More on the Job Guarantee and Wage Price Inflation

The_hand_that_will_rule_the_world

I’ve got quite a response to my last piece on the Job Guarantee program and it’s possible influence on wage-price spirals. Some of the kickback I received is, I think, based on a misunderstanding. A few people seemed to think that the JG program itself might induce a wage-price spiral. This is not what I was saying at all.

What I was really saying is that a JG program, as it provided continuous full employment, would lead to a sharp increase in worker bargaining power. If an external shock — like an oil price shock or a substantial currency devaluation — caused inflation to bounce workers may then try to push the costs of the inflation onto capitalists through increases in wages. The capitalists may then try to push these costs back onto the workers and other capitalists by raising prices. So, the causality runs,

JG Program => Tight Labour Markets => Increased Worker Bargaining Power => Potential Tinderbox Scenario Where a Wage-Price Spiral May Occur

Now, Neil Wilson said that I have no evidence that this would happen. Well, as with all applied economics I can never prove this beyond a shadow of a doubt. I am engaged in crystal ball-gazing to some extent here. But I can show historical correlations that imply that the mechanisms that I outline have the potential to do what I say that they might do.

First, let’s look at the relationship between labour markets and unemployment. As Nate Silver has shown there is a strong negative correlation between the unemployment rate and support for unions. You can see this in the regression plot posted below.

laborsup

For those not use to reading regression plots, the closer the dots (observations) bundle around the line the more correlation there is between the two variables. An upward-sloping line indicates positive correlation while a downward-sloping line indicates negative correlation.

What the graph shows is that the higher unemployment is, the lower is support for unions. Conversely we can say that the lower unemployment then the higher the support for unions. So, if the JG program wipes out unemployment altogether we can say that there is a good chance that support for unions goes up. This is the increase in worker bargaining power that I outlined in the causal argument above.

But what about the theory that increased worker bargaining power leads to a potential for wage-price inflation? Well, first we must ask: how would this occur? The answer to that question is simple: workers would engage in strikes to try to get pay hikes. Do we have evidence to support this? Of course we do! Matias Vernengo has laid the whole thing out in a post here. But the key graph is probably this one,

conflict1

If you don’t believe me that the increase in strike is strongly correlated with unionisation rates check out this graph.

As Vernengo notes,

That’s is why higher commodity prices in the 1970s, including the oil shocks, led to high inflation back then, but has had a marginal impact this time around. This also suggests that the low inflationary pressures in recent times – Bernanke’s Great Moderation – have less to do with Central Bank ‘credible’ policies than with the attack on unions and workers’ rights.

Indeed!

So, let’s recap. The causality runs like this,

JG Program => Zero Unemployment => Support For Unions => Unionisation => Potential For Wage-Price Inflation

Now, again I am saying: why risk this? If anything might unwind a JG program after it was put in place it would be inflation. It would surely be one of the first things on the board for cuts. Indeed, it would probably be pointed to as the cause of inflation by conservative economists. They would say, “Oh, but we told you that silly program would cause demand to rise too high and spark inflation”. And so it would likely be dismantled even if the source of the inflation was not the JG itself.

Why not instead just include measures in the JG package that minimise the risk of the above scenario playing out? What have we got to lose by tacking some combination of TIPS and MAPS onto the JG program? I really do not see a strong argument against considering this.

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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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16 Responses to More on the Job Guarantee and Wage Price Inflation

  1. paul davidson says:

    the great wage price spiral of the 1970s was in large part due to the fact that major industrial unions had obtained cost of living adjustment [COLAs} in their wage contracts with employers. Thus when anything like the oil spike of the early 1970s set of a price index increase, money wages in all other major industries rose, leading to a further price index increase resulting in another COLA money wage rise, leafing to price increases, etc.

    At the time in a meeting of a major liberal political group I tried to convince liberals and labor leaders that such union COLA behavior was self defeating as even union members would become unhappy with the wage price spiral– and that labor unions would be smarter if they accepted an incomes policy which adjusted money wages in line with productivity gains in order to keep costs of production and therefore prices constant.

    I was immediately denounced by others — including Leon Keyserling — as some sort of capitalist lackey! So much for the smartness of labor union leaders– and many liberals.

    • I’m not surprised at all, Paul. That is why I suggested in the last piece that some combination of TIPS and MAPS is implemented in times of high unemployment and low inflation. That way, it becomes normalised before institutions emerge that risk another wage-price spiral in the future.

  2. NeilW says:

    You still haven’t established any causality here at all. It’s all begging the question – declaring correlations as causal. If support for unions falls, then its just as likely that causes unemployment goes up – and vice versa. Or there’s a third variable – the hollowing out of the quality of work for example.

    The Job Guarantee doesn’t really ‘wipe out unemployment’. It changes classic unemployment into something else. Those people are still not engaged in the traditional labour market. It’s vitally important to realise that. JG is ‘soft’ full employment. The unemployment rate just becomes the job guarantee rate.

    ‘hard’ full employment and ‘soft’ full employment have very different dynamics.

    Classic unemployment receives a fixed income. Job Guarantee receives a higher fixed income. There is no reason at all to suspect that the latter will have any more effect on the wage structure than the former – as the rises in the minimum wage have shown.

    You can’t bid up the JG wage by agitating in a union any more than you can unemployment benefit, or tax credits. The more people on the JG, the less effective unions are.

    “What have we got to lose by tacking some combination of TIPS and MAPS onto the JG program?”

    Complexity and systems that are not designed with the JG in place. Why are they needed when the standard auto-stabilisers can just drain demand before you get to a pinch point? Businesses will then start to struggle and fail and people will shift onto the job guarantee from higher paying positions, stripping out even more demand and neutralising union action.

    The JG allows you to strip out a whole load of current ‘protections’ that add frictions to the setup and failure process in capitalism. You can allow it to be much more raw – for example why do you need redundancy protection or redundancy pay when there is a JG. Why do you need unfair dismissal procedures? If people fall out, let them go their separate ways for a nominal payoff.

    You don’t need to cuddle businesses any more with a fully functional finance safety net. That way you get the bounce-back potential and productivity gains of the current US economy, with the ‘lack of unemployment’ recovery currently seen in the UK.

    Why would a shrinking JG pool (which strips government expenditure) and the existing percentage based corporate, income and sales taxes (which strip income) fail to halt the expansion?

    • You still haven’t established any causality here at all. It’s all begging the question – declaring correlations as causal. If support for unions falls, then its just as likely that causes unemployment goes up – and vice versa.

      So the fall in union support after 2008 was… the result of unemployment?

      Sorry, Neil, I can’t take that argument seriously.

      Anyway, there’s the evidence. People can make of it what they will. I don’t understand the resistance here at all… and frankly, I couldn’t really care less.

      • NeilW says:

        “So the fall in union support after 2008 was… the result of unemployment?”

        And the recent fall in unemployment in the US has caused union support to go up?

        See. Nothing there. The causality could go either way or not be causal at all.

        What is ‘union support’ anyway? Deunionised workplaces, or a whether people are happy with unions this week.

        “Anyway, there’s the evidence. People can make of it what they will. I don’t understand the resistance here at al”

        The main issue is added complexity. Why use complex rules when simple ones will do. The tax system is already complex enough and that causes friction that is completely unnecessary. Most of it needs stripping out.

        So the question is whether these risks are large enough to require a barrier, and whether they fail to be handled by the proposed structures.

        I have to say I’m much more concerned about rapid capital movement in the foreign exchange market – which I think will require something to slow it down or eliminate it – rather than the distant prospect of wage price spirals.

        Now if we switched to a land value taxation system – which is less responsive to changes in income flows – then there may be an argument that you need a change in income taxation. But I don’t see the need with the existing income, corporate and sales taxation systems. They seem to me to be more than sufficient to contain the risk within the existing auto-stabiliser structures.

        It’s going to be hard enough getting a JG in place as it is, without requiring fundamental parallel structural changes to the tax system.

  3. NeilW says:

    And just to be absolutely clear, I’m very glad that you’ve written these two pieces. And you raise some good points. It’s good to bash these things around and see if there are any obvious holes.

    But ultimately we’ll not know what works and what doesn’t until we try it.

    I think it’s pretty much got to that stage now.

  4. Phil, I like your general “Why not?” but also Neil’s reply that it may politically difficult to get both the JG and TIPS and MAPS through at once.

    Moving to the causality question, however, you say:

    JG Program => Zero Unemployment => Support For Unions => Unionisation => Potential For Wage-Price Inflation;

    But isn’t your argument really:

    Any effective full employment program enacted without efective protective measures against Wage-Price Inflation => Zero Unemployment => Support For Unions => Unionisation => Potential For Wage-Price Inflation

    And, if so, why not just enact TIPS and MAPS as stand alone programs against the day when we might be approaching full employment again. Politically, it would be a sop to rightists that they would find it difficult to vote against. On the other hand, it would provide progressives with a fail-safe against possible future success in tightening labor markets.

    On other points, Neil is right in pointing out that JG-dependent full employment is less likely to contribute to wage price spirals than private sector full employment, because unions, even if they get rejuvenated, can’t bid up the JG wage, but two thoughts occur to me here. First, to the extent people are JG employees there would be a political constituency of of one size or another for raising the JG wage as inflation occurred. If that constituency were large it could become a powerful political force bidding up wages. And second, if private sector activity rendered the JG small and its constituency less important, the rising tide of a private sector bubble fueled by financial interest might still tighten the private sector labor market enough to feed inflation, in spite of the downward pull of the JG wage.

    Finally, I guess what I’m saying is that there are enough possible scenarios that might trigger Wage-Price Inflation as we approach and arrive at full employment with whatever mix of JG and private sector full employment we have, that extra security of having TIPS and MAPS in place seems to me to outweigh Neil’s complexity argument.

    • Yes, enact them for ANY full employment policy! Of course!

      I only talk about JG because that is my favourite full employment policy and so I want to see it work!

      • Same here; but to put to put a finer point on my argument; I’m saying that the causal relationship here is between full employment, taken alone, however enabled or achieved by policy and the tendency toward Wage – Price Inflation.

        Whether a JG is the motivating factor, or stimulus spending, or a credit bubble, or trade policy creating a trade surplus, or a shorter work week, or a BIG, etc or some combination motivate full employment, the result will be a potential for demand-pull inflation, and Wage-Price Inflation. So, as we approach full employment we must have in place a variety of targeted anti-inflation measures, none of which should be as gross as standard monetary policies involving manipulation of interest rates.

      • Agreed. But I say: put the anti-inflation measures in place BEFORE there is inflation. Because once the spiral starts up it’s politically impossible to get them enacted. And then we get the right-wing kickback… and then, if history is any guide, we’re dead.

      • Yes, I think that too. Put the mechanisms in place for automatic stabilization first, provided you can them through the political process.

    • NeilW says:

      The question about why you need the complexity at all still has not been answered.

      As I pointed out the JG people can just be seen as unemployed with a bigger income.

      Many countries have very good unemployment provision and job protection. It’s pretty clear that in the UK both of those contributed to few people actually losing their jobs (we just got a drop in productivity instead).

      Dit it cause a surge in union support – not at all.

      In countries with good unions are you getting wage price spirals. Where are the wage price spirals in Sweden, Denmark and Canada for example where union support is much higher than anywhere else?

      It’s very dangerous to take the 1970s as though you understand entirely what happened then and the United States as the sole barometer of anything. The US is extremely atypical in most things and usually in a poor way.

      I still don’t see why these things are not dealt with via the usual draining of demand process – correctly applied.

      And I certainly don’t think there is the causality mentioned. It just doesn’t stack up with recent experience across the globe.

      So you’re really defending against an irrational fear. Now that may be required, since there are lots of irrational fears – rapid extreme currency movement being one of the other fears. Politically you may need to put in place salve that addresses the fears – even if they are never likely to activate.

      • “In countries with good unions are you getting wage price spirals. Where are the wage price spirals in Sweden, Denmark and Canada for example where union support is much higher than anywhere else?”
        It seems quite the other way around, since in the 1970s those Scandinavian countries with strong unions and cooperative capital-labour institutions could save employment with much lower inflation rates. Countries like USA went as Davidson said labour and capitalists freely competing each others pie.

  5. JohnB says:

    It’s been a while since I’ve read up well on the Job Guarantee, and I agree with your proscriptions here, as an optimised way of implementing automatic stabilizers against inflation.

    What I remember from when I read Bill Mitchell’s articles though, is that (generally), increased inflation will be met with taxes (and possibly general fiscal tightening) on the private sector, in an attempt to push private sector workers into the Job Guarantee (as part of the inflation management mechanism, and trying to stay within inflation targets) – is that, on its own, not sufficient for avoiding/ameliorating a wage-price spiral? (I view your policies as an additional optimization on top of this)

    I definitely don’t think that on its own is optimal (your solution is far more targeted/better), but I wonder if it’s still sufficient – the more workers bid up wages and business put up prices, the more of a squeeze government would place on the economy, causing slowdown of inflating sectors/business, and causing workers to move into a lower-wage JG program.

    I’m all for targeting inflation, and supply-bottlenecks in general, more specifically/directly (and for hearing more about stuff like this 🙂 not many good criticisms of the JG about) – so I’d support this being a part of the basic JG – just wonder how well this situation would be managed without these added policies.

    • Robin Green says:

      We have to remember that the Job Guarantee is no picnic. It is not supposed to be, and would not be, a preferred option for many workers, compared to having a private sector job. In such a context, deliberately and openly engendering an outflow of workers onto the Job Guarantee seems politically suicidal! Perhaps such a policy is necessary at times, but if so it seems to me that it should at least apply selectively to employers and/or workers that are contributing most to the phenomenon of wage/price inflation, rather than companies across the board. So I support Pilkington’s proposal.

      It sounds a bit like carbon credits, which I am also a fan of. I suppose climate change and the inflationary effects of price rises are both negative externalities. One can also compare it with Pigovian taxes and charges, such as the Congestion Charge in London – which seems to have worked rather well, although it now needs to be increased and expanded.

      In general I think we need to be more focused on taxing “bads” and less on taxing good things such as employment (and the Green Party is the only party in the UK which seems to recognise this). Indeed I think a coherent political philosophy could be formed around this, also encompassing land value tax and (existing and proposed) resource taxes, and taxation and/or nationalisation of natural monopolies.

      Interestingly, Bill Mitchell thinks that carbon credits are horrible and instead we should just legislate to shut down coal power stations, which I think is completely impractical and like asking for the moon. There’s no need to demand that, just demand cap-and-trade – when sufficiently strict and involving sufficiently many of the largest polluting countries, it will work just as well, only more efficiently. I think Mr. Mitchell has a blind spot when it comes to solutions to externality problems such as this, both in terms of climate change and in terms of inflation.

      • JohnB says:

        Absolutely – I support Phil’s proposal, precisely for making a JG more efficient, and I’d additionally support more selective pushing of workers from inflating sectors, into the Job Guarantee.

        Would the absence of the extra proposed policies though, not still cause workers to be pushed into the JG, by the fact that government will (I presume) have to be limited by inflation targets? (once those limits are getting hit, a reduction in spending – putting a squeeze on certain areas of the economy – seems inevitable)

        So, taking the above, I view that (inflation-targeted reduction in spending and/or increase in taxes) as something that will happen anyway, and what is proposed in the last two articles, makes that more efficient – and in addition to that as well, so would targeting specific inflating sectors, for increased taxes and tightened spending.

        I don’t know what I think of carbon credits (I’ve read it’s very easy to ‘game’/exploit), but yes, I also heavily agree with moving taxation more towards ‘economic rents’ – which fit a lot of what you describe.

        There was a ‘Do The Math‘ blog, by an ex-NASA physicist, who did an extremely good series of writeups on what is needed to transition away from fossil fuels (this in particular, was extremely good) – and indeed, a large mix/variety of different power sources (coal included) is likely to be necessary, as we are already past the window of avoiding an energy ‘crunch’, so there’ll be no technological magic bullets there.

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