How Would a Job Guarantee End Recessions?


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One of the more confusing bits in Job Guarantee (JG) advocacy is the claim that such a program would end recessions. Dylan Matthews repeats this claim today:

On the policy side, a job guarantee would, in theory, effectively end recessions in America. Right now, the US government’s strategy when the economy stops growing is to use a combination of monetary stimulus (in which the Federal Reserve cuts interest rates or buys up billions of dollars of long-term bonds) and fiscal stimulus (as in the 2009 stimulus package, which blended a boost in spending with temporary tax cuts).

For a variety of political and institutional factors, the Fed and Congress weren’t able to do enough in 2008 to 2010 to prevent unemployment from breaking 10 percent, and they certainly weren’t able to effect a full recovery within a couple years. Returning to normal unemployment rates took nearly a decade, resulting in years of human misery and lost wage gains that a healthier and faster recovery could’ve delivered.

Job guarantee advocates argue that their plan effectively creates a permanent form of fiscal stimulus that politicians wouldn’t need to scramble to pass whenever disaster hits. Instead, if the economy took a turn for the worse and companies started shedding jobs, the government would automatically soak up anyone who’s laid off and give them work. That, in turn, would put more money in consumers’ pockets, boosting demand and improving business’ prospects. Before you know it, the economy’s back to normal.

As I noted previously, the best way to understand JG within the usual welfare state taxonomy is as a basic unemployment allowance with a rather extreme activation requirement. Like a basic unemployment allowance, a JG provides a fixed minimum income to anyone in the labor market without a job. And like activation models, JG requires you to do specific tasks to claim your benefit. In more typical activation models, the requirements involve going through training, taking classes, or carrying out job search activity. In the JG activation model, the requirements are to spend all day doing tasks created specifically for unemployed people, sometimes called workfare.

The argument for why JG would “effectively end recessions” as identified by Matthews is that the JG payments act as a countercyclical fiscal stimulus, otherwise known as an automatic stabilizer. But if it is the benefit payments that are ending the recession, then a basic unemployment allowance should also end recessions since it provides the exact same benefit payments. Yet there are countries with basic unemployment allowances, e.g. Finland, and they nonetheless find themselves having recessions. Furthermore, a basic unemployment allowance or JG are both worse than an earnings-related unemployment benefit at automatic stabilizing since the earnings-related unemployment allowance actually replaces laid off people’s income rather than bringing it down to the minimum wage.

The other way the JG could be said to “effectively end recessions” is by defining recessions in terms of unemployment and then saying JG by definition ends unemployment. Despite his extended discussion of unemployment, Matthews does not seem to quite go down this route, but others have. Needless to say, this argument is just an accounting trick. If you take a basic unemployment allowance and rebrand it as wages for a job that consists of complying with activation requirements, you can say you have 0% unemployment. But what does that really mean?