On Using Nairu To Analyse A Chore Guarantee

Professor Simon Wren-Lewis wrote "Some thoughts most the Job Guarantee," inward which he makes an evidence to analyse a Job Guarantee using the NAIRU concept. The analysis suffers from the well-known defects of NAIRU.



In the article, he argues that a Job Guarantee implementation would campaign a former upward stupor to wages. He argues that this is non "acknowledged" past times MMT authors, fifty-fifty though it appears this upshot is mutual noesis to anyone who has read the MMT literature. As a result, that is a curious argument. However, he in addition to so flips to an analysis where the Job Guarantee has no upshot on inflation.

However, the province of affairs gets to a greater extent than interesting. He writes (note JG = Job Guarantee, IU = involuntary unemployment, in addition to NAIRU = NAIRU):

Suppose nosotros outset amongst an economic scheme amongst stable inflation, implying unemployment was at the NAIRU, in addition to innovate JG. As this puts upward push clit per unit of measurement area on inflation because the costs of losing a project are reduced. the solely way of keeping inflation stable is to deflate demand, which of course of teaching would trim output, labour need in addition to thence growth the number of people on JG jobs. So if nosotros were to compare 2 economies where inflation was stable, 1 amongst IU in addition to 1 amongst JG, the number of JG jobs would transcend IU inward the other economy.

This passage would live on helped past times a clearer mathematical exposition; every bit it stands, I receive got to brand or so guesses every bit to what he means.

My interpretation of his declaration is every bit follows.

• Let the pct of the people inward the workforce non employed inward "regular employment" live on denoted every bit NW. 
• In the electrical current institutional structure, the number NW is equal to the the unemployment rate, or involuntary unemployment (IU).
• In the electrical current institutional structure, at that topographic point is a number NAIRU for which inflation volition non accelerate solely if NW = NAIRU. (It accelerates upwards if NW < NAIRU, in addition to downwards if NW > NAIRU.)
• If nosotros alter institutional structure, NAIRU is unchanged.
• If nosotros implement a Job Guarantee, the term NW = (percentage of workforce inward the Job Guarantee) + (people inward the workforce who pass upwards to receive got a Job Guarantee job). (This latter term is presumed to live on really small.)
• Because a Job Guarantee project is assumed to live on meliorate than unemployment, at that topographic point is less disciplining effect. Therefore, the novel signal of inflation stability is NAIRU + k, where k > 0.

Although this analysis is simple, it runs into obvious problems.

• NAIRU is patently non a constant inward the electrical current institutional environment. Any evidence to specify NAIRU every bit a constant fails statistically.
• We receive got no thought what determines NAIRU inward the electrical current environment. It is estimated past times a statistical physical care for that tells us what NAIRU would receive got to live on if the gap (NW - NAIRU) explained inflation acceleration. This physical care for is patently non-falsifiable; whatever variable correlated to the concern bicycle would yield only every bit useful predictions when the same physical care for is applied to it. Correlation does non imply causation, in addition to all that.
• If NAIRU was invariant to institutional structure, it would live on the same for all countries. It patently is not.
• There is no way to approximate k in the absence of a working Job Guarantee. Even if it is positive, is it larger than the errors inward the approximate of NAIRU?
• No microfoundations. There is no explanation why this model would work, other than or so vague give-and-take most the cost of losing a job. 
• Incoherent model dynamics. The model implies that if the initial JG puddle was also small, the economic scheme would explode inward a puff of hyperinflation. Imagine that the JG wage is fixed for all fourth dimension (0% inflation policy). If NW < NAIRU + k, the model says that (wage) inflation volition accelerate upwards. However, the gap betwixt the somebody sector wage in addition to the JG wage would live on expanding, in addition to at that topographic point would live on less incentive to larn into the program. The termination is that JG spending would decrease. How does a shrinking spending programme that buys a existent input at a fixed cost going to campaign increasing inflation? And if nosotros flip the sign, the termination is fifty-fifty to a greater extent than ridiculous. If the JG puddle gets also large, the somebody sector wage falls at an accelerating rate, in addition to so nosotros simultaneously receive got expanding JG spending, a shrinking labour force, in addition to falling inflation. In other words, the predicted sign from the model appears backwards.
• Critically subject upon the specification of "potential." If nosotros role potential gross domestic product to approximate the output gap, it is unclear whether implementing a Job Guarantee affects potential somebody sector GDP. (The accounting for the output of the Job Guarantee programme is going to enhance issues.)
• Plausibility is terrible (related to microfoundations). In what feel does an excessive number of French-speaking unemployed workers inward the Gaspé influence wage determination inward (mainly English-speaking) Calgary? The commons soil of affairs is that the volume of the unemployed are inward "low pressure" regions, in addition to so it is unclear that nosotros tin relate aggregate unemployment to aggregate inflation.
• It ignores existing labour marketplace research. There is a large trunk of operate discussing "hysteresis": long-term unemployed becoming viewed every bit "unemployable," in addition to no longer mattering for "disciplining" wages. Re-attaching such workers to the project marketplace (which is a major objective of the Job Guarantee) would effectively enhance the size of the workforce. It is unclear what powerfulness come about to the measured unemployment charge per unit of measurement (such people typically are dropped from the workforce inward surveys inward the electrical current environment), but full somebody sector workers (and presumably output) would live on higher. In other words, the postulated "k" upshot is smaller than hysteresis-reduction gains. Since the objective of policy is to enhance living standards (and non play games amongst questionable survey definitions), the Job Guarantee would live on an unambiguously superior outcome.
• Is a Job Guarantee project actually meliorate than unemployment benefits for many workers? For the upper one-half of the income distribution, the Job Guarantee wage is every bit irrelevant every bit the minimum wage. Meanwhile, given rampant wage inequality, the top one-half of the distribution rakes inward a lot to a greater extent than than one-half of the full wage bill. In other words, how tin the beingness of the programme deed that whole mass of salaries?
• The analysis is static. If the Job Guarantee wage is high plenty to line employees away from existing jobs, those employers receive got no selection but to either enhance reward or invest to growth productivity. With investment higher, so volition live on potential output, in addition to the estimated NAIRU could destination upwards lower.
• Completely ignores other variables, such every bit the gap betwixt average somebody sector reward in addition to the Job Guarantee wage. Can the same grade of NW live on every bit inflationary (deflationary) if the Job Guarantee wage is 20% of average somebody reward instead of 50%?

As an aside, the whole premise of DSGE macro was to avoid analysis similar this. We receive got an evidence to analyse a novel policy framework based on a questionable plumbing equipment of historical data. Instead, DSGE macro was to supercede that amongst an in-depth analysis of the decision-making physical care for of economical agents, in addition to so conduct would live on invariant to institutional change.

(c) Brian Romanchuk 2017