Fiscal policy and the job guarantee

Abstract

Discretionary monetary and fiscal policy decisions have meant that the Australian economy, like most others, has been prevented from generating enough jobs in the last 25 years to match the growth of the labour force. The same policy decisions have also not allowed the economy to generate enough hours of work to match the preferences of the employed. The result has been persistently high unemployment and rising levels of underemployment. Ironically, highly desirable, labor intensive projects go undone; to the detriment of all. The dominant economic orthodoxy has, since the mid-1970s, supported policymakers and politicians who have deliberately and persistently constrained their economies under the pretext that the role of policy is to ensure the economy functions at the so called natural rate of unemployment. The cumulative costs of the foregone output and unemployment are huge and dwarf the costs of alleged microeconomic of inefficiency. There is also mounting empirical evidence undermining the NAIRU approach. Though the evidence dictates the real costs of unemployment substantially outweigh any costs of inflation (and there is no strong evidence that a low inflation-environment delivers more external stability); politically, the desire to use unemployment to fight inflation has prevailed in most OECD countries. Voters have been convinced it is better to suffer high unemployment than to risk even moderate levels of inflation. As a consequence, full employment has been abandoned in most OECD countries. With this myopic NAIRU-buffer stock attack on employment, unemployment will continuously inhibit both real growth and the standards of living of the Australian people. In this paper, we argue that there is another option available; instead of mandating a buffer stock of unemployment to stabilise prices, governments can both more effectively anchor prices and maintain full employment with an open ended, fixed wage buffer stock of employed workers. We term this approach the Job Guarantee (JG) policy following earlier published work by both authors. The paper juxtaposes these two buffer stock options: employment (JG) versus unemployment (NAIRU). We confine ourselves to the macroeconomics issues only, including, (a) the impact and implications of the impact on the budget deficit; (b) the implications for inflation; and (c) the implications for the balance of payments.