Workfare in Hungary

One year ago, I wrote a piece that was just a series a quotes from Randy Wray’s 1997 paper titled “Government as Employer of Last Resort: Full Employment Without Inflation.” In the paper, Wray argues that it would be possible to use a job guarantee (JG) program to achieve full employment without setting off inflation.

The problem the JG aims to solve is that, when labor markets get too tight, workers’ wage demands can become too excessive, setting off a wage-price spiral. The JG solution to this problem is to use macro policy levers to induce mass layoffs and then funnel those laid off into a minimum wage public jobs program (conventionally known as “workfare”). The reason this solution is supposed to work is that the workers who are laid off into the JG program will be desperate to escape that program for better jobs and will therefore bid down the wages of those better jobs, holding down wage demands.

Here’s Wray:

However, just as workers have the alternative of [JG], so do employers have the opportunity of hiring from the [JG] pool. This is the primary “price stabilization” feature of the [JG] program. If the wage demands of workers in the private sector exceed by too great a margin the employer’s calculations of their productivity, the alternative is to obtain [JG] workers at a mark-up over the [minimum wage]. This will help to offset the wage pressures caused by elimination of the fear of unemployment.

Put in the Marxist lingo, what Wray is saying is that the JG program will act as a reserve army that will discipline the wage demands of private sector workers. Indeed, Wray himself uses this Marxist lingo to say exactly that:

It must be remembered that the [JG] workers are not “lost” as a reserve army of potential employees; rather, they can always be obtained at a mark-up over [the minimum wage].

In the mid-2010s, JG advocates decided to start targeting gullible leftists after decades of centrist targeting seemed to sputter out. So they toned down their calls for the “elimination of the welfare structure” and began to say that the JG was actually a way of empowering the working class against their employers. This made no sense conceptually — if the JG stokes wage demands rather than dampening them, then how can it help achieve “full employment without inflation”? — but certainly it sounds better and so some inroads were made in the dimmer parts of the American left.

However, despite this messaging shift, you still catch glimpses of the old school JG from time to time among those who have not quite gotten with the new messaging program. I was delighted to see just this happen in Tribune Magazine earlier this month in a piece written by Thomas Fazi and Bill Mitchell.

But if there is a need to attenuate spending growth in the economy, MMT demonstrates the superiority of an employment buffer stock approach–the Job Guarantee–over the current unemployment buffer stock approach to inflation control. Instead of creating unemployment to discipline wage demands, MMT proponents advocate that the government would, instead, offer a public sector job at a socially- inclusive minimum wage to anyone who seeks to work. Redistributing labour from the inflating sector to the fixed price sector would ensure price stability and avoid costly mass unemployment.

They smartly shroud what they are saying in technical-sounding language that most people won’t feel comfortable with. But there is Randy Wray’s reserve army back from the dead.

What Fazi and Mitchell are saying is that MMT will control inflation by causing mass layoffs (“redistributing labour from the inflating sector”) and then putting those unemployed by those mass layoffs into a minimum-wage workfare job (“to the fixed price sector”). The reason this holds down inflation (“price stability”) is that those in the workfare job (“the fixed price sector”) will bid down the wages of those in higher-paying jobs (“the inflating sector”).

I’ve never heard of Thomas Fazi but Bill Mitchell has explicitly said in the past that he would like to get rid of unemployment benefits, and Randy Wray in the paper quoted above specifically says that the JG would better at disciplining wage demands than unemployment benefits because people in a JG program would be more desperate to escape into a regular job than unemployed people on benefits are.

Two Questions

The problem of achieving full employment without inflation basically raises two questions for leftists to answer.

The first question is whether there is a way to have everyone (outside of those frictionally unemployed) employed in regular good-paying (i.e. non-JG) jobs without setting off a wage-price spiral. The answer to that question, in my view, is that you can achieve that through coordinating wage-setting, i.e. through sectoral bargaining, which is sometimes called an “incomes policy.” This could ensure that wage growth remains in line with productivity growth without requiring unemployment to bid down excessive wages.

The second question is that if it is not possible to have everyone employed in a regular good-paying job without setting off a wage-price spiral, then what is the best way to handle the unemployed? Put differently, if we need to create some unemployment in order to keep wage demands down, is it better to give benefits to the unemployed (i.e. an unemployment check) while they look for a job or better to enroll them in a minimum-wage workfare program while they look for a job? The answer to that question, in my view, is unemployment benefits.