Simulating the Logic, Effects, and Costs of the Job Guarantee

Simulating the Logic, Effects, and Costs of the Job Guarantee Scott T. Fullwiler Wartburg College & Presidio Graduate School Hyman P. Minsky Summer Seminar Jerome Levy Economics Institute June 2012 JG and Great Recession--2009q2 to 2012q1 Simulation The Model Simulating JG JG employees pay employee portion of payroll tax but no income tax JG employees assumed to be "unproductive" for now JG wage adjusted to account for size relative to minimum wage via same method as FRB/US Why a Job Guarantee? The Proposal Sir William Beveridge (1879-1963): "True full employment exists only when there are jobs available for everyone who wants one." By contrast: The "Natural" Rate of Unemployment Cyclical Unemployment=0% Frictional Unemployment > 0% Structureal Unemployment >0% "Natural" Rate of Unemployment, NAIRU, Output "GAP," etc. Unemployed buffer stock of labor necessary to stabilize inflation "Taylor's Rule" approach to central bank strategy Inconsistencies in theory and policy: Millions in unemployed buffer stock to stabilize inflation Labor market policies assume unemployed are at fault Raising minimum wage misses the point Alternative paradigm: 100 dogs vs. 95 bones Employed buffer stock of labor vs. Unemployed buffer stock of labor Defining "Costs" What is the opportunity cost of an employed buffer stock of labor? 1. Crime/Prisons/Prevention 2. Domestic/Community "Unrest" 3. Human capital 4. Poor Health 5. Poverty 6. Involuntary Unemployment 7. Any "output" JG workers might provide From Bill Mitchell, et al., (2008) Productivity? Think more carefully about opportunity cost-- How productive are the involuntarily unemployed? JG in the Fairmodel The JG and Business Cycles Macroeconomic Effects Budgetary Effects Side Benefits Multipliers Counterfactual=No Obama Stimulus=Base Level for Comparison Obama Stimulus = $738B JG Only = $611B Obama Stimulus + JG = $1,292B So, JG is an automatic stabilizer, NOT stimulus. Small addition to potential output stimulus to bring full employment with lower inflation (<$100B over 3 years) Or, potential output stimulus can be smaller and less inflationary for same capacity utilization and private sector job creation if JG is added Payroll tax holiday + JG even even better given deflationary effects of lower employer costs So, the JG . . . Stabilizes GDP/Output AND Inflation across business cycles; modest effect on fx Provides stabilization to household and firm net saving across business cycles Adds to private sector job creation and capital stock "Costs" about 1% of GDP on average (depends on version of program implemented and accompanying safety net) Stochastic Simulation--How MUCH Stabilization? So, JG with efficient buffer stock and workers 1/2 as productive as pvt sector (=PROD in Table 2; 1/2 PROD = 1/4 as productive) stabilizes to the degree that monetary policy adds almost nothing (row 30 vs. row 31) JG with workers less productive than this or less efficient bufferstock still stabilizes in comparable magnitude to other rules Results are significant particularly given Fairmodel's bias against JG Price level set by unemployment rate (and other things) Other rules stabilize buffer stock of unemployed (i.e., unemployment rate) JG stabilizes total employment via fluctuating employed buffer stock Overall . . . Logic of JG in Business Cycles--stabilization with positive side effects JG is an automatic stablizer, not stimulus (this is not a problem--important to understand the difference) As an automatic stabilizer, JG compares favorably to several policy rules JG does not require policy makers to correctly interpret incoming data or have the "correct" ideology--it's AUTOMATIC "Potential Stimulus" = $Billion per qtr (2009q2-2012q1) in government purchases necessary to return to path of NGDP growth of 5% per year using 2007q4 as starting point. Government purchases = largest multiplier spending in Fairmodel (1.0-1.5, depending on time frame). So, "Potential Stimulus" is a low-end estimate for spending, and 2007q4 isn't necessarily full employment NGDP.