Learn about the Job Guarantee


Question 8 - What are the roots of the Job Guarantee proposal?

The logic of the Job Guarantee is based on the operations of the Wool Floor Price Scheme introduced by the Commonwealth Government of Australia in November 1970. The scheme was relatively simple and worked by the Government establishing a floor price for wool after hearing submissions from the Wool Council of Australia and the Australian Wool Corporation (AWC). The Government then guaranteed that the price would not fall below that level. There was a lot of lobbying to get the floor price as high above the implied market price. The price was maintained by the AWC purchasing stocks of wool in the auction markets. The financing of the purchases came from a Market Support Fund (MSF) accumulated by a small contribution from growers based on the value of its clip. Fund shortages were made up with Government-guaranteed loans. The major controversy for economists was the "tinkering with the price mechanism" (Throsby, 1972: 162). There was an issue as to whether it was price stabilisation or price maintenance. This was not unimportant in a time when prices were in sectoral decline and a minimum guaranteed floor price implied ever-increasing AWC stocks.

By applying reverse logic one could utilise the concept without encountering the problems of price tinkering. In effect, the Wool Floor Price Scheme generated "full employment" for wool production. Clearly, there was an issue in the wool situation of what constituted a reasonable level of output in a time of declining demand. The argument is not relevant when applied to available labour. We can define full employment to be the state where there was no involuntary unemployment and that is ensured by a sufficient number of jobs to be available in relation to the supply of labour at the current money wage rates. This amounts to a rejection of the notion that all unemployment is voluntary and that full employment can be defined by market relations - the intersection of the labour demand and supply curves at some "equilibrium price". Accordingly, mass unemployment is construed as a macroeconomic problem related to deficient demand, which in turn reflects a deficient budget deficit. The reverse logic implies that if there is a price guarantee below the "prevailing market price" and a buffer stock of working hours constructed to absorb the excess supply at the current market price, then we can generate full employment without encountering the problems of price tinkering. That idea was the seed of the Job Guarantee approach being advocated by the Centre of Full Employment and Price Stability.

The work of Benjamin Graham (1937) is also instructive. He discusses the idea of stabilising prices and standards of living by surplus storage. He documents the ways in which the government might deal with surplus production in the economy. Graham (1937: 18) says, "The State may deal with actual or threatened surplus in one of four ways: (a) by preventing it; (b) by destroying it; (c) by ‘dumping’ it; or (d) by conserving it." In the context of an excess supply of labour, governments had at this time and now adopted the "dumping" strategy via the NAIRU. It made much better sense to use the conservation approach. Graham (1937: 34) notes,

"The first conclusion is that wherever surplus has been conserved primarily for future use the plan has been sensible and successful, unless marred by glaring errors of administration. The second conclusion is that when the surplus has been acquired and held primarily for future sale the plan has been vulnerable to adverse developments."

The distinction is important in the Job Guarantee model development. The Wool Floor Price Scheme was an example of storage for future sale and was not motivated to help the consumer of wool but the producer. The Job Guarantee policy is an example of storage for use where the "reserve is established to meet a future need which experience has taught us is likely to develop" (Graham, 1937: 35). Graham also analysed and proposed a solution to the problem of interfering with the relative price structure when the government built up the surplus. In the context of the Job Guarantee policy, this means setting a Job Guarantee wage below the private market wage structure, unless strategic policy in addition to the meagre elimination of the surplus was being pursued. For example, the government may wish to combine the BSE policy with an industry policy designed to raise productivity. In that sense, it may buy surplus labour at a wage above the current private market minimum. In the first instance, the basic Job Guarantee model with a wage floor below the private wage structure shows how full employment and price stability can be attained. While this is an eminently better outcome in terms resource use and social equity, it is just the beginning of the matter.

Graham (1937: 42) considered that the surplus should "not be pressed for sale until an effective demand develops for it." In the context of the Job Guarantee policy, this translates into the provision of a government job for all labour, which is surplus to private demand until such time as private demand increases.

References:

Graham, B. (1937). Storage and Stability, (McGraw Hill: New York).

Mitchell, W. F. (1998). "The Buffer Stock Employment Model and the NAIRU: The Path to Full Employment", Journal of Economic Issues,, 32, 2, June, pp.1-9.