I have been writing some manuscript comments about labour market capacity constraints and inflation, which I hinted at in my previous article. One tangent that came up that will not fit the manuscript is the behaviour of the employment-to-population ratio. Although the argument that the “labour market overheating is a major component of sustainable domestic inflation” is quite plausible, the problem is defining “overheating.” If we want to tell stories about the back history, we can pick and choose data as we wish. But it we want to make quantitative forecasts — which is what you need for a falsifiable theory of inflation — you need some variables to feed into your model.
I have been seeing comments about how labour market models have been misleading this cycle. The fun thing about this subject is how mainstream economics is supposed to be a rigorous data-driven science, yet mainstream economists are flailing around trying to come up with a relationship between two time series. (Note that this article is re-hashing points I made previously; I am too lazy to check whether I am just re-writing an old article.)
The usual response to critics who state things like I just did is “give me a better model.” The idea is that we need to replace one reductionist model with another reductionist model. The reasoning seems to be that economics is like physics, where a lot of the history of the field is doing exactly that. (Physicists might be getting into “complexity,” which may or may not be a mathematical pseudo-science. In any event, this is not what people have in mind when they compare economics to physics.) If inflation is a complicated process, any reductionist model is going to fail.
Any empirical work on the link between inflation and the labour market is going to run into a snag that is the result of what I argue are relatively non-controversial positions.
We assume that there exists a unitary variable that summarises the business cycle — which might not be directly measurable. It might be something like the first principal component of a few underlying variables. The usual measured variable that is supposed to be a proxy of this variable is GDP, but one may note that the NBER looks at a variety of variables to date recessions. The justification for the existence of this variable is that recessions are a somewhat nonsensical concept without the notion of some way of summarising the state of the business cycle which goes up and down. (If one wants to insist that no such unitary variable exists, we end up with business cycle nihilism. This might be the correct stance, but makes it very awkward to discuss macro.)
Inflation is a pro-cyclical variable, possibly with a lag. This can be justified by eyeballing inflation/GDP charts. There are any number of theoretical stories justifying why this is the case.
Employment growth is pro-cyclical, almost by definition. Rising unemployment is one of the defining characteristics of a recession.
(Core/median) inflation and employment growth empirically exhibit “trends” — although monthly data might be noisy, the averages across months tend to be smoother after seasonal adjustment (albeit with step changes during things like recession).
As an added bonus, we can note that private sector credit is pro-cyclical. This can be seen by eyeballing charts, and is likely to be a component of any model that takes the Kalecki Profit Equation seriously. (Neoclassical models notably do not.) Bank lending and hence deposits are a component of private credit, and thus the bank deposit component of M1 is going to be pro-cyclical.
You do not need a doctorate in statistics or need to study Real Analysis to know that 1-4 taken together imply that inflation and employment growth are going to be correlated to some possibly unknown “business cycle” variable. It is going to be nearly impossible to detect a causal relationship between the variables unless the relationship is simple and stable over time. Guess what? We cannot find any such relationship.
(The fifth point in the list is aimed at any Monetarists who for some bizarre reason decided to read this article.)
Inflation is complicated, and there is no reason to expect that rents are going to move in the same way as college tuition, used automobiles, or imported jeans. To any extent we can model inflation, we need to decompose the aggregate (which was allegedly proved to be the wrong way to look at inflation, according some neoclassical economists).
The whole “unemployment needs to rise to reduce inflation” was a terrible take since it was a somewhat innumerate understanding of a “stylised fact” about recessions. Recessions tend to be associated with disinflation (rate of inflation dropping). As such, one strategy to control inflation is to throw the economy into recession whenever inflation is “too high.” (I am not saying that is a good strategy, but reading between the lines, that is the neoliberal strategy.) However, the causal implication is one way — a recession is (typically) sufficient for disinflation, but it is not necessary (as seen in the disinflation after the pandemic spike).
Book Progress? Sigh.
I am still plugging away at editing my inflation manuscript (interrupted by the CFL Labour Day Classic). Most of the work is tweaking existing text, and thus not publishable here. However, I added a missing section that should show up within a week or so.
If I were productive, I might be able to finish it off within a month or two. Based on past experience, a publishing date in January is more realistic.
I just wanted to make two quick comments about data in the United States. The first is about a new rent series from researchers at the Cleveland Fed, the second is about labour data.
New Rent Index Data
Brian Adams1, Lara Loewenstein, Hugh Montag, and Randal J. Verbrugge just published the working paper “Disentangling Rent Index Differences: Data, Methods, and Scope.” URL: https://www.clevelandfed.org/publications/working-paper/wp-2238-disentangling-rent-index-differences. I did not have time to look over the paper, but the graphs are consistent with the story I have seen elsewhere: the rental data used in the CPI lags behind the latest changes, and the latest changes point to a lower growth rate in rent hikes.
The interesting part of the inflation debate is the question of labour market tightness. If we are looking at the CPI, what we see is that many components hit high rates of inflation. This means that we need similar gains in 2022 to keep the CPI from dropping back towards 2% or whatever. The more interesting issue is whether strong wage gains will continue, as that increased purchasing power would give a lift to demand and increase purchasing power across all sectors.
The latest U.S. labour market data dump was consistent with continued improvement in the labour market, with the broad employment-to-population ratio rising to 59.2% (figure above). That is well above the lows, and returned to the values seen in middle of the last cycle.
My not very useful observation is that hourly earnings is perkier than would be justified by historical rules of thumb based on macro data. Potential explanations appear to be as follows.
One explanation I have seen is that wage growth may be more sensitive to the rate of job creation, rather than levels, as is conventionally assumed. (I saw the analysis on the EmployAmerica website, but I cannot remember which blog/report contained it.) Since a good portion of job gains are firms getting back to work after shutdowns, employment growth rates will presumably burn out relatively soon.
Policies that paid people not to work obviously help tilt bargaining power towards workers. I am unsure as to how much of this effect remains.
Have workers dropped out of the workforce due to health concerns? This is the story being pushed by the hawks. It is unclear to me how sustainable such a strategy is for workers.
On a related point, day care employment has not fully recovered, and so workers are effectively locked out of the job market.
The changing consumption patterns of consumers has invalidated certain modes of operation for firms. So firms could theoretically have the same number of employees, yet need a different mix of workers. This would cause “skills bottlenecks,” even in the absence of net employment growth.
Certain firms and industries feasted on unsustainable labour practices — being able to call in workers effectively on demand, for example. Even a slight amount of labour market tightening would squeeze out such practices. Meanwhile, there are industries reliant upon pushing capital expenditures to “contractors”: trucking and ride sharing. Sooner or later, the supply of suckers who don’t understand depreciation would dry up.
Projecting high wage growth on a multi-year horizon appears to be reliant on the premise that firms and workers cannot adapt to the realities of a world with COVID-19.
Peak Oil
One of the other issues with the inflation outlook is the question of oil prices. At the moment, wholesale energy prices have undergone a correction, which will blow a hole in the rate-of-change of the energy component of the CPI. On a longer horizon, we might need to be cautious.
As seen in the chart above, “liquid” production has peaked in the United States (right about when one of the more reliable contrary indicators on Twitter was laughing about Peak Oil). This was somewhat predictable: fracking generates output quickly, but the depletion rate is also rapid. The industry was unable to keep up the frenetic pace of drilling since it was not economic.
Admittedly, high oil prices could generate another burst of fracking activity. However, the reality is that the fracking needs to move towards more marginal sites, and depletion gets worse as conventional oil production continues its secular decline.
There are of course other sources of hydrocarbons. However, the United States was the epicentre of fracking triumphalism, and the most that oil production bulls can hope for is that the same script plays out elsewhere (horrifying anyone worried about climate change).
Note: This is an unedited excerpt section from my latest manuscript, which is an inflation primer. Unlike my previous writings, this planned book largely stays clear of theoretical disputes, and mainly discusses what we know for sure about inflation. This section dips a bit into theories — mainly to say to read about them elsewhere.
I view this text as very preliminary. I will take a long look at it again once I have the rest of the book put into place. My plan is that the book was supposed to be a short report, and it may be that I am near the end of overall text structure. I then need to fill in more details - data from other countries, more references - but I will do that once all the sections are assembled. There is no point tracking down data and references for a section that ends up getting deleted completely.
The usual convention is for inflation to refer to the cost of goods and services – things people buy. From a macroeconomic standpoint, a good deal of “inflation” discussions are about another phenomenon – wage growth.
From the perspective of most individuals, getting a pay increase is a good thing. An increase in the price of goods and services means you can buy less stuff, and that is viewed as a bad thing. This fits the framing that inflation is bad.
Once we start looking at the macroeconomy, the emphasis starts to shift. The labour market is watched intensely.
Wages are Domestic, Prices Often International
The bond market reacts to the interest rate policy decisions of the central bank, and modern central banks are generally mandated to control inflation. That said, they have very little control over many key prices, such as oil prices.
Oil prices are set in international markets, driven by both private firms and state actors. If oil prices increase, rate hikes by the Bank of Canada would do very little to tame them. Even rate hikes by the U.S. Federal Reserve might do very little to oil prices if the reason for the price increase is either a supply constriction or a demand increase elsewhere in the world.
Policymakers need to focus on what they can feasibly control, which is the domestic economy. Wages represent one of the most important domestic prices (the price of labour).
(As an aside, one could argue that policymakers could adjust the level of the currency to counter-act rising international prices. Since the developed economies generally let their currencies float, this is not possible. But even if the currency were controlled, it is not necessarily a good idea to let your currency increase in value in response to an oil price spike if you are not a major oil exporter. Rising energy costs displace other spending, and so there is a demand shortfall in the developed countries that import oil. This means that your exporters would face a double whammy – falling external demand, as well as a loss of competitiveness from currency appreciation.)
Relationship Between Wages And CPI
From the perspective of mainstream theory or post-Keynesian theory, we expect to see a relationship between wage growth and inflation. However, there are considerable differences of opinion regarding the exact mechanisms involved. So long as we focus on prices determined by domestic macro factors, we generally see a relationship. In a country where imported goods or non-processed foods represent a large part of the CPI basket, then there can be large divergences between wage growth and CPI inflation.
When we look at the data, we typically see that wage growth and CPI inflation move together. The chart above shows the U.S. experience, comparing average hourly wages to the core CPI. The top panel shows growth rates and see that they tend to rise and fall together – but not at the exact same rate. (The pandemic caused an unusual spike in 2020 – lower-wage workers were disproportionately stopped from working by health directives, and so the mix of workers shifted towards higher-wage workers, raising the average.) I used core inflation to demonstrate how it is smooth, very much like the wage growth series.
The bottom panel shows the ratio of wages to core inflation. Using core inflation in the ratio is admittedly an unusual choice – we normally want to do the ratio to headline. I kept it with core CPI so that it is directly comparable with the previous panel. Since the average hourly wages are in dollars while the CPI index is a number without dimensions, the ratio is arbitrary. I set the scaling of the ratio so that the displayed series equals the original value in January 2020, which is often described as using a January 2020 baseline. We can think of the series as average wages in 2020 dollars (keeping in mind that I used core CPI). We see that there are smooth trends – falling in the 1980s, and then recovering in the mid-1990s until just after the Financial Crisis of 2008.
So long as we lop out oil prices – largely driven by global factors after the 1990s – we can say that there is a relationship between wage growth and CPI inflation.
So long as we keep in mind the domestic/global distinction, we can see that CPI and wages represent different segments of a wider notion of “domestic prices.” I will often refer to this wider concept as the “price level” – a generic notion of prices that includes all the major components of the prices of current goods and services, which includes wage measures and producer prices as well as the CPI. However, I do not include asset prices within this concept, as I discuss further in Chapter 4.
(As an aside, the bottom panel could be used to discuss the standard of living of workers over time. However, if the (core) CPI systematically deviates from the true “cost of living,” then the readings for the “real wage” are not comparable over the decades. If we accept the common view among economists that the CPI overstates the “cost of living,” then wages should have a rising trend over time that is not apparent in the figure.)
Lots of Theories
There is a long history of arguing that conditions in the labour market determine the inflationary trends in the economy. In economic commentary, you will see many references to concepts like the Phillips Curve, the non-accelerating inflation rate of unemployment – more normally referred to by its acronym NAIRU.
If we ignore the details, we could paraphrase these ideas as: if the labour market gets “tighter” (or “overheated”), wages and then CPI inflation will rise with a delay (“lag” in economist-speak).
If we stick to generalities, this largely represents my beliefs about the causes of inflation (with various exceptions). However, the problem is getting more specific. As soon as we try to come up with a mathematical model that links observed labour market data to inflation, the models sort-of work until they do not. The determination of inflation is complicated.
(Since many of my readers are fans of Modern Monetary Theory, I would note that my comments here largely refer to existing institutional arrangements. The argument is that the introduction of a Job Guarantee programme would help stabilise wages and thus the price level. I discuss this in my book Modern Monetary Theory and the Recovery, such as in Section 4.3. However, we cannot point to historical data to demonstrate this conclusively yet.)
Why There Should be a Link
To what extent workers have cost of living adjustments (COLAs) in their bargaining agreements, a rise in CPI inflation will tend to raise wages. This certainly was a factor in the 1970s, when private sector unions were relatively more powerful than now. Even in their absence, every firm that has employees has wages embedded in their cost of doing business. There are two fighting flavours of theories to link wage costs to output prices.
The mainstream view is that firms set wages based on the value of the output of the “worker at the margin”: if output prices rise, they can pay more.
The post-Keynesian view is that firms set prices as a markup over the cost of production. So if worker’s wages go up, the cost of production goes up, and so firms want to raise prices to compensate.
I lean towards the post-Keynesian view, but both views point in the same direction. If wage costs rise, then we should expect the cost of domestically produced goods and services to also rise (sooner or later). This explains why central bankers and bond market participants pay a great deal of attention to labour market data, instead of obsessing about the price increases of Crunchy Cheese Treats in the snack section of your local grocery store. Admittedly, they tended to analyse the data incorrectly, but nobody is perfect.
The relationship between wages and CPI inflation is not the simple case of one being a constant ratio to another (which marginal theories might suggest). Wages are a cost of doing business, and if they go up without output prices rising, profits fall. This leads to the post-Keynesian conflict theory of inflation. Workers and firms each attempt to increase their income share, and wages and output prices increase to accommodate this.
It is a basic accounting fact that the ratio of wages to output prices determines profit margins, and that ratio is not constant. The only real debate is around whether we can make useful predictions using this observation. Since I do not want to get into theoretical disputes within this introductory text, I will just point the reader to Chapter 17 of Macroeconomics by Mitchell, Wray, and Watts for more details.
Output Has to Be Bought
The general demise of cost-of-living adjustments means that the psychological link between CPI inflation and wage growth has faded. To a certain extent, there is a fear that inflation just destroys workers’ standards of living. This is certainly what it feels like from the perspective of an individual.
From a macroeconomic perspective, we see that it is harder to de-link the two. Produced output has to be bought, or else it piles up as unsold inventory.
For example, imagine that the price of goods and services suddenly rose by 10%, while wages did not respond. Unless workers suddenly dip into their savings to make up for this, the implication is that workers can buy 10% less stuff. The most likely outcome is that this would trigger a recession (albeit with an unlikely exception that I will return to). Pricing power of firms normally softens in recessions, counter-acting the previous price jump. Very simply, raising prices of goods and services without rising wages to purchase them is difficult.
That said, we can see such outcomes in the real world, which are typically the result of a currency collapse or a supply disruption (e.g., a failed harvest). If the price of a critical import spike in price, a country faces a drop in the standard of living. Such episodes are common, but currently less of an issue for most developed economies. As firms get used to operating in a floating currency regime, they become less sensitive to foreign exchange volatility. Also, developed countries feature less food inflation swings. the industrial food sector has more reliable yields, a diversified set of suppliers all over the globe, and the layers of processing between the raw food inputs and the output “food product” means that large changes to raw food prices only have a limited impact on final prices in the grocery store/
This explains why the phrase “price and wage spiral” is commonly used in the discussion of inflation: wages generally need to rise in order to purchase goods that are rising in price.
As a final theoretical point, we can imagine a possibility where output prices rise but wages are unchanged – the owners of capital spend the increased profits to make up for the loss of purchasing power of workers. Although this happens to a certain extent, the extent of this effect are limited. Very simply, rich people are not going to run out and buy all the Crunchy Cheese Snacks that workers cannot afford to purchase.
Productivity
The conflict theory might suggest that workers and employers are fighting over a fixed size income pie. This is essentially true in the short term, but over the longer term, the pie itself is growing. This means that both wages and profits can grow faster than the rate of inflation.
The reason that the pie is growing is chalked up under the term productivity. The output per hour of workers has tended to increase. This can largely be attributed to technology in its various forms, in particular the ability to harness concentrated energy, and increased agricultural yields. The increase in agricultural output has allowed developed societies to transition from mainly rural to mainly urban. However, the increase in productivity can be the result of more efficient institutional structures (possibly aided by new information processing technology).
Historically, productivity growth has been high, and there is a common assumption that this will continue going forward, because it is somehow an inherent property of industrial capitalism. From the perspective of Peak Oil, this is a dangerous assumption. The harnessing of the concentrated energy in fossil fuel sources went hand-in-hand with the rise of industrial capitalism. That era is coming to an end, either due to environmental concerns or resource depletion. Industrial societies may be able to innovate away from fossil fuel usage, but their ability to do so is still largely untested.
Concluding Remarks
Average wages will not rise at exactly the same pace as goods inflation. Nevertheless, there is a strong linkage between domestic prices and wages if we are looking at what is happening within a business cycle. This has the result that labour market data is the most closely followed set of macro data.
References and Further Reading
Macroeconomics, by William Mitchell, L. Randall Wray, and Martin Watts. Red Globe Press, 2019. ISBN: 978-1-137-61066-9
I just wanted to make some generic comments on the latest U.S. jobs data that came out last week. My comments are somewhat delayed as I was somewhat groggy from vaccine side effects over the past few days. Although there was some divergence in the data, I tend to look at underlying trends, and those seem to be in a positive direction.
Matthew C. Klein also recently joined Substack, and wrote a lengthier piece on it. If the reader has not already gone through the details of the report, Matthew’s piece is a good place to start.
I will largely not comment on what he wrote, other than the big point he notes: there was a divergence between the Household and Establishment job growth numbers.
Employment data surprised to the downside in Canada and the United States. In Canada's case, this likely reflected lockdowns mandated in a pair of large provinces. This softness did not match up to the anecdotes of tight labour markets, with low-wage employers in the United States being forced to greatly raise wages to attract workers.
My view is that this just reflects short-term effects: people do not want to take jobs that pose infection risks. However, with the rollout of vaccinations in North America, this effect will fade. I do think there is some sectoral tightness that might cause an upward bump in wages, but I would be cautious about over-reacting to that. Since I am not in the business of short-term data forecasting, I am not in the position to dig into this. Even if I were, my bias would be that these effects will fade, so there is no point extrapolating the trends of a few months in 2021 out for multiple years.
Although I expect to see fairly impressive rates-of-change in economic variables over the coming months, levels matter as well. Under normal circumstances, the economy is relatively close to its steady state glide path, and the fixed income market is quite reasonably jittery with respect to the latest growth rates. (I would argue too sensitive, but people who are paid to stare at lines all day generally want to make the backstory about those lines as exciting as possible.)
The possibility of an increase in the minimum wage at the Federal level of the United States is an extremely interesting reform. By itself, I am unconvinced about its macro significance (for reasons to be discussed herein). However, if part of a slate of policies aimed to run the economy hotter, it could be one potential component of a hypothetical structural shift.
The Job Guarantee is a programme that offers all citizens willing to work for it a guaranteed wage – which becomes the de facto minimum wage in the economy. It creates a floor for incomes and working conditions. It also gives the government a workforce that can undertake non-time sensitive projects. (Permanent government jobs and most infrastructure jobs would be unaffected.) The implementation of the programme would be country-specific, as the objective would be to re-use existing job seeking infrastructure. The central government would pay the workers and oversee the programme, but local governments and non-profits would likely be the employers, at least in larger countries.
Note: This is an unedited draft from my upcoming Manuscript. Rather than write a review of Pavlina R. Tcherneva's The Case for a Job Guarantee, I have created my summary of that text.
The discussion of the role in unemployment is a key theoretical divide between Modern Monetary Theory and mainstream approaches. Theoretical conclusions determine the suggested policy response of governments to unemployment. The structural changes to the labour market made by policymakers in the 1990s were based on following a theory.
(This is a rather lengthy unedited excerpt from the manuscript of my MMT primer. It has references to other sections of the manuscript.)
Yet another MMT book is out in North America: The Case for a Job Guarantee, by Pavlina R. Tcherneva (Amazon affiliate link). The book does a very good job of covering the ground of what the Job Guarantee is, and why it is needed.
Although online discussions of MMT typically revolve around "printing money" and "whether MMT is new?," the Job Guarantee is a core part of the theory, and often skipped over.
This article is not meant to be a formal review, nor do I explain the Job Guarantee. I am in the process of writing a MMT primer, and I will use this book as the basis for sections on the Job Guarantee.
My view is that changes in structure in the labour markets that started in the 1980s – but kicked into gear in the early 1990s – explain the structural breaks in the behaviour of the developed economies that took place in the early 1990s. The advantage of these changes has been the decline in inflation. Although neoclassical economists attribute this change to the switch to inflation targeting (as will be discussed in Section 2.5), I do not think we can assume away the changes to the labour markets. The disadvantage of these changes has been the persistent sluggishness in developed economies.
(Note: This is an unedited section of a manuscript that discusses MMT and the upcoming recovery. Although most people focus on fiscal policy stories when discussing MMT, labour market analysis offers a much greater contrast to neoclassical thinking. The section following this one delves into that aspect more deeply,)
Both Canadian and American labour market data for May surprised to the upside, and the Treasury market has sold off.
My view always was that guessing what would happen this month is a bit of a waste of time, and we won't get a clean read until the June data. A mechanical bounce in employment was always in the cards, the question is when, and at what levels.
U.S. labour marker data for April was released, and it was ugly, which should be a surprise to nobody. If we step back from considering the human costs of this downturn, the chart above demonstrates that a lot of data has lost information value courtesy of the nature of the pandemic. As shown, measured hourly wages for non-supervisory employees has risen by the most since the early 1980s. Since people like myself often used this time series as a measure of inflationary pressures, this would be concerning. The reality is that this rise is just an artefact of the reality that low-wage jobs have borne the brunt of layoffs or furloughs.
SNAP participation. (U.S. Department of Agriculture)
I have returned from the 3rd annual Modern Monetary Theory conference, and I am now catching up on things. One of the observations that stuck with me was some comments about the Supplemental Nutrition Assistance Program (SNAP) made by the presenter Maggie Dickinson. She noted that the welfare state did not contract completely since the 1980s, as some components have grown, with SNAP being an example of growth. While thinking about this, I realised that the rise in food assistance (such as SNAP, as well as food banks, which have grown in importance in the other "anglo" countries at least) helps explain the breakdown in employment statistics as an indicator.
Noting that the unemployment rate is "broken" as an indicator as a result of the changing structure of the labour market is not particularly novel. For example, Bill Mitchell's academic work has documented the structural changes in employment policies in the OECD since the early 1990s, and the rise of "underemployment." (Bill Mitchell is one of the founders of MMT, and I was on a panel with at the conference.) My concern is somewhat more stark: employment status as a whole has become somewhat meaningless as an indicator.
Courtesy of travelling with my family, I mercifully missed most of the latest eruption of the "Phillips Curve Debate" -- is there a trade-off between unemployment and inflation? I once again have a bit more time for writing, and I wanted to look to see whether there was anything interesting. The NYT article by N. Gregory Mankiw "Yes, There Is a Trade-Off Between Inflation and Unemployment" held the promise of of giving me guidance on what the latest iteration of the debate was about.
The relationship between labour market slack and inflation (typically referred to as the Phillips Curve) is complicated, as it depends upon the structure of economic institutions. The post-1990 era saw labour market reforms that led to widespread underemployment. This article summarises some points from the Modern Monetary Theory (MMT) textbook Macroeconomics by Mitchell, Wray, and Watts (affiliate link). I replicated a chart of Australian data -- which of course meant that I needed to add support for data from the Australian Bureau of Statistics on my research platform.
I just wanted to post a couple of charts I plan on using in a chapter on the construction industry. It acts as an update on the Canadian employment situation, a topic I have not commented on in a long time. As the chart above suggests, not much has changed, but the construction industry is still of over-sized importance.
The bear market in Treasurys is ongoing, which I do not view as particularly surprising. The usual way to generate excitement about the bond market is to claim that there will be horrific consequences if some technical level on the 10-year benchmark (or sometimes the 30-year benchmark) is reached. Although attention-seeking behaviour would probably get me more page views, I call them the way I see them. There is absolutely no reason for equity investors to care about what is happening in the Treasury market right now, and it would take something really big for that to change.
The Job Guarantee is a programme that offers all citizens willing to work for it a guaranteed wage – which becomes the de facto minimum wage in the economy. It creates a floor for incomes and working conditions. It also gives the government a workforce that can undertake non-time sensitive projects. (Permanent government jobs and most infrastructure jobs would be unaffected.) The implementation of the programme would be country-specific, as the objective would be to re-use existing job seeking infrastructure. The central government would pay the workers and oversee the programme, but local governments and non-profits would likely be the employers, at least in larger countries.
My view is that changes in structure in the labour markets that started in the 1980s – but kicked into gear in the early 1990s – explain the structural breaks in the behaviour of the developed economies that took place in the early 1990s. The advantage of these changes has been the decline in inflation. Although neoclassical economists attribute this change to the switch to inflation targeting (as will be discussed in Section 2.5), I do not think we can assume away the changes to the labour markets. The disadvantage of these changes has been the persistent sluggishness in developed economies.
