The Job Guarantee, Wage-Price Inflation And Alternative Solutions: Part 1

March 25th, 2017
in macroeconomics

by Philip Pilkington

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.

Follow up:

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.


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