Category Archives: Unemployment and Inflation

Energy Bill Relief and the Inflation Dragon: A Fairy Tale?

Last week the official inflation data came in higher than expected with a 1% rise in the Consumer Price Index (CPI) for the March Quarter (up from 0.6% for the previous quarter). That led to much commentary that it was the end to hopes for a cut in interest rates later this year. Apparently the inflation dragon is yet to be slayed, and, as noted in an earlier post, despite an alleged broadening of its focus, the Reserve Bank still aims its sole and somewhat blunt weapon first and foremost at the dragon.

The concern about the inflation dragon also flows through to the upcoming federal budget. The government is under significant pressure to provide cost of living relief, but its options are limited by the need to avoid contributing to further inflation by spending money or enabling more household expenditure. This is all premised on standard monetary macroeconomics which sees increasing money supply leading to increased demand and (absent proportionate production increases) to inflation.

But since neoliberal economics has seen governments of both political stripes outsource monetary policy (to the RBA), abandon fiscal policy (because higher taxes are bad) and largely ignore direct price controls[1] as means of constraining demand and inflation, how can the government help households without being economically irresponsible?

The Quest

The answer appears to lie in a magical quest to slay the inflation dragon (or at least control it) with a new weapon of “non-inflationary” spending. And in this quest, the government is aided by the good folk at the Australian Bureau of Statistics (ABS) who produce inflation data and some lazy economists who think that the data (the CPI) is the actual thing (inflation). Marx would probably call this data fetishism, but in a post-structural twist on ye olde dragon tale, the quest morphs into slaying not the inflation dragon, but its signifier – the CPI.

Image of the CPI header from the ABS website - but no mention of an inflation dragon.

How does this work and why is it important?

Let’s consider the Energy Bill Relief package announced in the last Federal Budget. It is a prime exemplar of this non-inflationary spending.

In the face of sky-rocketing energy prices, the federal government spent some $1.5bn (matched by state and territory governments) to provide a rebate on electricity bills for low-income households and small businesses. Without the rebate, the ABS estimates that electricity prices would have gone up by 17% since June 2023, rather than the 3.9% increase measured in the CPI. (This is because the CPI measures changes in the prices paid by households, so the government subsidy reduces that price – even if the actual price charged by the energy company has still gone up by the higher amount).

Sidenote: a similar calculation applies to the 15% increase in Commonwealth Rent Assistance in the last budget (totalling $540m this year) which took 1.7 percent points off what would have otherwise been a 9.5% increase in CPI for rent over the last year.

These policies provided welcome relief for low-income households struggling to pay for essential items, and as the data shows, they brought inflation down.

But this is just a mirage. Let’s consider what happens in the real world not defined by CPI.

Electricity Bill Relief v the Inflation Dragon

Ignore for a moment the problem that (at this stage) the energy bill relief is temporary, so electricity prices in the CPI will rise when it runs out. But remember that the package was introduced in the face of massive predicted energy bill increases. So, if a household’s electricity bill was $1,000 (to keep the maths simple) in June 2023, according to the CPI the household would now be paying $1,039 instead of the $1,170 that would apply without the rebate. There is still a cost increase to the household (inflation), but just looking at the bill, the government expenditure has at least constrained the dragon rather than fuelling its inflationary fire.

However, the analysis gets a bit trickier when we look at the household budget more broadly. Without the rebate the energy bill would be higher, but for many low-income households with no spare capacity in their budgets, a substantial rise in electricity prices is paid for by decreasing other consumption (often food because it is a more flexible expenditure). In that case, the total household expenditure is unchanged and the absence of the rebate does not increase demand or inflationary pressure in the economy – it is just shifts demand from food to electricity. In that context, the energy bill rebate is a good social policy (because the household can afford food), but it would have no impact on the inflationary pressure generated by household demand.  

That said, some households who received the energy bill rebate would have some savings or savings capacity (not least because the relief was poorly targeted). The increased cost of electricity could be met by those savings, or simply spending more and saving less in the budget. Either way, the total household expenditure would increase, and as this money flowed into the economy, it would increase demand and inflation.

While the energy bill rebate appears to lower inflation when we just look at the electricity bill (as the CPI does), when we look at the household more broadly it may have little impact or may fuel inflationary pressures.

The Macro-economy and the Inflation Dragon

But dragons fly higher than houses and it is only at the macro level that we see the inflationary impacts plainly. While in the above example, the household electricity bill went up by $39, the actual bill still went up by $170 and that extra money was paid – by the government. That money ($3bn in total) is out there in the economy. It initially goes to the energy companies, then to suppliers, workers and shareholders and is multiplied through their additional income and expenditure (with leakages for savings and overseas ownership).

All other things being equal (i.e. unless the government taxes back the energy bill relief expenditure, or it cuts spending elsewhere), this is just $3bn that governments are pumping into the economy and in standard economics that adds to demand and potentially to inflation. It is not magically non-inflationary simply because it is invisible in the CPI (which was not designed to capture it).

Just because you can’t see the dragon does not mean that the economy around you is not heating up!

Conclusion

None of this is to say that the Energy Bill Relief rebate (or the increase in rent assistance) were bad policies. They were not bad (notwithstanding the poor targeting of the energy bill relief, and the eligibility restrictions for CRA). Both measures provided much-needed support for people and households in need – I am just unconvinced that they would not add to inflation pressures.

If there is a magic trick to be had in this tale of the inflation dragon, it is not in the designation of some government expenditure as non-inflationary or imagining that restricting CPI is the same as controlling inflation. The real magic is probably in questioning the economic theory of the relationship between money supply, demand and inflation. There are some examples of this (in MMT and in the analysis of profit-led inflation), but that is a story for another day.

[1]              The exception here was the Federal government temporary cap on gas prices, but beyond that, there is no political will for such a controls – witness state and federal governments running a mile from rent freezes or even capping rent increases.

Premier Malinauskas’ “Full Employment” – a dangerous definition

Yesterday (21 February 2024), on ABC Radio National, the South Australian Premier Peter Malinauskas told the country that we have full employment in the state. It is a claim I have heard him make before. Given that I think that full employment is a historical myth, at best an unstable temporary state, and probably unattainable in the long term, I did a quick fact check on the Premier’s statement.

Head shot of Peter Malinauskas

The latest data from the ABS shows that in January 2024, the unemployment rate in South Australia was 3.9%, equating to around 40,000 unemployed people. The underemployment rate was 7.6% of the labour force, which means that there were an additional 75,000 people who were less than fully employed. Further, the proportion of the state’s population who were employed was significantly below the national average, so we probably have an unknown number of unregistered unemployed people.

So, on its face, the Premier’s claim is simply wrong. There are clearly unemployed and underemployed people in SA looking for jobs. We do not have full employment.

At this point a populist would bemoan “lying politicians”, but the Premier was probably relying on the infamous NAIRU, the Non-Accelerating Inflation Rate of Unemployment, to define full employment. The NAIRU is basically the minimum level of unemployment that is not expected to trigger supply constraints and inflation. It is a definition of “desirable” rather than “full” employment, but Malinauskas is not alone in using this as the definition full employment. In fact, such definitions are crucial to current federal policy debates.

The latest review of the Reserve Bank was celebrated for giving the goal of full employment equal status with its inflation management goal – a radical departure from its inflation-focused recent history. However, the RBA’s December 2023 Statement on the Conduct of Monetary Policy makes clear that this full employment is the “maximum level of employment that is consistent with low and stable inflation” (the NAIRU).

As Mike Beggs argued in a recent JAPE article, when the RBA defines full employment as the NAIRU, then the change is essentially meaningless. Economic growth and the existing inflation target will deliver the NAIRU “full employment” (almost by definition) – while actual unemployment will continue.

The Federal Treasurer Jim Chalmers also notes the problem of using the NAIRU as a measure of full employment, saying of the NAIRU:

“While it’s a useful measure, it doesn’t capture the full potential of our workforce and it shouldn’t – and doesn’t – limit the Government’s ambitions for getting more Australians into work.”

Chalmers’ White Paper on future work defines full employment as where anyone who wants a job can get a job without searching for too long.

This is a more common-sense definition, but it is hard to see how we will achieve this full employment if State Premiers and economic institutions like the Reserve Bank use a language which renders unemployed people invisible. Unemployed people simply cease to exist when the NAIRU is translated as full employment.

As a general rule, if you actually want to get unemployed people into work, you probably need first to acknowledge that they exist.

Alternatively, if the reality is that you don’t want or can’t have full employment (in the sense of everyone being able to get a good job), then you might want to find other ways of ensuring unemployed people have access to a dignified life (rather than pretending they don’t exist, or trying to starve them into work with conditional welfare at below-poverty-line levels).

Either way, pretending that unemployment does not exist by adopting a NAIRU definition of full employment is dangerous. It misdirects political debate and shuts down policy options that would deliver better outcomes for unemployed people and the community more broadly.

Inflation – what to do depends on your starting point

I have a T-shirt that I am wearing as I type this. On its front, in mock Gothic text are the words:

The wealth of those societies in which the capitalist mode of production prevails, presents itself as “an immense accumulation of commodities,” its unit being a single commodity. Our investigation must therefore begin with the analysis of a commodity.

These are the opening words of Marx’s epic work, Capital. As openings go, it is not as memorable as “In the beginning God created the heavens and earth” (Genesis), or “Man is born free, but everywhere is in chains” (Rousseau), or even Marx’s own “There is a spectre haunting Europe”.

However, it was only after reading Anwar Shaikh’s Capitalism and listening to his lectures that I realised the importance of this opening to Capital.

T-shirt with the opening words of Marx's Des Capital.

Comparing starting points

Marx’s words here are a recognition that to analyse capitalism we must start with the production of commodities, and their expression/capture of value. In capitalism, production does not happen as a charitable act or even as a provisioning of society in response to demand for goods and services (because we know that many people are not provisioned and some demand for necessities is unmet). Rather, production is organised and happens in the expectation of profit. From this starting point comes an analysis of:

  • how the production process is structured and contested,
  • the extraction of value beyond the cost of inputs into that production process, and
  • how this surplus is shared through the community – initially the distribution between capital and labour, but subsequently through flows to different parts of capital (e.g. financiers, technology owners) and finally through tax and transfers to different parts of the economy and society.

By contrast, much mainstream economics tends to start from exchange in a market – the price at the meeting of supply and demand. The production process is almost assumed (at least in the first instance). The return to capital is naturalised at an equilibrium rate determined by the market, while at the macrolevel, equilibrium can be obtained (or at least approached) by management of supply and demand – because what governs the economy is not a pursuit of profit but a market whose “natural state” is equilibrium.[1]

At one level, the different starting points mean that we are simply asking different questions and one may choose a theory depending on what question you want answered. However, it is more complicated than that, partly because the above is over-simplified, but also because, as I argued long ago, such theoretical starting points do not just ask different questions, they actually create different objects of inquiry – “the economy” is a different animal in the different theories.

But beyond that, the different starting points may have very different policy outcomes. Take for instance our current problem of persistent inflation.

Inflation

Regardless of the external factors that may have kicked off inflation (e.g. COVID, war, energy shocks), if your economic starting point is a supply and demand equilibrium, you are likely to see the need to reduce demand in the economy to ensure that demand is not exceeding supply and thus pushing up prices. At the most basic level, reducing demand at the macroeconomic demand can be done by:

  • fiscal policy, that is, increasing taxes to take money out of households and business, thus reducing their demand for goods and services), or
  • monetary policy – that is, increasing interest rates which in theory will increase savings (or loan repayments), similarly meaning there is less money to demand goods and services.

Fiscal policy is regarded as dangerous, partly because neoliberalism has convinced us that taxation is bad (and even undemocratic) and partly because surpluses lead to political pressures to cut taxes or spend more – which would be inflationary. So, we are left with the Reserve Bank increasing interest rates to try to dampen demand and bring inflation back to its target zone (2-3% p.a.)

However, if you start your economic analysis not from a theory of equilibrium supply and demand, but rather from a theory of capitalism and flows of value in an economy, then firstly, you might question the possibility of macroeconomic control by demand-management – as Shaikh does. Secondly, you might want to trace the impact of interest rates on flows in the real economy, where higher interest rates represent a bigger claim on surplus by finance capital. In this analysis, those seeking to make money out of non-finance capital are forced, to the extent possible, to increase their prices to maintain their return on capital.

This is most evident in the housing market where rental prices are increasing faster than inflation (September Quarter 2023 CPI: 5.4%, rent increases 7.6%). Higher interest rates increases costs and lowers the return to landlords with mortgages. They then put up rents to cover their increased costs, while landlords without mortgages can cash in on the higher rents attainable in the market. In this scenario, interest rates are driving rental inflation. Further, as the ABS has highlighted, rent increases are one of the major contributors to overall inflation. This is not to deny that there are supply problems in the rental market, but it does suggest that increasing interest rates may have a contradictory inflationary impacts.

Similarly, the conventional wisdom of higher interest rates taking money and demand out of the economy is challenged by the fact that around one-third of Australian households are not paying a mortgages or rent. For many of those households, higher interest rates translates as increased income from their savings. They have more money to spend and there is a growing recognition that this is promoting demand in those groups and undermining the demand-reducing purpose of increasing interest rates.

Conclusion

Put most simply, increasing interest rates to control inflation makes sense if your starting point is a conventional supply and demand analysis where macroeconomic outcomes can be regulated by demand management. But increasing interest rates to attack inflation makes less sense if your analysis starts by looking at how capital will respond to such an increase, and how that will impact on economic flows in the economy. In this scenario, increasing interest rates is possibly counter-productive (even in its own terms – and not even thinking about the human cost of the “desired” economic slowdown). At best it is a blunt instrument when more direct market interventions (such as price caps or taxes) could better impact on the particularly economic flows driving of inflation.

Or, to put it another way (in light of populist media attacks on Philip Lowe and Michele Bullock), don’t blame the person or personality of the Reserve Bank Governor – blame the economic theory.

[1]              In Shaikh’s analysis, this supply-demand-equilibrium applies as much to Keynesian and neo-Keynesian economics as to neoclassical economics, it is just that the former theories recognise that the equilibrium may, without state stimulus, be below a full employment of resources.

Did We Ever Have Full Employment?

Did we ever have full employment? It seems like a simple question – just a matter of checking the historical data and answering yes or no. But strangely, it is not so simple. And nor it is just a curiosity of history. It is a question loaded with contemporary significance.

The Long Boom

The golden era of full employment was the Long Boom (or the Trente Glorieuses in France – because everything sounds better in French!) which followed the Second World War and lasted until the 1970s. In Australia, with post-war construction and Keynesian economic strategies dominating economic management, the unemployment rate averaged 1.9% from 1941 to 1974 – with most of that accounted for by frictional unemployment as people changed jobs. Further, the employment model was largely full-time, under-pinned by a centralised wage-fixing system and industries protected by significant tariff barriers (as well as the expense of pre-containerised shipping – which also meant mass employment on the waterfront).

So, question answered. We did, for all practical purposes, have full-employment in that long boom. Since then, the world has changed. Unemployment has generally hovered between 5% and 8%, peaking in December 1992 at 11.2%, and a different policy mix is clearly required to re-establish full-employment in the modern economy. But the data clearly suggests that it is possible to have full employment in a capitalist economy.

Hmmm – not so quick. Firstly, given the historic record before and after the Long Boom, that period may have simply been an aberration – a one-off event caused by a unique coincidence of factors which can’t be repeated. More importantly, it should be remembered that these very low unemployment rates were obtained in part by culturally or legally excluding parts of the workforce.

Women who had been employed through the Second World War were forced out by cultural norms, or social pressures to give up their jobs for returning heroes or later for men who had families to feed, or women were simply barred from work. Indeed, the marriage bar in the Commonwealth public service (and in other major employers like banks) lasted officially until 1966, and probably informally in some instances for much longer. Women like my mother simply lost their jobs on marriage and were out of the workforce for years, but they were not “unemployed”.

Similarly, given the long history of Aboriginal exclusion, wage theft and the ambiguous labour force status of station workers and domestic servants, it is likely that the unemployment data did not capture the reality of Aboriginal employment and unemployment.

And many people with disabilities who are now in the labour force (but not necessarily employed) were kept at home and either not expected to work, or placed in sheltered workshop “employment”, both potentially hidden forms of unemployment.

So, on closer inspection the golden age of full employment was not – at best it was full male employment with caveats. To refer unproblematically to the full employment of the long boom is to take a gender-blind and privileged view of history.

Participation Rates and Full Employment

The crucial factor here is the labour force participation rate, that is, the proportion of the adult population in the workforce. The graph below shows the significant rise in participation rates since that golden age, from 60.2% of adults in the workforce in 1966 rising to 66.5% in January this year. This growth was driven largely by the increasing proportion of women entering the workforce, from 36.6% of adult women in the workforce in 1966 to the current 62.1%.

Line graph of labour force participation rates from August 1966 to January 2023, showing rate increasing the through the 1970s, dropping back to around 60% in the late 1970s early 1980s and then a long term secular growth since then.
Source: ABS Labour Force, Historical Charts.

This increasing participation rate is important because, if today’s participation rates applied in 1966, then there would have been 515,000 more people in the workforce (my calculation from ABS Labour Force data). If there were same number of jobs at that time, then the unemployment rate would have been 11.1%, not the 1.8% in the ABS data. Again, not exactly the “full employment” of legend.

Of course these counter-factual statistics are flawed because if the labour force participation rates were higher and those hypothetically unemployed people were actually “in the workforce” then the price of labour may have been lower (especially as this was pre-“equal pay” so women were cheaper to employ). Further, expenditure patterns would have been different if some of those people found employment (and the non-market production of cooking, housework and childcare may have been monetised sooner creating more jobs). All of which may have created more employment.

The counter-factual data therefore does not definitively give us a negative answer to the question of whether we ever had full employment. Rather, it reminds us that the statistics are not neutral. The statistic data, like the very notion full employment, is in part socially and politically constructed by the social patterns and expectations of the time.

Theory and Policy

This social construction immediately makes me suspicious of any economic theory that posits employment dynamics (full or un/under-employment) as being driven solely by market dynamics, for example aggregate supply and demand.

At one level, this is a critique of most macroeconomic theories, but the proposition that we possibly never really had full employment is particularly problematic for Keynesian and post-Keynesian theories. As noted in my previous post, such theories posit full employment as not just possible, but as the aim of macroeconomic policy. It is also those theories which tend to hark back most to the golden era of “full employment” for real-world legitimacy.

Of course, the historical record does not definitively rule out full employment (even if we did not have it in the past, it may still be possible in a theoretical future), but the long-term record is not promising.

Given the enormous social and economic costs of unemployment, the idea that full employment may not be possible is hard to stomach. But simply wanting it does not make it possible.

By contrast, both the Monetarist-neoclassical and Marxian-classical schools of thought posit some level of unemployment as being inherent in the system – the former with a NAIRU, the later with a reserve army of unemployed. (Again, see previous post).

What is at Stake?

If the mainstream theory or the Marxists are right, then the post-Keynesian full-employment approaches create false hope and may be economically counter-productive, but of course if full employment is possible, then both mainstream economics and Marxist theories may be selling the unemployed short. That is what is at stake in the curious debate over historical full employment.

That said, I do not think that accepting that full employment may not be possible is giving up on the unemployed. Certainly, as I suggested previously, the idea that there is a natural level of unemployment has been deployed by neoliberalism to undermine progressive interventions in the economy (unions, minimum wages, welfare) and limit government spending.

However, the idea that unemployment is inherent in the economic system can equally be deployed to undermine the stigma of being unemployed (because someone has to be unemployed) and to create arguments for minimum income guarantees not attached to workforce participation.

The policy approaches here and are as debateable as the political economic theories which underpin them. I am simply suggesting that, at a minimum, we might want to have those debates without reference to an idealised era of full employment which was socially constructed at best, and fictitious at worst.

What Level of Unemployment is Acceptable? Theory and Policy

In a previous post I highlighted unemployment data which showed that, despite all the business and economic talk of labour shortages, the rates of effective unemployment are higher than in the official ABS headline data and that there remains a problem of entrenched long-term unemployment. However, in policy terms, what we make of the level of unemployment – and what to do about it – is shaped by one’s theoretical starting point (with the following discussion of theory drawn primarily from my reading of Anwar Shaihk’s Capitalism, Competition, Conflict and Crisis).

Theories of Unemployment

Neoclassical

In the neoclassical theoretical model there should be no unemployment because in a perfect market wages would be at the price where the market cleared – that is, the demand for labour matched its supply. Any unemployment is therefore a product of market imperfections (lack of full market knowledge or mobility of resources, or pesky things like minimum wages, unions, government regulation, or welfare payments). While unemployment obviously exists in the real world, this is a “natural” consequence of the departure from the perfect competition and the setting of wages above the level of market clearance (zero unemployment). Unemployment then becomes “voluntary” – an option chosen by society and by individuals where welfare payments allow people not to work at the market equilibrium rate.

For Friedman and others, this “natural rate of unemployment” morphed into the NAIRU – the Non-Accelerating Inflation Rate of Unemployment. In theory, once you approach full-employment, there is increasing competition for labour and the price of labour increases, which drives inflation. But with a certain level of voluntary unemployment, that inflation tendency kicks in below the level below full employment – hence, the effective rate of full employment (or the desired level of unemployment) is the point just before employment “accelerates inflation”.

The graph below shows the Australian Treasury estimates of the rate of NAIRU over the last 40 years, with the pre-pandemic estimate just under 5%. While there are endless arguments about the estimates and the theoretical relationships underlying it, the NAIRU and the need to contain inflation has long been a part of the dominant rationale for maintaining some level of unemployment.

Line graph showing the estimated NAIRU declining from around 7% in 1980 to just under 5% in 2019, and the much more volatile official unemployment rate above the NAIRU in the 1980s, and again in the 1990s, falling to below the NAIRU in the early 2000s then rising after the Global Financial Crisis.

Keynesian

By contrast, those coming from Keynesian and post-Keynesian traditions assume an imperfect market and have a theory that demand drives supply and economic growth. Given that the imperfect market will be below full employment, the government can (and should) via stimulus spending boost aggregate demand up to the point of full employment. Modern Monetary Theory (MMT) fits within this tradition, but adds a jobs guarantee as an additional “automatic” stabiliser (see for instance, Kelton, pg 65-66).

In this context, the persistence of unemployment simply shows that neoliberal governments worried about inflation have not provided enough stimulus to reach the levels of full employment.

Classical

Like many classical (and neoclassical) political economists, Anwar Shaikh believes that such Keynesian stimulus measures can lead to short-term economic boosts, but in the longer term unemployment will return as a natural part of capitalist competition. Marx referred to this as the “reserve army of the unemployed”, but it is not a conspiratorial “disciplining of labour”. Rather, in Shaikh’s view ongoing unemployment is a function of the logical response of profit-driven capital to full employment.

Supply and demand processes suggest that as unemployment falls, there is upward pressure on wages. This negatively impacts on profit rate, which in turn, leads to lower investment which decreases the demand for labour. Alternatively, capital can look to counter this increasing cost pressure by increasing labour supply (by migration or capital flight to source labour overseas), and this increased labour supply will lead to unemployment. Or, in response to rising wages, capital can invest to increase productivity, which displaces labour and creates unemployment. There is no pre-determined path, but ultimately capitalist production is driven by profit not demand, and the self-governing mechanisms of profit-seeking ensure some level of unemployment.

Implications of the Different Theories

There are of course lots of variations within the three broad approaches described above, and I am not going to adjudicate these long-standing theoretical differences here. However, it is interesting to look at the implications of the recent employment data (in my previous post) for different aspects of these theories.

The existence of the sustained and significant unemployment highlighted in my previous post is obviously not consistent with the neoclassical paradigm of a perfect market, but it is compatible with the revised Friedmanite version where less than actual full employment is functionally full employment. Since many of those in long-term unemployment are never going to get jobs (as new labour market entrants out-compete them), the relevant inflationary impact will be at some level of unemployment below 0%.

That said, it is not immediately clear how the official unemployment rate relates to the NAIRU and inflationary pressures if, as we saw in my previous post, 72% of the newly-employed do not come from those who are counted as unemployed. The unemployment rate is simply not measuring the potential labour supply which is purportedly driving wages and prices.

The persistent unemployment data is also consistent with Marx’s notion of a reserve army of the unemployed, but again, the data suggests that most of this reserve army is located outside of the ranks of the unemployed. Shaikh’s analysis of capital’s response to near full-employment may be valid, but it relates more to a labour supply not-in-the-labour-force than to the long-term unemployed, who are more an outside sub-class than part of the reserve army.

But perhaps the biggest challenges of persistent long-term unemployment are posed for post-Keynesian theory and the attempts at government intervention to ensure full employment. At the macroeconomic level, having a cohort of semi-permanently excluded job seekers points to the limits of generic demand-led stimulus strategies. It is not just that there has not been enough stimulus. The barriers faced by many unemployed people may prevent them from winning most of the newly-created jobs (as jobs are filled from outside the labour force). More demand management will not (or not easily) create full employment.

A Job Guarantee

This leads many, particularly in MMT, to argue for more direct government job creation through a job guarantee (with the government or government-funded organisations “employers of last resort”). In theory, this should be good for those entrenched in long-term unemployment. Direct job creation can target disadvantaged groups, and there would be a guarantee of a job that they would probably not get in a competitive market. However, here we are not necessarily talking about people who freely move in and out of jobs as the labour market changes. The jobs need to be created and supported in a way to address the specific needs of those with barriers to employment – which is a difficult and resource intensive task.

This is recognised at least in passing by some proponents of a job guarantee, but much of their description of how such a program might work seems to suggest a workforce moving flexibly in and out of the guarantee program. Moreover, even if people with employment barriers flock to a job guarantee, if sufficient numbers of them can’t go back to the private workforce when demand for labour increases, then the macroeconomic “automatic stabiliser” can’t do its job in adjusting labour supply.

These problems may or may not be solvable, but they do mean that the Keynesian-inspired solutions are not as easy as they are often portrayed.

Other Possibilities

There are of course dangers in focusing on labour “supply-side” issues like the barriers faced by long-term unemployed people. This can and has led to reactionary “victim-blaming” policies, and to surveillance and back-to-work programs which pretend that the problem is a deficit in the unemployed person rather than the labour market.

However, if we take the persistence of long-term unemployment as evidence of systemic unemployment within capitalism, as per the classical (and even the neoclassical) theories, then perhaps we can stop demonising and starving those who are unemployed. We might accept that the labour market can’t provide income for everyone, and actually build support and value them outside the labour market.

This could be an argument for a Universal Basic Income, but it could also simply be an argument for the removal at some point of “job seeking” pretences of current social security payments. This already happens (in a minimum and controlled way) for people over 55 where mutual obligation requirements change after 12 months to basically accept volunteer work instead of employment. But the payment is still called “JobSeeker” rather than, say, a Community Participation Allowance, and in practice it may be closer to a job guarantee than a UBI.

Whatever, any income support (universal or not) needs to be at a level which provides for a minimum healthy standard of living – which clearly is not the case currently. This need to increase payments is not just for humanitarian reasons, but a recognition that the unemployed are the collateral damage of capitalist production (the classical theory) or that they are bearing the cost on behalf of the community of fighting inflation (the neoclassical model).

The acceptance of the inevitability of some level of unemployment may not initially sit well with those interested in equality and the rights of those who are struggling, but it can still have progressive possibilities. And it may be better than simply hoping for a full employment which may not be possible.

Of course, if full employment is possible, accepting less is selling out. That is why the theory matters!