Opinion: Job Guarantees – an economic stimulus worth considering?

India introduced a job guarantee programme, for the rural poor in 2005. It was dismissed by many as fiscal folly. Yet this developing country has weathered the financial storms of the economic downturn far better than most European countries. Argentina ran a successful programme in the wake of their debt default and Canada has had a good experience with such programmes.

Job guarantee as an economic policy builds on the concept of employer of last resort. The policy requires that the public sector offers a fixed wage job to anyone willing and able to work. The job pool expands when private sector activity declines, and declines when private sector activity expands.

To avoid disturbing the private sector wage structure and to ensure the job guarantee is consistent with inflation targets, the wage rate should be set at the current legal minimum wage for each age range.

Under the programme, people of working age who are not in full-time education or full-time employment would be entitled to a full-time or part-time job, undertaking work of public benefit at the minimum wage. The aim is to replace involuntary unemployment with paid employment, so that those who are at any point in time surplus to the requirements of the private sector (and mainstream public sector) can earn a reasonable living rather than be forced to become reliant on benefits.

A citizen’s income tax credit, equivalent to the current unemployment benefit could replace most existing benefit programmes and be recouped by taxation of a full-time minimum wage sufficient to ensure an effective zero rate of deduction from minimum wage earners.  Full-time employment (supported by child care provision) would become part of the eligibility criteria for able-bodied social housing tenants and housing benefit claimants.

It is a genuine bottom-up approach to economic recovery. It stabilizes the incomes and purchasing power of individuals at the bottom of the income distribution that trickles up and stabilizes the rest of economic activity. Strong and stable demand means strong and stable profit expectations – the conditions needed to restore confidence in business investment. A programme that stabilizes employment and purchasing power is a programme that stabilizes cash flows and earnings. Stable incomes through employment also mean stable repayments of debts and greater overall balance sheet stability.

I have suggested in an earlier article that a job guarantee programme aimed at tackling structural youth employment may require a public investment of 2.5 billion and generate 3.75 billion of additional GDP.

A programme that included over 25s would be targeted at the long-term unemployed in regional unemployment hotspots. Such a programme may attract between 500,000 and 750,000 adult participants and cost a gross 6 to 9 billion. Headline costs reduce substantially with savings in benefit payments and it is quite possible that the effects of the economic stimulus at the lower range of the income distribution would make the programme self-financing.  An unacceptable risk to the deficit reduction programme? Contrast this with the cost of an early increase in the personal allowance to £10k (10 billion), Ed Balls’s proposed VAT cuts (12 billion) or Liam Fox’s preferred business tax cuts, all of which would need to be paid for by bringing forward future spending, borrowing, further expenditure cuts or tax increases elsewhere. We can then conclude that the cost issues come down to priorities, economic leanings to redistributive stimulus measures and political will.

* Joe Bourke is an accountant, former parliamentary candidate and Treasurer of Hounslow Liberal Democrats

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26 Comments

  • Andrew Suffield 1st Mar '12 - 6:17pm

    A nice idea. What work of public benefit would you find for them to do?

    That’s the really interesting bit, and it’s notably missing.

  • Andrew,

    The jobs of public benefit are those that we would do if we had the funds. With libraries, community centres, youth clubs and recreational facilities facing closure across the country – maintaining these community facilities would be an obvious first priority. Local authorities would administer the scheme. Projects submitted by local charities, community and environmental organisations, social enterprises and small business incubators would be assessed on a needs basis.

    The tax-free personal allowance is due to increase by £630 to £8105 in April this year. Increasing the allowance to £10k now will cost circa 10.5 billion in 2012/13, 7 billion in 2013/2014 and 3.5 billion in 2014/15 i.e. 21 billion over 3 years.

    £7 billion a year, over the next three years, would cover the costs (net of benefit savings) of employing roughly 1 million workers on minimum wages. £7 billion is the estimated annual amount of additional tax that can be raised by restricting pensions relief to the 20% basic rate of tax i.e the rate of tax that the great majority of taxpayers pay on their pension income.

  • Andrew Tennant 1st Mar '12 - 7:40pm

    I’m not opposed in principle, but I have two questions:
    1) Were the individual’s labours worth minimum wage, would not an employer somewhere already be willing to pay them?
    2) If offering a job guarantee to those whose labours are not worth minimum wage, then how poor value need their labours be to withdraw the offer? A person turns up and does nothing – do they still get paid? A person turns up and actively detracts from or damages the work of others – should they still get a salary?

  • Interesting idea – would there be any element of compulsion?

  • Richard Dean 1st Mar '12 - 7:52pm

    I recently returned from Trinidad, in the West Indies, where they have two schemes which might be something like this – the Unemployment Relief Program (URP), and the CEPEP (Community Environment) program. I think people who need money can sign up on a day-by-day basis to do community work of the type you describe. The work gangs clean up streets, cut grass verges, etc. They are not very productive – you see at least half doing nothing while the other half work slowly – but they provide fantastic help to the poorest people in the country.

    I imagine that one of the potential problems might be that the schemes distort the business and employment worlds. If I invent a new, more efficient grass cutting machine, can I still set up in business and compete against guaranteed-work groups for local government contracts to cut verges? Conversely, can I provide the scheme with my invention and thereby make other verge-cutting companies go out of business? Can councils sack expensive workers and then re-employ them at a cheaper rate on this scheme?

    Another issue is motivational – the scheme removes the fear of unemployment which keeps some people from leaving their present jobs, and there is little motivation for people on such a scheme to perform efficiently.

    WIth high UK unemployment and almost 50% of under 25’s out of work in some EU countries (http://www.independent.co.uk/news/world/europe/eurozone-unemployment-hits-new-high-7468651.html), something drastic is needed, and I think this is worth looking at. I think the people in Trinidad found that the scheme sufferred from unexpected corruption – it seems that there are always people who take unfair advantage, so new proposals have to address those issues.

    Is the scheme necessarily coupled to the citizen’s income concept, or can it be run independently of that concept?

    I hope these comments are not discouraging!

  • Good idea, that is why it will never be adopted. The government wants a pool of unemployed, and the economic policy it adopts requires this.

  • Won’t this mean that employers paying the minimum wage simply won’t be able to recruit? Why would anyone in a cushy state occupation want to take on a private sector job under this scheme, if they have the “right” to a job anyway? Also who is eligible? UK citizens only, or all EU citizens?

  • We used to have this, many years ago – it was called the Old or Elizabethan Poor Law, which predated the workhouse.

  • Andrew Tennant,

    My thoughts are

    1) there are currently 2.6m unemployed (including 1m 16-24 year olds) and 400.000 job vacancies, mostly at low wage levels and not in the regions worst affected. Minimum wage rates run from 2.60 per hour for 16/17 olds (try getting a teenager to wash the car for 2.60) to 6.08/hour for over 21s. A key element of the program is the economic stimulus needed to generate private sector job creation. The stimulus comes from a redirection of government spending on higher rate pension relief to wages for the unemployed.

    2) A job guarantee program serves to provide work for those who find themselves temporarily surplus to requirements, and as a means for younger workers and the long term employed to gain the work experience necessary to improve their value in the labour market. The terms and conditions of their employment should mirror those they will encounter in the private sector including the standard disciplinary and grievance procedures common to all employment agreements.

  • Tabman,

    No element of compulsion should be introduced. There may be many reasons why people are disinclined or unable to take up an offer of minimum wage employment. What is important is that it is made available to those who need it. Of the 2.6m unemployed only 1.6m are JSA claimants. Some will not be eligible for JSA and others may not need or want to jump through the hoops that claiming unemployment benefits entails.

    The exception to this would be new claimants for social housing tenancies or housing benefits. If they are not incapacitated or in full time education, training or employment at the time of application for a tenancy or housing benefit then it would not be unreasonable to expect a guaranteed job offer to be accepted as part of the application process.

  • Richard Dean,

    Interesting comments about your experiences in the Caribbean. I would hope we could do better than cutting grass verges as we have the machines for this already. One fruitful area could be affordable child care provision. With Child care costs running at something like 15,000 per year many mothers who would like to be able to work are excluded from the workforce. They and single mothers staffing affordable child care centre’s could free up a lot of women that may otherwise be housebound. Affordable home care assistance for the elderly is another area in need of serious attention that councils are struggling to meet. Community organizations and social enterprises are constantly in need of manpower resources for projects. The temporary nature of these projects is important as the pool of workers available will decline over time.

    The pool of workers employed can be expected to decline as the economy recovers and people take up more rewarding work in the private sector. The economic recovery will be aided by the stimulus of a net 7 billion increase in purchasing power being made available at the bottom rung of the income distribution scale. For this reason the job pool cannot be relied upon by local authorities as a permanent substitute for or replacement of core staffing levels.

    The scheme is not necessarily coupled to a citizens income. The introduction of Universal credit will aid in incentivising those caught in the benefits trap to take up an offer of employment. A basic income would however provide for carers and others who may not be in a position to take up an offer of employment and more fully eliminate the current disincentives of benefit withdrawal when taking up part-time or low paid work.

  • Richard Dean 1st Mar '12 - 11:54pm

    Community projects looks good, but I’m not sure that child care or home assistance would be suitable. Both need skills that the pool may not all have, and probably require some form of continuity that the scheme should not provide. Would an old person appreciate a different home help every day or week or month? Both also need careful monitoring, as not everyone in the pool will be a nice, patient, respectful, honest, loving person.

  • RC,

    even after shifting 1m off the dole, there will still be a rump of 1.6m unemployed against roughly 400,000 job vacancies, a ratio of 4:1. Beveridge’s definition of full employment was when the number unemployed was equal to vacancies in the economy. The increase in unemployment of about 1 million since the start of the downturn is largely made up of people made redundant, in both the private sector and public sector, and new graduates/school leavers. These former employees, graduates and school leavers will be highly motivated to secure better paying work with long term career prospects as soon as the anticipated economic stimulus begins to create private sector job opportunities.

    Eligibility would be based on the existing criteria for JSA with the addition of 16/17 year old’s who, in the main, do not currently qualify for unemployment benefits.

  • Tim,

    With the current direction of travel we may well see the return of Dickensian conditions to this green and pleasant land.

    As a party we are committed to a fairer society in which no one will be enslaved by poverty. To me that means ensuring that everyone seeking work has the opportunity to at least earn a minimum wage; that 16-24 old’s are offered work within a structured training programme as detailed here ; and that those who cannot work or devote their time to unpaid work in the community or caring for children, partners or relatives can rely on a basic minimum income.

    To deliver on this committed, I am of the view that we need to redirect spending from higher rate tax reliefs to a job guarantee program and undertake a major reform of tax and benefits as follows:

    1. Replacement of personal tax allowances, child benefit, JSA and most means tested benefits with a citizens incoome equal to the current level of JSA.

    2. Combining of income tax and NI into a flat tax of 32% and application of this flat rate to alll sources of income including capital gains, corporation tax and inheritance tax.

    3. Replacement of the approx 60 billion of higher rate tax on income with a progressive tax on the 4.3 trillion of residential and commercial property assets in the UK. Over time land values would replace property market values as the tax base.

    Details are available here

    None of these programs would increase the overall tax burden in the economy or increase borrowing requirements. It is purely based on a rationalization of the current tax code and welfare system that shifts a very small percentage of national income from the upper ranges of the income distribution to the lower ranges.

  • Richard Swales 2nd Mar '12 - 8:33am

    This is basically the work-for-benefits idea that is so unpopular with left-wingers. Suddenly when you dress it up as gauranteeing the “right to work”, (rather than as now “the right to make the rest of society work to support you”) it sounds better.

  • Richard,

    I expect you are right about the kind of difficulties that will be encountered. However, an average constitutency would have a flexible employment pool of about 1500 workers (around 3% of the workforce) and around 11 million of funding.. A good perentage of the staff engaged would have prior working experience and skills, some perhaps in child care provision and social care. These staff would be the mentors and trainers for younger and less experienced staff. A similiar approach can be applied to developing other skills e.g. tradesmen training and supervising younger workers in construction skills to accelerate the bringing of dilapidated council properties back into use or council schemes to refurbsh flats above shops to increase the stock of accomodation in the private rental market. Such schemes are paid for by flat owners by collection of the costs from private rents as the flats are let out.

    Graduates can gain and impart useful skills by teacing much needed remdial numeracy and literacy classes to improve the future job prospects of younger and older workers alike. Other graduates may be engaghed to deliver English as a foreign language courses to ethnic minority communities. These are all local authority activities that have been cut in the current climate due to lack of availble funding.

  • Richard Swales,

    there is a crucial difference. The program is voluntary and pays the minium wage, putting significantly more money in the pockets of participants than they would receive from a reliance on benefits alone.

    If the job guarantee program was followed on with the introduction of a universal citizens income tax credit to replace tax allowances, reliefs and exemptions and most existing benefits, the whole edifice of the welfare system would change from one of resentment and suspicion to the common security of knowing that whatever life throws at you there will always be a minimum guaranteed income available to help you get through..

  • William,

    “The government wants a pool of unemployed, and the economic policy it adopts requires this.”

    The tory government of the 80’s argued that high unemployment was a price worth paying to control inflation. The dominant economic orthodoxy practised around the world accepts involuntary unemployment as a necessary policy tool to control inflation. As cost pressures rise, the standard monetary policy carried out by cental banks tightens interest rates, creating a buffer stock of unemployed people, that is intended to reduce wage demands, and ultimately inflation. When inflationary expectations subside, interest rates are reduced and job creation is allowed to resume . The unemployed serve as a reserve army of labour. By contrast, in a job guarantee program, a buffer stock of employed people (employed in the job guarantee program) provides the same protection against inflation without the social costs of unemployment, fulfilling the dual mandate of full employment and price stability.

    However, in our present low interest rate environment, it is not cental banks monetary policy that is creating unemployment; but rather the contraction of money supply that follows widespread deleveraging in the banking sector coupled with the dampening effects of a painful but necessary fiscal retrenhment..

    With a 0.5% base rate in the UK, monetary policy has reached the limits of its stimulative effectiveness. Quantative easing supports asset prices and provides a buffer against a more severe money supply engendered contraction, but has little stimulative effect on economic growth. The new policy of credit easing is due to begin next month whereby the Bank of England will create new money and purchase packages of business loans in an effort to stimulate business investment activity. We shall have to wait and see how effective this new program is.

    My view remains that the widedening inequality gap that we have seen develop since the 1980’s in this country, is itself a major impediment to economic growth and stability. Correcting, at least in part, that level of inequality, can furnish us with both a much needed economic stimulus at this time and a more stable economic base to build upon.

  • As an ardent fan of MMT i am very encouraged that you have picked up on it and created a debate on its merit .
    I pray this idea goes further than this article for the sake of our country .

  • Pavlina R. Tcherneva 6th Mar '12 - 8:22pm

    Dear Joe Bourke,
    Thank you for this article. I wholeheartedly support your formulation of the problem. I am afraid, however, that so long as policy makers continue to believe that they are running against a hard budget constraint and the deficit has to be reduced first, none of these programs stand a chance. Note that the UK spends in its own currency (the pound sterling) and it can never run out of pounds in funding important programs that serve the public purpose. The UK is not like Greece and the other members of the EMU which are using a currency over which they have no sovereign control–those countries do have hard limits to spending. Not so for the UK or the US. The problem is lack of enough jobs for those who want to work, not the deficit.
    Once we move past this misconception, then we can truly launch a genuine bottom-up approach to fiscal policy, which is exactly how I have framed it in my own research: http://ineteconomics.org/people/pavlina-tcherneva.

    Finally, the job guarantee improves the income distribution faster than any other type of fiscal policy, because it stabilizes employment at the bottom and allows incomes at the low end of the income distribution to improve faster than incomes at the top. Currently fiscal policy works precisely the opposite way–it improves the employment conditions and incomes of the so-called ‘employable’ individuals–high-skill/high wage workers with little interruption in employment experience. For a genuine bottom up approach, policy must target those who experience the most precarious labor market conditions–the poor and the unemployed.

  • Thanks to all those who have posted references to Modern Monetary Theory (MMT(. It is an economic debate that I am following with interest.

    As to the effectiveness of job guarantee schemes versus workfare, I would urge anyone with an interest in these matters to read the DWP report on the subject: job guarantees

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