Job Guarantee and Employer of Last Resort schemes: the political constraints on maintaining full employment

Full employment is surely a laudable goal for a capitalist economy. Many of those inspired by Keynes, radical or otherwise, continue to carry the torch for policies to achieve it. But economic history suggests that there is a difference between achieving full employment and maintaining it, as Michal Kalecki argued back in the 1940s. Kalecki came up with the idea in economics of effective demand and its role in the determination of employment at around the same time as Keynes, and his thinking, which was more left wing and influenced by Marx, ultimately laid some of the foundations for the post-Keynesian school of economics.

A recent article in the Cambridge Journal of Economics (behind a paywall, though you can read the abstract) by Mark Setterfield, Peter Kriesler and Joseph Halevi (SKH hereafter), offers a critique of ‘Job Guarantee’ (JG) and ‘Employer of Last Resort’ (ELR) schemes intended to maintain full employment. These schemes count among their proponents many followers of Modern Money Theory. The authors of the article lump the two types of scheme together and call them forms of Buffer Stock (BS) employment policy. Essentially, both policies mean that in the event of an economic downturn and a fall in employment in the private sector, the government would employ all those who would otherwise be laid off from the latter, so that unemployment, and the attendant economic and social misery, would not rise. As the economy recovers and demand for workers in the private sector rises once more, the government schemes would diminish and release workers back into private sector employment. Thus, the schemes act as a BS which fluctuates inversely with private sector employment so that, at least in theory, full employment is sustained.

In their article, SKH consider the BS schemes in light of Kalecki’s ideas on the political aspects of full employment (FE), and how it may be relatively easy to achieve via policies which increase effective demand (or in this case via BS schemes), but likely much more difficult to maintain under capitalism in the absence of fundamental institutional reforms. They argue that the BS schemes do not remove the constraints that Kalecki identified.

Kalecki’s constraints and the possibility of reform

For Kalecki, capitalism tends to operate with surplus labour, or unemployment, as well as a degree of excess capacity in the workplace, so that the usual economic constraint on achieving FE is the level of effective demand, or realised expenditure in the economy as a whole. Government policy could raise demand via fiscal and monetary expansion and achieve FE relatively easily in a technical sense. But he identified several political obstacles to the maintenance of FE:

1. A general dislike of government intervention in the economy, particularly when it comes to employment creation, by private business and captains of industry concerned with the ‘state of confidence’. Fiscal expansion to increase employment can undermine their power to influence government when it comes to economic management and performance.
2. A dislike of rising government expenditure on public investment and subsidising mass consumption.
3. A dislike of the social and political consequences of maintaining FE over the long term. Even if profits are higher amid buoyant demand, the sack ceases to be a disciplinary measure as the bargaining power of labour increases vis-à-vis the capitalists. As Kalecki put it, “‘discipline in the factories’ and ‘political stability’ are more appreciated than profits by business leaders”. This produces the idea that “unemployment is an integral part of the ‘normal’ capitalist system.”

Kalecki argued that unemployment is the means by which the capitalist class asserts its control over the working class. There is nevertheless the possibility of reform which would entail a social pact or cooperation between government, capitalists, and workers as represented by organised labour or trade unions. This would involve regular agreements to manage the complications that arise with the removal of the threat of the sack as a disciplinary device in the workplace. It would include an incomes policy to prevent accelerating wage inflation at FE, and substantial negotiations over the terms and conditions of work. If these institutional reforms could not be made within capitalism then, Kalecki argued, the system should be “scrapped”.

There is an alternative to this kind of social pact, and that is an incomes policy based on fear. This takes the form of minimal labour market regulation, and reduced trade union power and workers rights as a regressive way of achieving FE while maintaining discipline in the workplace, notably wage discipline, and low inflation. Needless to say, progressives are against these kinds of policies.

Some issues with Buffer Stock schemes

BS schemes as a means to achieving FE, in the same way as monetary and fiscal policies which maintain buoyant demand, are likely to reduce the cost of job loss (the threat of the sack) as a disciplinary device over wages and hence the means to keep inflation low. Proponents of BS schemes argue that the government should set the BS wage level low enough when compared with that in the private sector so as to maintain a degree of labour market and overall economic efficiency. If the BS wage were set too high, then fewer workers would be attracted back into private sector employment during an economic recovery. It is therefore important to consider the impact of the BS wage level on the cost of job loss in the private sector. If the BS wage provides income greater than that previously paid out as unemployment benefit, then the cost of job loss will be less than in the absence of BS schemes, putting upward pressure on wages and inflation due to increased worker bargaining power. It would therefore require lower private sector employment in order to constrain bargaining power and its effect on wages and inflation. This would increase the cost of the BS scheme to the public sector and reduce the size of the private sector.

On the other hand, BS schemes may have a positive impact on the efficiency of the labour market if they reduce the degradation of skills when private sector employment falls during a downturn. This is because all workers would be employed in some way rather than there being a share of unemployed potentially subject to the decay of the skills they have accumulated and sustained while in work. The negative impact of frictional unemployment would thereby be reduced.

In the absence of BS schemes, spells of unemployment can also create worker stigma in the eyes of potential new employers, making the attainment of new employment more difficult. But such stigma might also be a problem for those on BS schemes, when employers compare them to those already employed in the rest of the economy.

BS schemes remain insufficient

In sum, BS schemes generally may not reduce or eliminate the need for the threat of the ‘sack’ created by the loss of private sector employment, whether that leads to a rise in unemployment or BS employment. The need for institutional change in the form of a social pact identified by Kalecki remains, whether BS schemes are used or not. But social pacts have historically been difficult to create and sustain over time. They require strong and cooperative trade unions and amenable governments and capitalists. Unions are needed to act as a form of countervailing power to the state and capitalists to overcome problems associated with class interests and conflict.

These difficulties make sustaining FE under capitalism problematic in general as the balance of power in society changes over time and across nations. BS schemes are thus not sufficient to sustain FE and remain institutionally inadequate. This is not to say that they definitely have no place in a reformed capitalism. But they are unlikely to sustain FE by themselves.