Learn about the Job Guarantee


Question 5 - Would it be inflationary?

The Job Guarantee wage provides a floor that prevents serious deflation from occurring and defines the private sector wage structure. However, if the private labor market is tight, the non-Job Guarantee wage will rise relative to the Job Guarantee wage, and the Job Guarantee pool drains. The smaller this pool, the less influence the Job Guarantee wage has on wage patterning. Unless the government stifles demand, the economy will then enter an inflationary episode, depending on the behavior of labor and capital in the bargaining environment.

In the face of wage-price pressures, the Job Guarantee maintains inflation control with the assistance of traditional aggregate demand management policies, which will choke aggregate demand and induce slack in the private sector. The difference between this approach and the NAIRU approach is that the slack does not reveal itself as unemployment, and in that sense the Job Guarantee may be referred to as a "loose" full employment.

The Job Guarantee policy generates inflation stability because the suppression of private demand asserts the numeraire price -- the Job Guarantee wage. This leads to the definition of a new concept, the Non-Accelerating Inflation Buffer Employment Ratio (NAIBER), which, in the Job Guarantee economy, replaces the NAIRU as an inflation control mechanism. The Buffer Employment Ratio (BER) is the ratio of Job Guarantee employment to total employment. The reference to the buffer employment is that the Job Guarantee functions as a buffer stock to absorb the workers who are currently not demanded by the private sector.

As the BER rises, due to an increase in interest rates and/or a fiscal tightening, resources are transferred from the inflating private sector into the Job Guarantee at a price set by the government; this price provides the inflation discipline. The disciplinary role of the NAIRU, which forces the inflation adjustment onto the unemployed, is replaced by the compositional shift in sectoral employment, with the major costs of unemployment being avoided. That is a major advantage of the Job Guarantee approach.

Reference:

William F. Mitchell (1998). “The Buffer Stock Employment Model - Full Employment without a NAIRU”, Journal of Economic Issues, 32(2), pp.547-55.