The Job Guarantee and contributory unemployment benefits systems

The unemployment rate in Finland is climbing steadily and in October 2015 was 9.6 per cent (seasonally adjusted) and the employment to population ratio stood at 60.1 per cent and was trending down. Finland is fast becoming the next basket case of the Eurozone. What was once a highly supportive society is steadily being turned into a austerity-ridden backwater. The latest news, however, that the Finnish government is due to debate a proposal to provide every citizen with a basic income of €800 a month has excited the progressives – unfortunately. The proposal currently being prepared by the national agency that administers the Finnish welfare system (KELA) would offer this basic allowance in lieu of all other existing benefit payments. It would be paid regardless of whether the person received income from any other source. I have been considering the Finnish welfare system over the last month or so since my visit there in October. This is in relation to a series of queries I had from activists there who were keen on the Modern Monetary Theory (MMT) Job Guarantee proposal but were wondering how it would situate itself within the existing system of unemployment benefits in Finland. This blog captures my thoughts on both of those topics.

My recent blogs about Finland include:

1. Full video – University of Helsinki lecture, October 9, 2015

2. the Unit Labour Costs obsession in Finland

3. Finland – more austerity is not the answer

I won’t repeat much of what I’ve written there in this blog. So by way of background to what I have to say here you may want to refresh your memories by reading 2) and 3) above.

When I was in Finland in early October this year I have one interesting meeting with the former National labour minister Jouko Kajanoja, who also has worked as a research manager for Kela (aka The Social Insurance Institution of Finland), which administers the Finnish welfare system.

Jouko and the others at the meeting were interested in discussing the Job Guarantee (JG) in relation to its implementation in Finland, in the context of the particular structure of that nation’s welfare system, specifically the unemployment benefits system.

In fact, the questions that were raised have relevance for many nations that have tiered unemployment benefits, which are in some way differentiated by the wage that the unemployed person earned prior to becoming unemployed.

The specific issue discussed was this: the JG advocates a single and fixed wage being paid to all workers in the JG pool, who cannot find work elsewhere but wish to receive a stable income.

In Finland, as in other nations, the unemployment benefit system is quite complex. Broadly speaking, the system has to elements, which are administered separately by private insurance funds, on the one hand, and KELA, on the other hand.

KELA “is an independent social security institution with its own administration and finances”, which is “supervised by the Finnish Parliament”. Its operations are governed by the Finnish Constitution and relevant social security legislation and legal interpretations of the same, which define social rights in Finland.

KELA provide “a basic allowance”, which is “paid for a maximum of 500 days”. A person aged between 17 and 67 years “who meet their work requirement but are not enrolled in any unemployment fund” are entitled to receive the basic unemployment allowance.

The – Statistical Yearbook on Unemployment Protection in Finland 2014 – says that:

The entitlement to basic unemployment allowance and its possible supplementary parts is determined on the same grounds as for earnings-related unemployment allowance, except for membership in an unemployment fund.

in 2014, the basic allowance was €32.66 per day, with supplements for children.

The unemployed in Finland can also receive an “earnings -related unemployment allowance”, if they have “completed 34 calendar weeks of eligible employment during the preceding 28 months” and are members of a relevant unemployment fund.

The 2014 KELA yearbook says:

The earnings-related unemployment allowance consists of a basic amount equal to the basic unemployment allowance and of an earnings-related amount … The earnings-related amount is determined by reference to the recipient’s earnings before unemployment. It is equal to 45 percent of the difference between the daily salary and the basic amount … The earnings-related unemployment allowance is payable five days a week for a maximum of 500 days of unemployment. Another 500 days of eligibility are available as soon the recipient requalifies.

There are all sorts of additional conditions and qualifying rules, etc governing the system, which we do not need to go into here, but clearly need to be addressed if one was seeking to write a procedure manual for implementing a Job Guarantee in Finland.

The unemployment benefit system in Finland (as in other nations) is funded by a combination of central government public spending (basic allowance) and “insurance contributions collected from employers and employees” and “voluntary membership feeds paid to unemployment funds”.

The 2014 KELA yearbook says that:

A total of 413,200 persons received unemployment benefits at year-end 2014, which represents 12% of the Finnish population between ages 17 and 64 … Of them, 54% were in receipt of a basic unemployment benefit.

In other words, “a total of 181,405 persons were in receipt of earnings-related allowance, representing an increase of 22,800 persons on the previous year”.

56 per cent of the total expenditure on unemployment benefits in Finland in 2014 came from public sources, 35 per cent came from the Unemployment Insurance Fund (which accumulates the compulsory insurance payments), 5 per cent came from local government and 3 per cent came from the membership fees.

So the topic of the discussion that evening was how would a fixed-wage JG system, which augmented that fixed wage with national productivity distributions on an annual, say basis, work in the system of unemployment benefits where the majority of recipients would be entitled to income support under the various insurance arrangements that would be in excess of the JG wage?

It was an illuminating conversation and bears on the question of running the JG alongside existing income support systems (specifically those targeting unemployment support).

I have also noted noise in the blogosphere in recent months advocating a wage structure for the JG. Let’s dispense with that notion immediately.

For all my JG blogs go to the articles that appear under the – Job Guarantee Category. Bear in mind that these are more specific blogs about the JG and are supported by many other articles, which outline theory, data etc. You can start to learn the macroeconomic essentials by accessing the blogs under the – Debriefing 101 Category – of my blog.

These blogs, however, are just an entree into my work on the topic. The substantive literature is in the academic domain, which has been developed over many years. I decided to start a blog in 2004 to provide a more public focus for some of this literature in terms of summary points and ease of exposition. But one should not assess the concept of a JG by only considering the blogs, or a subset of them, perhaps the latest blog on the topic.

I think the blog platform is a potentially liberating force in society as it breaks the hold that the publishing companies have on the dissemination of information and argument.

However, I have observed a tendency in the blogosphere for participants (particularly commentators) to see it as a platform for the knee-jerk venting of raw prejudice. I read statements such as “MMT should drop the crazy Job Guarantee idea” and “Bill Mitchell wants everyone to be enslaved in a low wage job”, and comments such as that.

This then leads the commentator to wax lyrical about how stupid or oppressive MMT is for advocating such a ridiculous idea – that people who want to work who cannot find work in the private sector should be provided with a decent job in the public sector. The shock of it all.

It is clear that these commentators haven’t read very much of my work; have never considered the nuances that you will find in it; and haven’t considered that I (and the rest of the original MMT proponents) might have anticipated and addressed all of the likely criticisms of an employment guarantee that could be raised in the long literature that we have constructed on the topic.

Each new commentator – seems to think they have a privileged position to rant about our work without any knowledge of the long-history of that work.

While it is clear – if you read the many articles, books etc that I have published in the academic literature – that I consider the JG to be part of a liberal and radical agenda to transform the way we use the economy to advance a very broad and egalitarian conception of public purpose, the blogosphere commentators still seem content to conduct their attacks on spurious grounds.

In this blog – The Job Guarantee is a progressive vehicle for change – I outline how the JG provides a path to something very progressive and very radical in terms of the norms that govern public perception at present.

But it does it by starting with the standard norm that people who can work should do so (given that the unemployed overwhelmingly indicate they want to work) and then moving the concept of productive work further away from today’s norm and towards something quite different and quite lateral.

By way of summary the JG has the following features:

• The JG should not be seen as a ‘job creation’ scheme. Narrowing one’s perception in that way severely limits and understanding of its role in a macroeconomic stability framework.
• The JG works on the “buffer stock” principle and provides an ‘inflation anchor’, which means that, in the context of the macroeconomic literature, it eliminates the trade-off between inflation and unemployment (the so-called Phillips Curve). That is radical in itself.
• The JG requires that the national government operates a buffer stock of jobs to absorb workers who are unable to find employment in the private sector. The pool expands (declines) when private sector activity declines (expands). The JG fulfills this absorption function to minimise the costs associated with the flux of the economy. So the government continuously absorbs into employment, workers that are displaced from the private sector.
• The JG stands in contradistinction to the current approach, which uses an unemployment buffer stock to discipline the inflation process. The costs of this buffer stock approach to macro stability are enormous in both system-wide terms (lost income) and personal terms.
• Employment buffer stocks serve to control inflation while not sacrificing the full employment goal. When the level of private sector activity is such that wage-price pressures forms as the precursor to an inflationary episode, the government manipulates fiscal and monetary policy settings (preferably fiscal policy) to reduce the level of private sector demand. This would see labour being transferred from the inflating sector to the “fixed wage” sector and eventually this would resolve the inflation pressures. Clearly, when unemployment is high this situation will not arise.
• In general, there cannot be inflationary pressures arising from a policy that sees the Government offering a fixed wage to any labour that is unwanted by other employers. The JG involves the Government ‘buying labour off the bottom’ rather than competing in the market for labour. By definition, the unemployed have no market price because there is no market demand for their services. So the JG just offers a wage to anyone who wants it.
• Under the JG, the ‘buffer stock’ employees would be paid the minimum wage, which defines a wage floor for the economy. Government employment and spending automatically increases (decreases) as jobs are lost (gained) in the private sector.
• To avoid disturbing private sector wage structure and to ensure the JG is consistent with stable inflation, the JG wage rate is best set at the minimum wage level. The JG wage may be set higher to facilitate an industry policy function, by which I mean, if the government considers the private wage floor is too low then it can force dynamic change in the private sector by setting the JG wage above that private wage floor. Firms that are unwilling to increase their productivity levels will thus be unable to attract the necessary labour and they will, rightfully, go out of business.
• The minimum wage should not be determined by the capacity to pay of the private sector. It should be an expression of the aspiration of the society of the lowest acceptable standard of living. Any private operators who cannot ‘afford’ to pay the minimum should exit the economy.
• The JG wage would be supplemented with a wide range of social wage expenditures, including adequate levels of public education, health, child care, and access to legal aid. Further, the JG policy does not replace conventional use of fiscal policy to achieve social and economic outcomes.
• The JG is not a form of Workfare, the latter which does not provide secure employment with conditions consistent with norms established in the community with respect and non-wage benefits and the like. Under the JG workers could remain employed for as long as they wanted the work. There would be no compulsion on them to seek private work. They could also choose full-time hours or any fraction thereof.
• Training ladders can be integrated into the paid-work JG environment. However, if a JG worker chose not to undertake further training no pressure would be placed upon them to do so.
• The existing unemployment benefits scheme could be maintained alongside the JG program, depending on the government’s preference and conception of mutual responsibility. My personal preference is to abandon the unemployment benefits scheme and free the associated administrative infrastructure for JG operations. In other words, I do not personally see the JG as being optional for someone who wants to draw on state income support but does not want to contribute back to society.

A more detailed discussion of the basics of the JG are outlined in this blog – What is a Job Guarantee?.

For detailed analysis and answers to all the questions you might have please consult the following work.

• Creating effective local labour markets: a new framework for regional employment policy – this report was the result of a three-year study and extensive interviews with Local Government engineers and managers.
• Mitchell, W.F. (1998) ‘The Buffer Stock Employment Model and the NAIRU: The Path to Full Employment’, Journal of Economic Issues, 32(2), June, 1-9.

As I explained at my meeting in Helsinki that I referred to above it would undermined one of the basic elements of the JG to create a wage structure within it.

The fixed-wage characteristic is an essential element of its capacity to provide an inflation anchor. There should be no hint that the government is competing at market prices with other buyers of labour.

Essentially, the government is dealing with workers who have a zero ‘bid’ for their services from the private sector. The government is offering to these workers a job at a wage, which will ensure the worker is not socially excluded and can enjoy a reasonable standard of living.

These workers can also enjoy real wage growth over time as productivity in the economy as a whole grows.

But once the government started paying differential wages to the JG workers in accordance with their previous wage levels, the capacity to use the buffer stock of jobs to discipline the inflation generating process is lost.

I emphasise that the JG is a macro stability framework rather than a job creation program.

The other thing to reflect on is that in times of mass unemployment it is the most disadvantaged workers in the labour market that endure long-term unemployment. It is true that professional classes lose jobs and become unemployed.

Many of these workers do not even take unemployment benefits because they typically negotiate redundancy payouts which tide them over until they can find alternative work.

There is a concept in labour economics called ‘Wait Unemployment’ – which refers to workers of this ilk. They would neither take unemployment benefits or a JG job for various reasons and prefer to ‘wait’ for a new job to emerge. One of the reasons for this type of observed behaviour is that the professional class, typically, has much lower durations of unemployment than the more disadvantaged, unskilled workers.

Given that the JG pool is likely to be dominated by the most disadvantaged workers during a sustained downturn, the issue raised about the structure of the unemployment benefit system noted above, is likely to be relatively insignificant.

The JG wage would only have to be set above the existing basic unemployment allowance in Finland for it to be attractive to workers and eliminating the basic support would therefore not disadvantage those workers.

The question then is what to do with the workers who receive earnings-related unemployment benefits, which would be well above even a generous JG wage?

My response was that in these situations, given the historical and institutional importance of these contributory schemes, the JG wage could be offered unconditionally alongside the continuation of the earnings-related unemployment schemes.

Then the worker could decide what option would best serve them upon job loss. For many (the majority in Finland according to the 2014 data), the JG would be the most beneficial.

For others, remaining on their existing income support would be most beneficial.

What would happen when a worker’s eligibility to receive insurance-type support ran out is another question. At present, in Finland, they qualify for a labour subsidy of some sort.

In the unlikely event that a skilled worker would remain unemployed beyond the eligibility period (that is, assuming governments do not remain obsessed with austerity), the worker would be confronted with the JG or no support. At that point, clearly, the JG is the most beneficial option.

Income guarantees

Most major newspapers in the last day or so have carried the story that Finland is debating the idea of giving every citizen a basic income of €800 a month. This is not new. They have been discussing this for some time now and the current right-wing government sees it as a way of reducing welfare spending.

Need I add, that one of the most vocal proponents of a basic income scheme (in the form of a negative income taxation scheme) was Milton Friedman, arch type right-winger. So the idea is not exclusively ‘progressive’.

The UK Telegraph story (December 6, 2015) – Finland is considering giving every citizen €800 a month – is as representative as any of the recent news stories on the proposed basic income introduction.

We learn that:

Under proposals being draw up by the Finnish Social Insurance Institution (Kela), this national basic income would replace all other benefit payments, and would be paid to all adults regardless of whether or not they receive any other income.

I have written extensively (alone and with others) on the superiority of employment guarantees over income guarantees. Please read my blog – Employment guarantees are better than income guarantees – for more discussion on this point.

But if you want a deeper, academic discussion, then we have published several peer-reviewed articles on the topic that the above blog merely summarises.

In summary, I don’t think humans should be treated as meagre ‘consumption units’ and I oppose the use of a Basic Income Guarantees as the primary means of poverty reduction for the following reasons:

• It creates a dependency on passive welfare payments.
• It creates a stigmatised cohort.
• It does not provide any inflation buffer and is inconsistent with the macroeconomic principles spelt out by MMT.
• It does not provide any capacity building. A BIG treats people who are unable to find adequate market-based work as “consumption” entities and attempts to meet their consumption needs. However, the intrinsic social and capacity building role of participating in paid work is ignored and hence undervalued. It is sometimes said that beyond all the benefits in terms of self-esteem, social inclusion, confidence-building, skill augmentation and the like, a priceless benefit of creating full employment is that the “children see at least one parent going to work each morning”. In other words, it creates an intergenerational stimulus that the BIG approach can never create.

Unlike the BIG model, the Job Guarantee model meets these conditions within the constraints of a monetary capitalist system.

The JG is a far better vehicle to rebuild a sense of community and the purposeful nature of work. It is the only real alternative if intergenerational disadvantage is to be avoided.

It also provides the framework whereby the concept of work itself can be broadened to include activities that many would currently dismiss as being leisure, which is consistent with the aspirations of some BIG advocates.

There has been considerable research done by social scientists which suggests that people still consider work to be a central aspect of life and there are deep-seated views about deservingness and responsibility for one’s circumstances. These views translate into very firm attitudes about mutual obligation and how much support should be provided to the unemployed.

These attitudes while mostly unhelpful are ingrained and will take time to shift. Further, most unemployed workers indicate in surveys that they prefer to work rather than be provided with income support.

If the vast majority of workers prefer to work then the systemic failure to provide a sufficient quantum of jobs imposes harsh costs that can be alleviated by the introduction of a Job Guarantee. In this regard, the Job Guarantee is a source of freedom – the capitalist property relations notwithstanding.

I accept that some people – the so-called “sea-changers” – do not value work in any intrinsic sense and if confronted with the choice between the Job Guarantee and a Basic Income would take the latter option every time. A blanket Job Guarantee is coercive in its impact on this particular group.

Please read my blog – Would the Job Guarantee be coercive? – for more discussion on this point.

The future of paid work is clearly an important debate. The traditional moral views about the virtues of work – which are exploited by the capitalist class – need to be recast.

Conclusion

The Job Guarantee can easily co-exist with contributory unemployment insurance benefits systems, although such a coexistence is administratively more complex than eliminating all existing unemployment benefits systems and replacing them with a JG.

There would be a switch-point where from an individual perspective one system became superior to the other.

But for the disadvantaged workers, who overwhelmingly, make up the long-term unemployed, the JG will always be the superior option.

That is enough for today!

(c) Copyright 2015 William Mitchell. All Rights Reserved.