more centralized than the MMTers plans envision; that’s what happened with the WPA, who had the same American touchy-feely urges. The MMTers are few with much to do, but most need to study the 30s-40s even more than they have. The economic histories of that era are appalling crap, filled with FDR-hating lies and fabrications easily refuted from primary and contemporary sources- and that’s the liberals.

    The only important bottom-up, decentralized feature of the JG is its definition. The guys and gals on the bottom – anybody can just decide all by their decentralized lonesome to have a decent, living wage, family wage job that will support them. The rest is just boring PR or unimportant details.

    The devil ain’t in the details. Any JG that deserves the name – even a bad one by your or others’ criteria – is infinitely superior to the absence of one; a win-win by any sane measure, for everyone but sadists and saboteurs who like seeing homelessness and misery, and nothing else will do what it does.

  8. Pete,

    Not entirely unrelated and hopefully of interest.

    Joshua R. Hendrickson. July 2018. Monetary Policy as a Jobs Guarantee.
    Hendrickson Policy Brief: Monetary Policy as a Jobs Guarantee

    With the incorporation of a surprising addon, Hendrickson (something of a connoisseur of the gold standard) considers the JG as part of a “labour standard”.

    He also references

    Earl A. Thompson, “Free Banking under a Labor Standard — The Perfect Monetary System” (Working Paper, University of California, Los Angeles, January 1982);
    Free Banking under a Labor Standard – The Perfect Monetary System

    David Glasner, Free Banking and Monetary Reform (Cambridge, UK: Cambridge University Press, 1989)

  9. Thanks, Magpie. I’ll check them out when I get a chance.

    I embedded the links because on my screen they seemed to be overhanging.


  10. Comment 1 – JG wage as a “living wage”
    Wray,Wray, Dantas, Fullwiler, Tcherneva,and Kelton have recently made JG proposals for the USA.
    Their “core policy objective” is to provide decent jobs at decent pay on demand to all individuals of legal working age who want to work”.
    “Decent pay” is proposed as “a living wage of $15 per hour plus benefits “(roughly double the existing minimal wage in many areas).
    This notion of a JG “living wage” implies that it would not be fixed in nominal terms (except in the unlikely event of zero inflation). Rather the JG wage would have to rise over time to compensate for inflation.
    In other words, there would be no inflation anchor – the JG wage would in fact drift in response to the tides and currents of inflation!
    Comment 2 – Sensitivity of BER to JG wage etc.
    Instead of taking a JG scheme job, potential JG workers have the options of being unemployed on welfare benefits, no longer seeking a job (“hidden unemployment”), and taking a low paid unskilled job in the main economy.
    Thus the proportion of the labour force employed on JG schemes (BER) does not merely depend on the level of macroeconomic demand in the main economy. It would also be sensitive to the JG wage, the benefits available to unemployed persons and the pleasures/hardships of JG jobs relative to other low paid unskilled jobs.
    Irrespective of the level of macroeconomic demand, BER would be close to zero with a very low JG wage, but could be a substantial proportion of the labour force with a very high JG wage.
    BER could be much higher with zero unemployment benefits (workfare) or with low benefits.
    Similarly BER would be much higher if the JG work was easy/pleasant compared with jobs in the main economy.
    Comment 3 – Payments to unwanted labour don’t have direct effects on inflation.
    The confusing idea that JG provides an an inflation anchor is found in Mosler 1997: “Price is set through the ELR wage, which defines the purchasing power of the currency.”
    However, as early as 1998 both Mosler and Mitchell recognised that if the private labor market is tight “other prices will rise relative to the [JG] wage and old fashioned inflation can follow.”
    By 2013 Mitchell recognised that the JG wage does not affect inflation: “There can be no inflationary pressures arising directly from a wage to any labour that is unwanted by other employers”.
    Comment 4 – There in no valid analogy with commodity buffer stocks
    Mitchell and other MMTers try to make an invalid analogy comparing employment on JG schemes with buffer stocks of commodities. But there is no valid analogy: commodities are valued by the private sector, but JG employees are not wanted or are unwilling to work in the private sector. Useful schemes don’t hold stocks of useless scrap, obsolete, redundant, unwanted or unemployable commodities or labourers. If anyone decides to pay cash for such unwanted items, this won’t affect the supply or demand or prices of useful items.

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