Randy Wray Argues a Job Guarantee Will Suppress Wages by Matt Bruenig
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Over the last few months, I’ve been reading everything I can get my hands on about the job guarantee (JG). The most interesting thing I’ve learned from all of that reading is that the arguments for a JG change dramatically over time and are always curiously primed to the political moment that they are in.
In the 1970s, one of the main JG arguments was that it would combat runaway inflation, which indeed was a big problem in the 1970s that advocates across the spectrum were saying their preferred policies would fix.
In and around the 1990s, one of the main JG arguments was that it would allow us to eliminate Aid to Families with Dependent Children (AFDC). Like inflation in the 1970s, “fixing” AFDC was one of the major political imperatives of the 1990s.
Inflation and welfare reform are no longer major political issues for the left of center, and so the JG arguments have also moved on. The JG is now important because it helps solve climate change, racism, sexism, the opioid crisis, and is also a path into socialism. These are the issues of the moment and so, naturally, the JG will solve them, just as it would have solved stagflation and the “welfare mess” and just as it will solve whatever the next big issues are, I’m sure.
The most fascinating example of this constant shifting pertains to the effect of the program on private sector wages. Back in the day, JG advocates like Randy Wray argued that a JG would hold down private sector wages. Nowadays advocates say they will run them up. Both can’t be true of course, but different political times call for different policy claims.
In his 1997 paper “Government as Employer of Last Resort: Full Employment Without Inflation,” Randy Wray goes to great pains to explain that a properly-designed JG would not run up wages and would in fact hold wages down better than regular unemployment benefits do.
Wray’s argument basically goes like this: A properly-designed JG will only pay a single wage, which will be in effect the minimum wage. In his 1997 paper, that is $12,500 per year. This might cause a modest “one-time jump” at “the low end of the wage scale,” but:
It is hard to see how the guaranteed $12,500 per year job will cause any
individual worker to continually increase her wage demand through time, because as she gets further from the $12,500 benchmark, her potential loss due to obstinacy rises.
This makes sense of course. If you are being paid right around the minimum wage, you might be able to get more with a quit threat depending on how credible it is (it may not be credible if the JG jobs are not particularly fun). But everyone making wages above the minimum wage will not have a credible quit threat and so will not be able to “obstinately” demand wage increases just because a JG program exists.
Wray continues along this same argument, noting that private sector employers will actually be able to use the JG labor pool to hold down the wage demands of their own workers:
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.
Wray’s point here is that the JG replaces the “fear of unemployment” with the fear of being replaced by a JG worker. That is, the existence of the JG will suppress private sector wages by providing a reserve army of replacement workers that employers can hire at any moment to crush their own workers’ wage demands.
Indeed, Wray actually puts this argument in the “reserve army” language later in his paper:
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 $12,500 per year.
Remarkably, Wray even argues that the JG will be better at holding down private sector wage demands than ordinary unemployment benefits are:
In the absence of [JG], these workers can be obtained at a mark-up over the value of the package of social spending and private income obtained when unemployed (unemployment compensation, food stamps, under-the-table work, handouts, etc); this mark-up, however, is likely to be higher than the markup over $12,500 since it must be sufficient to make employment preferable over idleness.
The argument here is that, because people prefer idleness over employment, private sector employers trying to discipline the wage demands of their workers by threatening to replace them with new hires will have an easier go of it after a JG established. This is because it will be cheaper to hire a JG worker than it will be to hire someone from the unemployment rolls, as people generally prefer unemployment over JG work. This, again, is according to the 1997 vintage of JG arguments.
Oh How The Time Flies
These arguments are now absent from the JG discourse, even though Randy Wray continues to be the author of many of the Levy Institute’s JG publications. The idea that a JG reserve army will hold down obstinate private sector wage demands is replaced with the idea that the JG will somehow offer workers up and down the income ladder a credible quit threat. And of course the idea that workers would prefer unemployment benefits over a JG job is not only rejected as false, but actually described as offensive and ridiculous.
What’s so remarkable about this particular shift is that it pertains to a key technical issue about how the JG works. It’s not just a situation where, in one era, people thought about how it could help get rid of welfare, and in another era, about how it could help fix climate change. Rather, it’s a situation where, if Wray 1997 is right, then that means that the contemporary JG advocates are arguing for a program that will create unsustainable wage-price inflation spirals.
The whole reason Wray felt compelled to write the paper (as the title of it suggests) is because he wanted to make the case that the program would not cause inflation because it would actually dampen the obstinate wage demands that drive such inflation. But if the new thinking is that the JG will not dampen those wage demands and will in fact especially enable them, then it must be the case that the program will be an unsustainable inflation bomb. In classic JG style, the answer to the question of which is the truth is found in the political winds, not the policy debate.
This article was originally posted on [source]