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CofFEE Working Papers

Author(s): William Mitchell and Martin Watts
Title: Capacity constraints and the Job Guarantee
No: 13-04
Year: 2013

Abstract:

The efficacy of the Job Guarantee (JG) as a strategy for sustained full employment has been the subject of ongoing debate between its advocates, who typically align themselves with the principles of Modern Monetary Theory (MMT), and other heterodox economists. The latter group have raised issues, including the stabilisation of inflation, balance of payments constraints, political and intellectual constraints, invisible under-employment, and the sustainability of full employment.

The focus of this paper is on the achievement and maintenance of full employment through the adoption of a JG in comparison to pump priming, which is advocated by a number of progressive economists. In particular, it is generally recognised that a reduced rate of growth of capacity during a recession can cause capacity constrained unemployment in the recovery which would be exacerbated if there was a significant pro-cyclical labour supply response, in addition to labour force increases driven by the rising working age population. Consequently an expansion in spending may have an insignificant real effect on employment and output and is likely to impact on inflation. In other words, the real output gap, which relief from the high unemployment is defined as the actual level of output minus potential output associated with the full utilisation of existing capacity, is not large enough to allow all the unemployed to gain productive jobs in the private sector.

We shall argue that, while private sector investment, which is governed by profitability considerations, may be insufficient to expand potential output sufficiently in a recovery to re-absorb the unemployed who lost their jobs in the downturn, this contention does not apply to a currency-issuing government which introduces a JG. While a major planning exercise is required, when the JG is first implemented, which must address the prevailing rate of labour underutilisation, the creation of additional JG jobs simultaneously creates the extra productive capacity required for program viability. On the other hand, the prospective fluctuations in JG employment arising from the fluctuations in non-government employment are likely to be relatively modest within a fully employed economy, which makes the planning process less challenging.

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