The Job Guarantee, Wage-Price Inflation and Alternative Solutions

inflation_recession_alligator[1]

Before I start this post I should make one thing abundantly clear: I strongly support the idea of a Jobs Guarantee (JG) program. I think that the benefits it might bring to society so far outweigh its potential drawbacks that implementing it should be a no-brainer not simply for anyone with progressive tendencies, but for anyone who believes that people should have the right to be independent and earn a living for themselves and their families.

I have always thought of the economics of the JG program as being similar to the economics of unemployment benefits. Indeed, the JG should really just be seen as a superior version of the dole that replaces handouts with an opportunity to work, grow and develop rather than being forced to sit idle when factors outside of one’s own control force you out of the labour market.

Most of the objections to the JG program (it increases worker bargaining power; it adds aggregate demand to the economy that is not backed by production; it redistributes income via price changes etc) could equally be leveled at unemployment benefits — indeed, they are by extreme right-wingers — and when I hear many of them coming out of the mouths of self-styled progressives it makes me a little queasy. Often I can only attribute these objections to fear in the face of a new idea.

But I think that a very real criticism raised against the JG is that it might increase an economic tendency toward wage-price spirals. Again, the same could just as easily be said about unemployment insurance, so this is not really a good objection against the idea per se. Nevertheless it does bear some thinking about. So, how might the JG program lead to an increased tendency toward wage-price spirals?

When the JG program is in full swing — i.e. when aggregate demand is low and unemployment high — all it can really do is set a floor beneath which wages cannot fall. Although wages tend to be extremely sticky in recessions anyway — and indeed as we have known since Keynes this is likely a blessing rather than a curse — the JG would certainly make them ‘more sticky’ as people would not fear being laid off nearly as much as they do when they have to fall back on dole handouts.

When the economy is at full employment, however, the JG could increase tendencies toward wage-price spirals. The fear associated with being laid off would be reduced and that would buttress worker bargaining power by just that much more. This certainly adds to the risk of a wage-price spiral. But again, it doesn’t increase the risk all that much. After all, at full employment workers really don’t fear the sack all that much anyway.

The real risk of a wage-price spiral is always and everywhere when exogenous factors increase prices. The two that come to mind are (i) substantial currency depreciations and (ii) increases in input costs, such as oil or other commodities. Wage-price spirals then tend to kick in as workers and capitalists try to use their market power to distribute the resulting inflation. Workers try to fob the price increases onto capitalists through wage hikes, while capitalists try to fob it onto workers and competing capitalists through price increases.

It is in such an environment that a JG could prove to greatly increase the tendency toward wage-price spirals. Such spirals are always a sort of battle fought between workers and capitalists and the more confident and self-assured both sides are, the more they will feel ready to duke it out. A JG program would greatly increase worker confidence and in doing so would add fuel to the fire under circumstances conducive to a wage-price inflation.

So, what institutions can we put in place to ensure that wage-price spirals do not happen? Broadly speaking there are two solutions: tax-based incomes policies (TIPS) and market anti-inflation plans (MAPS). The former is associated with Paul Davidson and Sidney Weintraub while the latter is associated with Abba Lerner and David Colander.

TIPS are based on simple taxation policies that try to protect against wage-price spirals. Basically, the idea is to penalise anyone trying to raise wages. The government sets an acceptable level of wage increases — usually pegged to measures of productivity — and then imposes a tax on any increase above and beyond this. It is typically company profits that are to be taxed, so the onus is on the capitalist to ensure that wages do not rise.

I think the basic principle here is solid but the implementation should be done somewhat differently. Personally, I would like to see taxation applied to wage and price increases. What’s more I would like to see workers and capitalists penalised. I think that in the case of wage increases beyond given levels of productivity increases workers should see their income tax rise while any price rises that are in excess, say, of some measure of input costs — i.e. price rises that seek to profit from rising inflation or seek to pass too much of the inflation on as price increases and not enough on as profit decreases — should lead to increased taxes on the offender. Taxing price increases, however, may prove rather complicated and this is where the MAPS approach might prove better.

MAPS is a slightly more sophisticated approach. Basically the government would issue a certain amount of MAPS credits to firms. These credits would then be used by the firms any time they wanted to increase prices. The amount of MAPS credits in existence would be tied, again, to the overall level of productivity in the economy (specifically they would be tied to a value added measure of output growth). The firms could then trade the MAPS credits between themselves. So, firms that were decreasing their prices through productivity gains and new technology would sell their credits to firms that were seeing price increases. Such a system would disincentivise inflation using market mechanisms.

TIPS is certainly a more straight-forward approach. It is certainly more hands-on — and would meet with far greater resistance from both unions and firms — but it is direct and, once the details are worked out, rather simple to administrate as the already-existing taxation system can be used. MAPS has an air of complexity about it reminiscent of Abba Lerner’s early work on market socialism — out of which it undoubtedly developed.

Personally, I think that some combination of the two would work wonders. On the wage side, I think that the TIPS would be quite effective. It would be simple to implement through the income tax system and it would provide an immediate disincentive for workers to engage in overenthusiastic bargaining. (If they want redistribution they must then lobby the government to adjust its taxation regime).

Meanwhile, the MAPS would probably work better on the price side. It would encourage firms to contain costs as best they could and would incentivise downward pressure on prices from productivity gains.

Finally, a note on implementation. These measures would best be introduced in a relatively deflationary period with low wages and low prices — i.e. a high unemployment period. Why? Because no one would even notice that much. Since wage and price increases had slowed to a halt anyway no one would notice the new institutional changes coming online. But then when the inflation barrier began to be approached these changes would kick in and be so strongly in place that the debate about whether they are fair or not would already be over.

Of course, this assumes that policymakers can be so forward looking as to deal with problems long before they arise. That is why I propose that some combination of MAPS and TIPS be included in any JG program that is sold to governments. This would also provide a credible case against opponents who claim that JG programs are not concerned with inflation and are just another product of the Keynesian tendency to see deflation behind every bush and inflation as an imaginary devil that never makes an appearance on the scene.

Update: I have laid out the argument empirically in a new post here.

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About pilkingtonphil

Philip Pilkington is a London-based economist and member of the Political Economy Research Group (PERG) at Kingston University. You can follow him on Twitter at @pilkingtonphil.
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30 Responses to The Job Guarantee, Wage-Price Inflation and Alternative Solutions

  1. Scott Fullwiler says:

    One thing you didn’t mention is that the jg is countercyclical. A properly implemented jg would be at its smallest precisely when a wage price spiral was most likely (though I don’t know that it is that likely even at its most likely point). Not only that, but spending on the jg program will have been declining as workers were leaving the jg program to take newly created pvt sector jobs. So, just by the nature of the program that is consistent with a functional finance approach to fiscal policy, the wage price spiral threat is inherently minimal. I’ve shown this in my own published simulations of the jg.

    • Hey Scott,

      I think I did note that, to be honest.

      The problem is that the JG will give workers more confidence when there is high aggregate demand. They’ll know that even if they get laid off there will always be a JG job there for them no matter what. In order to model this you would have to put confidence variables in for worker bargaining. Say you have a scale of 0 to 1 where 0 is no confidence and is a circumstance where workers accept the first wage deal offered (i.e. workers are price-takers) and 1 is absolute confidence where workers bid up wages to infinity because they are completely intransigent.

      Unemployment insurance raises this confidence variable a little bit. Heavy unionisation would be a primary variable. But a JG would push it up even more. The higher the confidence variable, the higher the chance of a wage-price spiral.

      • Scott fullwiler says:

        Hi Philip

        Sorry for the short responses as I’m writing these from a plane. my point is that at the same time the increase in AD is being restrained, perhaps by as much as 1% of GDP in my simulations, as a result of the program shrinking, which modestly reduces inflationary pressures. Also note that the Jg employees are a more effective buffer in terms of restraining labor demands since those working are a preferred alternative to those not working. Also again, the jg wage doesn’t rise with pressure in the labor market.

        Finally, you are assuming that the point of the jg is stimulus, whereas we don’t view it that way. We have regularly pointed out that the jg pool size is a matter of macro policy objectives. Make the pool bigger at the expense of pvt employment if there are inflationary pressures, for instance. In this way we’ve always conceived of jg as something to be used within the context of traditional views on adjusting aggregate demand to sustain price stability, whole we’ve also regularly suggested that if inflation threatens via pvt sector wages you’ve either set the jg wage too high (or let it grow too fast) and/or let the jg pool get too small so that it is not an effective buffer stock.

        so we wouldn’t necessarily agree that there would be more pressure on wages for several reasons, and certainly not at the bottom of the wage scale which a traditional unemployed buffer is intended to reduce. though we do generally accept that there could be a one off increase as the program is implemented, our main argument is that it is not more inflationary than an unemployed buffer, and if it is, you haven’t implemented it correctly in the first place in terms of the jg wage, size if the jg pool via other tols of macro policy, and sustained or improved competitiveness of the jg pool of workers relative to pvt sector workers.

        In other words, my view is that you are critiquing what we would call a poorly implemented jg, rather than the jg proposal itself.

        Best,
        Scott

      • Hey Scott,

        I’m not sure that you quite get what I’m saying. Let me try another tack.

        Imagine a world in which no unemployment insurance or social safety net exists. In this world if you lose your job you either mooch off your friends and family, beg or scavenge. Now take the world we live in where there is a social safety net. In which world do workers have more bargaining clout? Obviously the world we live in because they know that if they go up against the boss and they get fired at least there is always the dole. In this way unemployment insurance increases worker bargaining power and thus provides more of a chance that workers will get uppity and induce a wage-price spiral under the right conditions.

        Now, take the world we live in and compare it with the JG world. In which world do the workers have more bargaining power? Clearly in the JG world. In the JG world the workers can get a job anytime if they go up against the boss and he lays them off whereas in our world they would have to go on the dole.

        Simply put: the more of a safety net we provide workers the more bargaining power they get because they fear the sack less and less. And the more bargaining power workers have the more chance that they will engage in a stand-off with the boss to try to distribute inflation toward profits rather than wages.

        Phil

      • NeilW says:

        Phil,

        They only have more bargaining power if there are firms to bargain with.

        Once you introduce a Job Guarantee, then you don’t need to do the usual kowtowing to business that is required from the pump priming approach.

        So If you get overgrowth in the garden, then you start weeding – and you can weed very hard if you want.

        The main difference between Job Guarantee and Unemployment Benefit is that you can choose to be on the Job Guarantee, and the state isn’t desperate to get you off it as soon as possible.

        That means that you simply tighten policy sufficiently (i.e. put taxes up, start rationing, whatever), and start pushing weaker businesses towards failure. The Job Guarantee then picks up the fall out, and any wage drop strips demand from the system. Nobody falls into poverty, but a few new cars may not get sold.

        JG allows you to genuinely treat businesses as cattle, not pets. You no longer have to be frightened about stripping out the deadwood.

        The general idea is that you set policy so that it brings a private sector expansion to a halt before you get demand pull inflationary tightness. And yes you might have to do some supply side work to make sure that tightness doesn’t happen too soon.

      • Jason says:

        HI Phil,

        The world you imagined brought to mind a quote by Bertrand Russell regarding extremes – “A person imbued with the scientific spirit would hardly even examine these extreme positions.”

        If anything, a JG program gives the worker at least the confidence that he will be able to feed his family. It doesn’t ensure he can still meet his mortgage payment, enjoy vacations, pay for two mobile phones, etc…, but these are important considerations. Additionally, what about career progression, loss of skill-set, and benefits that is lost upon separation?

        So, yeah, more safety net equals more bargaining power, but not much more (at least for the middle classes). Is it the working class that concerns you more re bargaining power?

        Cheers,
        Jason

      • I don’t get the question. Under a JG workers will have more bargaining power. That carries inflation risks.

      • NeilW says:

        It doesn’t really carry any more risk at all. The risks are just different risks. You just don’t allow the economy to expand to the point where there is any issue.

        This is all fixed point thinking – just like Ralph does with his ‘when the economy is at full capacity’ line.

        You won’t ever be at the same point within the dimensions of the problem. Other things won’t be equal.

        You’ll be at another point entirely with a different distribution function. It’s a dynamically mapped multi-dimensional space we’re operating in.

        The question then is whether the new targeted area you get to with a JG delivers more of what we want as a society than an area within the policy space we could target with an unemployed buffer.

        I’d say it does.

  2. Pablo says:

    I discussed this very same point with some proponents of JG. Their reply was quite interesting. They told me that trade unions complained that the wage earned by JG participants would act not only as a floor but also as a roof, for wage demands. So it is not certain a priori that a JG program might stimulate further wage demands and lead to a wage-price spiral. The examples you mention (regarding the impact of depreciation or increases in input costs) trigger a wage-price spiral not necessarily because of full employment, but because of trade union activism. I grant you that trade unions are more likely to be stronger in full employment times, but not necessarily so (the US in the late 90s, to put an example). And your examples might trigger a wage-price spiral even in cases where there is no JG (as in the 70s) or even without full employment but with strong trade unions, as in Germany in the 20s. I agree that income policies are the way to deal with them.

    • I don’t see how JG puts a ceiling on wage demands. I discussed this in detail with Randy Wray a few years back and he never made that claim. His points were similar to mine above (i.e. compare with the dole etc.).

      • NeilW says:

        “I don’t see how JG puts a ceiling on wage demands.”

        At the low end, you can more easily replace people from the JG pool than you can from the unemployment buffer.

        People who are working are a less risky hire than people who are not. The JG eliminates the risk and means that the people on the JG are a greater substitution threat to existing low end workers.

        That then ripples upward via the usual wage structure.

      • That doesn’t put a ceiling on wage demands.

      • NeilW says:

        “That doesn’t put a ceiling on wage demands.”

        It puts a ceiling on wage demands exactly the same way as unemployment does.

  3. NeilW says:

    “When the economy is at full employment, however, the JG could increase tendencies toward wage-price spirals.”

    Isn’t that the same argument that was put forward against minimum wage. And we didn’t see a wage spiral there either.

    The unemployment fear becomes the fear of a *drop* in wages as people lose their higher paying jobs and are forced to take a much lower job guarantee wage.

    It’s the same thing, just of less magnitude.

  4. Pavlina R. Tcherneva says:

    Hi Phil, the counter-cyclical impact is fundamentally different from that of unempl insurance or other income support programs. I also model this is my Levy Minsky-Kalecki paper. Actually ELR has dampening effect on the markup. If I am reading you correctly, and your argument rests on the ‘confidence effect’, i believe it is overstated with respect to the wage-price impact. For that you need a ratchet effect (e.g., wage indexation), which we always state the JG does not have. Or you need some explosion in unionization rates or some other institutionalized method of negotiating continuously greater wage increases. I personally believe the most important ‘confidence effect’ from the JG is with respect to the standard wage-benefit-work conditions that the JG secures at the bottom (and private employers need to match). If the confidence effect on wage-price dynamics was big, the employment costs for high wage occupations should be rising/accelerating — they barely experience spells of unemployment (at least in the US) even in deep recessions as this one.

    • Yes, call it a ratchet effect. I am aware that the JG does not have this. But the JG will lead to increased bargaining power — which, in turn, will lead to increased unionisation as workers become more confident in standing up to the boss. If a spark ignites this fire — say, a big devaluation of the currency or a sharp increase in input costs — it could trigger a wage-price spiral.

      Even if you don’t think that this is the case you still have to admit that nothing in the JG prevents a wage-price spiral. So, even if it happened on its own through a devaluation or something the JG would not stop it. And, indeed, I would imagine it would be one of the first things on the chopping board as the conservative shills get into power on the back of an electoral wave of inflation-targeting.

      My point is simple: why not include measures in the JG that ensure that such wage-price spirals cannot happen? What on earth is the harm? We have nothing to lose, but we have the world to win!

      • Pavlina R. Tcherneva says:

        Phil, understood. As I show in the same paper, inflationary effects from factors other than the JG are a very real possibility at full employment (Keynes’s ‘true inflation’ definition), But you are framing the argument as if the possibility of a wage-price spiral is a real criticism against the JGs. It isn’t. Wage price spiral is not inherent to the JG. It is a potential problem with operating at max capacity (whichever way it is achieved). I get your point about JG being on the chopping block, if there is inflation (but that’s a problem of ideology, not of the JG). Since inflation can come from many different sources–speculation, capital consumption, overheating investment, foreign sector, government spending on no bid contract, etc etc (see components of the markup), I doubt there is an ‘appropriate’ redesign of the JG that would ‘solve’ the inflation problem from these various sources of demand. You certainly need other policies.

      • Yes, exactly. My goal is not to undermine the JG — which I fully support and actively promote — nor is it my goal to try to show that I am more clever than the MMT people or whatever. I’m simply trying to highlight the things that may undermine the JG/MMT should it ever be implemented.

        My thinking is that we should deal with before the fact. Put the institutions in place before certain tendencies undermine the foundations upon which we have built.

        But as I said to Neil: I really don’t care if people do or do not take this on board. I’ll still push for JG because its a fantastic policy. We just should, I think, be more long-sighted about our goals.

      • NeilW says:

        The problem perhaps is to conflate several issues in your post.

        There is no evidence to suggest that Job Guarantee will cause a wage price spiral. I think that part of the argument is just wrong. Job Guarantee has the same macro economic characteristics as unemployment – because the state doesn’t care if you work for the Job Guarantee or not. Similarly people will fear the status loss of being ‘thrown’ onto the Job Guarantee.

        So what works for unemployment likely works with Job Guarantee, because nothing fundamental has changed. In fact with JG keeping the buffer work ready you are more likely to be thrown onto the JG and substituted. So arguably JG is a strong anchor than the unemployment buffer.

        So wage price spirals are not a Job Guarantee issue. They are a separate issue, and IMV unlikely to occur – because we have a different capitalist structure than we had the last time we had any issues with wage spirals. The whole reason Job Guarantee is as it is – fixed price at the minimum wage – is to avoid disrupting the private sector wage distribution. If you’ve read any of Philip Harvey’s work (http://www.philipharvey.info), you’ll know that he attacks the MMT JG for forcing people to take a drop in income and argues that you don’t need to do that.

        I disagree with that position. Both on obsolescence grounds and on the grounds that you increase the risk of spirals if people higher up in the tighter skills area don’t see a downside.

        I agree that there is a fear of spirals there and the fear may need to be addressed – much as other fears may have to be addressed. And political salve will likely have to be applied to address those fears.

        But it is not *caused* by the JG design.

  5. NeilW says:

    “My point is simple: why not include measures in the JG that ensure that such wage-price spirals cannot happen?”

    Because that is not the place for them. The JG does quite enough already.

    To show what you are putting forward has any basis you’d need to have empirical evidence that rises in minimum wage during booms cause wage price spirals, and that heavily unionised countries have wage price spirals – caused by that unionisation (and not by other factors like propping up nationalised businesses that should be left to fail so the assets can be reallocated) and that tight industries have wage price spirals.

    For example I didn’t see anything like that during the IT boom when we could pretty much name our price. If anything prices charged by firms came down as they came up with better ways of doing things.

    So I just don’t see the dynamics working in the way you’re putting forward. I don’t see evidence that the mass psychology works like that.

    I appreciate the argument you are making, but I would say that the evidence suggests that what you’re putting forward is pretty much a straw man.

    The JG is an enhanced auto-stabiliser. When coupled with a sensible counter-cyclical taxation system I don’t see why you’d need anything else. Just let the excess spending drain on the demand side via the actions of the stabilisers, and possibly shelve a few discretionary government projects.

  6. Hi Phillip,
    I think the core assumption in your discussion is about the increase in labour bargaining power and so a possible wage-price spiral triggered by cost shock, ex, oil price hikes in the 1970s. As others have argued the pressures on prices in these conditions do not need full employement (or for that mater a JG programme) to happen. On the other hand, John Cornwall and Wendy Cornwall have showed that countries which set capital-labour conflict managment instituions fared much better against countries that left it to market power solutions when inflation pressures arose in the 1970s. So, it seems to me that JG programme is fine just because increase labour security and power. However, it would be necessary to think complementary institutions to increase conflict managment to reduce other threats market forces bring about.

    • Well, I’ve laid out the evidence here:

      http://fixingtheeconomists.wordpress.com/2014/03/22/more-on-the-job-guarantee-and-wage-price-inflation/

      I think its very strong.

      And yes, TIPS and MAPS are precisely the means by which to put institutions in place to soften capital-labour relations. That is why I am suggesting including them in a JG program.

      • I think my point has not being well understood. Reading the other post you directed me to I read Davidson’ account and see your evidences as a particular exposition of USA situation. No surprise. The USA is a case where capital-labour conflicts get no other coordination form than market competition. It is not for other reason that from 1980s till now the labour income share has declined, strikes have declined and unionization have declined in the USA and inflation came down than neoliberal policies favouring business interests. Following John and Wendy Cornwall, my point is that we already have examples of non market mechanisms which worked to maintain high employment and to reduce inflation effects of cost shocks. Davidson’s account shows that depending on the way labour and capitalists interact they will not accept TIP, for example. So, your favoured institutional solution would break down in such adversary institutional interaction. MAPS might be unacceptable by labour if credits come through wage reductions.
        So, I think that the success of your preferred solution depends indeed on other kind of interaction (coordination institutions) between labour and capital. Market competition or other market-like mechanisms (like TIP and MAPS) will still depend on these other coordination institutions to be successfull.

    • MrTumnas says:

      “On the other hand, John Cornwall and Wendy Cornwall have showed that countries which set capital-labour conflict managment instituions fared much better against countries that left it to market power solutions when inflation pressures arose in the 1970s.”

      I am interested in your reference to the Cornwalls, could you point me in the direction of their work where this topic in particular is discussed? Many thanks.

      • Fabiano says:

        MrTumnas,
        Its is in “Capitalist Development in the Twentieth Century: An Evolutionary-Keynesian Analysis (Modern Cambridge Economics Series)”, with empirical data mainly in ch 5 and ch 6.

    • David Merrill says:

      This is an important point if I understand it correctly. Successful corporatism or corporatist intermediation offers the possibility of price stability with a higher wages floor.

  7. Pingback: Your Government Owes You A Job[?] | For Economic Justice

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