sign up log in
Want to go ad-free? Find out how, here.

Is the Reserve Bank's focus on the moveable feast of maximum sustainable employment appropriate, or could something like a government job guarantee be a better way of dealing with unemployment?

Is the Reserve Bank's focus on the moveable feast of maximum sustainable employment appropriate, or could something like a government job guarantee be a better way of dealing with unemployment?

By Gareth Vaughan

This Wednesday the Reserve Bank is set to review the Official Cash Rate (OCR) in what will be one of its more closely watched monetary policy decisions for some time.

Bank economists and financial markets are anticipating the OCR will be increased from its current record low of 0.25%. But as COVID-19 continues to run amok around the world, others argue the Reserve Bank should hold fire.

Aside from concerns about rising inflation, a key factor the Reserve Bank must consider is the labour market. That's because the central bank's monetary policy remit sets out that it must support maximum sustainable employment.

The thing is, as the Reserve Bank acknowledges, maximum sustainable employment is not defined by a single number. The level of maximum sustainable employment can vary over time due to temporary or permanent structural changes in the economy, the Reserve Bank argues.

According to Statistics New Zealand, unemployment dropped to 4% in June from 4.6% in March. The average economists' forecasts had been for a 4.4% unemployment rate, while the Reserve Bank itself had forecast 4.7%. Off the back of this data bank economists were quick to say the Reserve Bank must start hiking the OCR, with ANZ economists saying "we’ve flown past full employment."

However, even at 4% unemployment, Statistics NZ points out there are 117,000 people without jobs. Within this, the proportion of people aged between 15 and 24 not in employment, education, or training is 10.8%. And the unemployment rate for both Māori and Pasifika is 7.8%.

The targeting of maximum sustainable employment was added to the Reserve Bank's monetary policy mandate in 2018, alongside the target for inflation of between 1% and 3% with a focus on keeping future average inflation near the 2% midpoint. The idea is that maximum employment is the highest level of employment or lowest level of unemployment the economy can sustain while maintaining a stable inflation rate.

The adding of employment to the Reserve Bank's monetary policy targets, championed by Finance Minister Grant Robertson, brought New Zealand in line with the United States and Australia. However, ex-Reserve Bank Chairman Arthur Grimes and former Governor Don Brash were critical of the move, saying having two potentially divergent policy objectives could create uncertainty.

"Almost every episode of financial instability in the world has come out of the US, and a lot of that is sheeted home to their dual targeting system," Grimes told RNZ in 2018.

(The Reserve Bank is also now required to consider the impact its monetary policy decisions have on house prices).

Over the years various approaches to unemployment, other than paying an unemployment or jobseeker benefit to those out of work, have been touted. One that has gained some traction in recent years is a Universal Basic Income, or UBI. This concept has been trialled overseas, including in Finland, and locally its most vocal proponent has probably been Geoff Simmons, former leader of The Opportunities Party.

And in this year's Budget Robertson said the Government is looking at establishing a Social Unemployment Insurance scheme, which would ensure people who lose their jobs temporarily receive more support than they would going into the regular welfare system.

What about a job guarantee?

Another concept, which has gained some traction overseas notably in the US where unemployment spiralled at the onset of the COVID-19 pandemic, is the idea of a government job guarantee. A contributor to this is a book by Pavlina R. TchernevaThe Case for a Job Guarantee. Tcherneva is Associate Professor of Economics at Bard College and a Research Scholar at the Levy Economics Institute.

According to Tcherneva, her book presents the case for the "overwhelming benefits" of a job guarantee and the blueprint for its implementation. The book's US centric and short on detail about what to do with people who simply can't or won't work. But the job guarantee concept is certainly transferable to New Zealand.

"The job guarantee is a public policy that provides an employment opportunity on standby to anyone looking for work, no matter their personal circumstances or the state of the economy. It converts the unemployment offices into employment offices to provide voluntary public service work opportunities in a wide range of care, environmental, rehabilitation, and small infrastructure projects," Tcherneva says.

She argues that research from psychology, the cognitive sciences, and public health shows the costs of unemployment, poorly paid employment, unstable and erratic employment and involuntary part-time employment are "simply staggering," suggesting we should think of unemployment as a "vicious, chronic and deadly disease."

She talks about thinking of the right to a job in the same way people think of the right to a pension when they retire or the right of children to education. Monetary and fiscal policies that treat unemployment as "natural" and "unavoidable" perpetrate "vandalism" on people, communities and the environment, says Tcherneva.

"Once we take into account its social, economic and environmental costs, it becomes clear that unemployment is already 'paid for' and the price tag is high," Tcherneva says.

"Employing someone is not less productive than keeping them unemployed."

The job guarantee offers a living wage floor for all working people. The living wage in New Zealand is set to rise 65 cents an hour to $22.75 on September 1, versus the current minimum wage of $20 an hour. The job guarantee, as proposed by Tcherneva, would be a central government programme in cooperation with local governments and non-profit organisations.

A countercyclical programme & powerful shock absorber for the economy

Tcherneva says the job guarantee would act as an employment buffer stock scheme with the added benefit that it stabilises the wage floor, overall prices, and the economy as a whole. She argues it would stabilise the price of an essential resource in the economy being labour.

"Mass layoffs in recessions depress worker wages and total demand, putting downward pressure on all prices. By employing the unemployed, the public option would maintain full employment at living wages, ensuring a much more robust floor to collapsing aggregate demand than in conditions of chronic unemployment. When the economy recovers and firms resume hiring, workers would transition from the job guarantee program into private sector employment. Government spending and payrolls would shrink, relieving any potential inflationary pressures from private sector hiring and the increased demand."

"This countercyclical feature of the program, offsetting changes in private sector demand for workers, would stabilize both economic and price fluctuations and could be strengthened by training, credentialing and other efforts to transition job guarantee workers to better paid employment opportunities," she says.

"In other words, the job guarantee would provide an economy-wide living wage floor, true full employment, and a powerful shock absorber for the economy."

Paying for it

As a Modern Monetary Theory (MMT) economist, Tcherneva argues paying for a job guarantee rests on the understanding that any monetarily sovereign government, like the US or NZ that issues and controls its own currency, may run out of real resources, be they human or natural, but can't run out of finance. 

"Thus how to pay for the job guarantee is much easier than addressing how to implement it and make it workable...With conservative assumptions about the potential savings, the budgetary impact of the program in the higher bound scenario is less than 1.5% of GDP [Gross Domestic Product] per year," says Tcherneva.

She rails against the NAIRU, or the non-accelerating inflation rate of unemployment, a different term for maximum sustainable employment, or an unspecified level of unemployment that doesn't cause inflation to increase.

"The idea that involuntary unemployment is an unfortunate but unavoidable occurrence, and that there is an appropriate level of unemployment necessary for the smooth functioning of the economy, is among the great, unexamined myths of our time, it is also bad economics," Tcherneva says.

"Unemployment has become far too abstract and paradoxically impersonal. Few things are as personal as losing one's job, and yet most economists and policy makers talk about unemployment much like meteorologists talk about the weather."

Highlighting care jobs for the young and elderly, environmental work and small infrastructure projects as potential areas of work for a job guarantee, Tcherneva suggests people could find local work in a community project that matters to them. And in a lofty, big picture sense she suggests a job guarantee could be "the basis of a global Marshall Plan that tackles the twin threats of environmental and economic insecurity."

Green work

In a Bloomberg interview last year, Tcherneva shed more light on how a job guarantee might operate.

You don't want the public sector to compete with the private sector. We're not going to be building electric cars and doing things for commercial return. If it is a public objective to provide an employment safety net it should create something  of social value and we have lots of neglected areas.

So I think the obvious place to go is really green work, community rehabilitation, environmental projects, dealing with things like flood control, fire prevention, the damage from hurricanes and other natural disasters.  In other words we can borrow from FDR's playbook and we can use some of that experience but really adjust it for the modern day.

A lot of environmentalists talk about trees as the lungs of urban spaces. It seems like a pretty easy, straight forward thing to do but it has huge effects on our living environment. So that would be where I would go to create employment opportunities.

But broadly I talk about care work. We have shortages in care for the elderly, for at risk youth. So anything and everything from after school activities, to classes and training, to recycling initiatives, urban campuses, to community gardens...to dealing with the fires in California.

We welcome your comments below. If you are not already registered, please register to comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.

58 Comments

A lot of sense in this......

Certainly, the population health costs of long-term unemployment are huge. In short, we need to work to avoid getting serious (chronic) illnesses. Chronic illnesses (both physical and mental) are an enormous burden to the health system.

TTP

Up
0

I definitely see where you're coming from and I tend to agree.. just a couple of points.

1. The ancient Egyptians had a '100% Job Guarantee' - it was called slavery. With land ownership at historic lows in NZ, such a policy might be a slippery slope.

2. The real mental illness of our time is 'Narcissism' and it has exploded due to Mainstream-Social-Media-Giants. Narcissists live in their 'false self', as such social-media has become their native domain, with everybody else (on social-media) their potential benefactors/"narcissistic supply".

These temples to self have magnified/invoked mental illness. 'Mental Health Professionals' claim there is no cure for narcissism. With secular cognitive-behavioral-therapy a VERY small amount of progress MIGHT be made over a period of years.

With mainstream-social-media minting and magnifying this mental illness - it'll become a HUGE employment issue as antisocial-personality-disorders proliferate in the workforce. The retention of highly skilled workers will become near impossible in many workplaces and will lead to business failure.

Up
0

There isn't a strict segregation of responsibility for unemployment. The Reserve Bank cannot fund the massive projects that would typically be used to recover from an economic shock (e.g. the collapse of a large asset bubble) but nor can Government afford to fund those programs without monetary support.

In reality Government and Reserve Bank are different sides of the same coin. Anyone thinking of them as truely "independent" entities is only deluding themselves.

Up
0

The Reserve Bank cannot fund the massive projects that would typically be used to recover from an economic shock (e.g. the collapse of a large asset bubble) but nor can Government afford to fund those programs without monetary support.

Yes they could. It would eventually wreak havoc on the currency though (IMO). Japan could get away with it because they're a net credit creditor nation; have massive industrial output; and firms and h'holds live within their means. So while NZ could do "something", I doubt we have the economic base to protect the purchasing power of the currency.

Up
0

RBNZ has directly funded massive projects before - the Labour Government of the 1930s amended the Reserve Bank Act and directed the Reserve Bank to extend credit (print money) to fund the state housing programme. Those were the days.

Up
0

Attitudes were completely different in the 30s. People generally lived with their means. It was accepted. The monetary system was completely different as well.

Up
0

The monetary system was actually more constraining back the. - if they could do it then, they can do it now.

People live outside their means now because they have to. Household debt fuelled growth with regular crashes and Govt bail outs is the new economic model.

Up
0

Attitudes were completely different in the 30s. People generally lived with their means. It was accepted. The monetary system was completely different as well.

Up
0

That is why we have taxation, it maintains the value of the currency by withdrawing and then cancelling it.

Up
0

An alternative to the current methods, which prolongs asset bubbles to keep people in work, would be welcome.

Up
0

So, work for the dole by another name?

Up
0

Until those with government jobs demand living wage. Then no one will want a low wage private sector job. They will opt for the zero effort govt job. This will ruin the private sector.

Up
0

You are literally arguing for a society where workers do not have enough money to live on!!!

Hey google, define: living wage.

Up
0

But what if the economy isn’t big enough to pay everyone the living wage (the amount of which is set by costs which are also linked to wages)? The government pays the living wage, then so does the private sector except they have to increase prices to do so, then up goes the living wage to accomodate those price changes, and so forth.

Up
0

Great questions. NZ GDP is about 291 billion NZD, people in work = 2.8 million, another 0.12m are unemployed, and let's assume that another 0.28m would re-join the labour market for a job that worked for them. Let's assume these are all full-time, which significantly over-eggs the numbers. So, 291 billion divided by 3.2 million full time workers = $91,000 average wage. So, on question one, I think it is fair to say that the economy is big enough to pay everyone the $47,000 living wage. Obviously with more people consuming and producing in the economy, we would also see an increase in demand / consumption and therefore GDP would increase.

The second point is the tricky one - will increasing the number of people employed at living wage create a wage / price feedback loop - i.e. inflation? The evidence from minimum wage changes suggests that you might see a one-off change. However, the impact tends to be a re-distribution of income rather than a wage / price spiral. For example, middle-class restaurant go-ers pay a bit more, waiters get paid a bit more, aged care workers get paid a bit more, older peoples' financial assets don't last as long etc.

Up
0

Or less of the money goes to rentier capitalists and more to wage earners; i.e. the wages/profit/economic rent shares of aggregate income change back to closer to what they were before the failed Douglas/Richardson neoliberal experiment.

Up
0

What is this zero effort government job? Is it really zero effort reckoning on your part?

Up
0

A job from a jobs guarantee is by definition guaranteed. You could pick up the job and then not do any work all day (put in 0 effort) and still retain the job.

Up
0

Not entirely the same....expectation that remuneration would be somewhat higher (minimum wage) but it could be presented as such. Muldoon had a similar scheme running in the early eighties, YPTP, which paid around twice the dole and provided employment (and limited training) within gov, and LG organisations for up to 25 year olds from memory.

There is nothing new under the sun.

Up
0

No not at all. A job guarantee replaces the minimum wage - setting a floor for the price of labour and creating a minimum employment offer that other employers would have to exceed to attract staff. It would also be entirely optional.

In a developed country like NZ, 'employment offices' run by local govt, NGOs etc, would match people to approved local jobs that were a good fit for them and met given criteria. The jobs would most likely be activities or projects that were beneficial to the local community and not time critical - e.g. fencing off streams on farms, music lessons for kids, capturing local history stories from elders, English lessons for migrants, maintaining walking trails, social support (not healthcare) for people that are housebound, etc.

Up
0

which sounds great to me -- why should people on the dole not have to contribute ? i bet it would take at least 15,000 of the dole in the first month as those working on the side and claiming had to stop for a start - and then many others would start looking for better employment than what was offered instead of sitting on their asses all day !

Up
0

Maybe you have a point IF the unemployment benefit was at least the level of the minimum wage. But it is well under that.

The sitting on their asses all day comment ticks the boxes for lazy bigotry.

Up
0

The dole currently requires a 30 minute interview per fortnight, if that. $315 per week (365 before tax)= $730 per fortnight. That equates to an hourly rate of $1,460 per hour, before factoring in accomodation supplements and other assistance.
You’d need beneficiaries to be required to do over 18 hours per week of work for the dole before the dole dropped below minimum wage. Those with accomodation supplements on top could easily be made to do 20 hours a week with no worries about dropping below the minimum wage!

Up
0

The whole point of the business cycle in capitalism is to continually reallocate capital and labour to where it is best used.

Part of this process inevitably involves incumbent businesses failing. We have completely abandoned this key principle by preventing any loss cycles...so the malinvestment just keeps piling up, cycle after cycle.

Up
0

The whole point of the job guarantee is to smooth the impact of the business cycle on people - so when businesses fail, people can move onto a job guarantee job (or 'transitionary job') and then back into something better paid as the cycle picks back up again.

Up
0

In reality the government scheme would become a permanent unproductive behemoth sucking the life and resources out of the rest of the economy.

Up
0

Oh the irony. The economy is supposed to be a mechanism for provisioning the population - but it has become the mechanism by which a handful of people suck the life out of the people and the natural environment. The job guarantee rebalances things just a bit in the peoples' favour. That's us by the way.

Up
0

The economy is not "supposed" to be anything, except for the type who likes to control others and rise to political power.

Up
0

We are discussing in English, so I am going to assume that the economy is a ‘system used to distribute limited resources’, because, errrm, that is what economy means. All societies create governance or roles to manage the ‘economy’. If you don’t like the Government model, there are countries that are closer to the ‘mad max’ model.

Up
0

Governments were supposed to protect us from that handful of people but they failed. The government sets the rules of the game that is crony capitalism. As they say, don’t hate the player, hate the game.

Up
0

On that we agree

Up
0

Why not both?

Up
0

maybe - or maybe it would at least generate some productivity from the 100,000 cant work wont work brigade - its not like paying people $22.50 an hour -- as opposed to their benefit, accommodation allowance, temporary assistance and th cost of managing those multiple benefits as opposed to a payroll would be financially any worse - they could even be saving $$

Up
0

And paying taxes on it.

Up
0

Unproductive? No, it would be addressing the externalities of markets.

Up
0

The Exacerbated The Wealth Gap

However, while the Federal Reserve got the desired outcome of increasing asset prices, “quantitative easing” failed to “trickle down.” Despite the massive expansion of the Fed’s balance sheet and the surge in asset prices, there was relatively little translation into wages, full-time employment, or corporate profits after tax which ultimately triggered very little economic growth.

The problem, of course, is the surge in asset prices remained confined to those with “investible wealth” but failed to deliver a boost to the roughly 90% of American’s who have experienced little benefit.

Since 2007, the stock market has returned nearly 200%, which is more than twice the growth in GDP and nearly 4-times the growth in corporate revenue. Link.

Up
0

This is obviously the right thing to do for NZ - where we have so much seasonal work and regional variation in the labour market. In 10 years time people will look back with disbelief at the idea of fiddling with the OCR to try and somehow tune employment to the right level across the country and the business cycle. It is like technical drawing with a toddler's crayon.

Up
0

OECD Secretary General Angel Gurria said the current performance of a nation's students predicts future economic potential.

"The quality of their schools today will feed into the strength of their economies tomorrow."

However, many developed nations haven't been able to improve education quality over the past two decades, even though "expenditure on schooling rose by more than 15% over the past decade alone," the report states.

"It is disappointing that most OECD countries saw virtually no improvement in the performance of their students since PISA was first conducted in 2000," Gurria said.

Socio-economic background did play a role in the test scores, accounting for 12 percent of the variation in reading performance in each country, on average. But the results also showed that the poorest 10 percent of students in China still outperformed the OECD average. That's perhaps surprising for a country with an average household net adjusted disposable income per capita that's about three times less than the OECD average of about $30,500. Link

Up
0

I'm not convinced that education matters because when 'performance' in education is measured it means literacy, numeracy and recalling of info. It doesn't measure what the adult world needs - dedication, cooperation, determination, knowing when to stop and think, respect for the talents of others, rational self-criticism. Given those mental attributes all that is needed from education is the ability to read.

Up
0

Hmmmm... - certain basic skills such as an understanding how to derive an off the run (infrequently traded) Treasury security price for a counterparty using the Monte Carlo Method etc were a mandatory part of my previous job description. Similarly, constructing and running live feed IRR spread sheet calculations to determine the cheapest to deliver (CTD) security for Treasury bond futures to calculate basis risk before the arrival of Bloomberg terminals were a necessity.

Up
0

Sounds as if you have gumption. Was it taught or encouraged at school?

Up
0

dp

Up
0

The comment about the bottom 10% of Chinese students is astonishing and should be seriously noted by our educational establishment. Every child leaving a NZ school unable to read is a disgrace - the names of these unfortunates should be tattooed on the minister of education.

Up
0

Just clarifying that the 'bottom 10% of Chinese students' does not refer to the 10th decile of Chinese academic performers being better than the OECD average, it refers to the economically poorest Chinese decile performing better academically than the OECD average. Probably to do with motivation from parents to better their kids' chances by getting through the education system. Lots of kids fail their gaokao (I know some), so it's not all roses within the Chinese system either.

It's fine to make these comparisons between Chinese and OECD educational outcomes, but we've got to make sure that we're actually understanding these results correctly. I totally agree that we can tighten up our educational performance, though.

Up
0

We all work for the government in other words directly or indirectly I believe it's been done before Russia and China have the expertise required the CCP could also offer advise on how to run re education camps for the uncooperative that need assistance in there views dear leader could kindly explain how this works no doubt

Up
0

Employment....with employment now in NZ, one may buy food and clothing but third basic necessity- house is out wether employed or unemployed as even if one is unemployed with benefits will be able to buy food and clothing but no house.

Welcome to NZ as shaped by Orr and Jacinda.

Up
0

And English and Key and Clark and Wheeler and Bollard and Brash.

Up
0

Bingo. Seems so many think we goy here in a vacuum with nothing else proceeding it.

Up
0

This is what likes of Jacinda target and very low on dole ignoring and killing aspiration of working class.

Agree now both working in Auckland may not be able to afford a warm home for themselves.

Irony and this very people voted Labour and are now screwed as national on one side and bad copy - Labour on the other side.

Time for third alternative representing working class.

Up
0

The idea is completely nuts ask yourself why are we currently in such a mess going further and further down the socialist rabbit hole is road to economic and social oblivian. It's astonishing so many are not versed in economic and political history. There are no free lunches, no short cuts in the short term it looks wonderful but it always ultimately fails.

Up
0

Hmmm…spelling and grammar are key to a successful education.

Up
0

Three errors in "Its astonishingly some". You need to be more supportive, Spiceeh. These days that's an A-.

Up
0

"with ANZ economists saying "we’ve flown past full employment."

In what parallel universe does a 4% UNemployment rate equal full employment. Well, that will be the artificial world in which utterly useless bank economists live. The world in which Nairu-the non-accelerating rate of unemployment- rules. Just how often has this 'rule' been shown to be wrong as unemployment rates fell but CPI inflation kept refusing to rise?
How many people are these cloistered economists prepared to see kept out of work to satisfy there artificial economic theories? How about retraining them all as fruit pickers.

Up
0

NAIRU, is cruel and unusual punishment.

Up
0

My thought on policy development is that when you create an expenditure in one area you should aim for such policy to offset expense in another area. The author's idea of using MMT to pay for such a scheme is (to my mind) a wee bit lazy. But I agree with others above that a work-for-the-dole scheme isn't what we need either. There are just too many people that simply cannot work for one or another reason - and many 'work' anyway in unpaid employment (caring for children, disabled or the elderly).

So, I thought we might target a government-guaranteed employment scheme at those exiting (or having recently exited) secondary (mandatory) education - say, those between 18-23 years old. The idea of a Conservation Corps has been raised recently and this would be a perfect target for such a scheme, given most of the work done presently is by volunteers. My thought would be that anyone between the ages of 18-23 could join the Conservation Corps and serve for a period of no more than three years (not necessarily consecutively). At least the living wage would be paid.

So, what other government expenditure could be offset by such a new policy proposal? And my thought was student loans and allowances. The idea being, that, if there is the unqualified/universal ability to earn a living wage straight out of high school - then individuals can save for their own higher education. I'd likely complement this new policy initiative with a very generous (i.e., widely spread) Conservation Corps scholarship system - adding further incentive if tertiary education is your aspiration in respect of a forward career.

Up
0

Our current economic model literally relies on hundreds of thousands of people being kept on the dole to 'prevent inflation'. The economists call this 'optimal' level of unemployment the 'NAIRU'. The job guarantee replaces this abhorrent 'adequate stock of desperate unemployment people' model with 'an adequate stock of community-beneficial jobs' model that keeps people employed and paid until the job market picks them back up again.
The job guarantee should basically end involuntary unemployment. However, it does not negate the need for support for people that are unable or unwilling to work for whatever reason.

Up
0

Bug

Up
0

In respect to the double question in the headline for this article:
1/ Yes.
2/ No.

Up
0