A Jobs Guaranteed Economic Disaster

Democrats are plugging new energy into an old idea: a federal “Jobs Guarantee” program. Senator Cory Booker previously introduced legislation for a pilot in high unemployment communities. Now Senator Bernie Sanders will announce a plan guaranteeing a job or training paying $15 an hour and health-care benefits to every American worker “who wants or needs one,” in a host of public infrastructure, care giving and environmental upkeep projects.

The scheme, seemingly based on a recommendation from the Levy Economic Institute, comes with grandiose purported benefits. It would, we are told, eliminate involuntary unemployment, deliver a living wage, boost GDP, reduce the cost of recessions, raise labor market standards, reduce environmental degradation, reduce racial inequality, and much else besides. If it sounds too good to be true, that’s because it is. There are severe problems with this idea, which can be loosely grouped under three “c’s”: costs, crowd out and corruption.

Costs

The Levy Economic Institute calculates up to 16 million could take part in such a program today (including the unemployed, those working part time seeking full time work and individuals currently inactive who might move into the labor market). Given the federal government would have to pay $15 an hour for full time jobs, plus benefits equal to 20 percent of wages, total labor costs per worker would be $37,440 per year. That’s before the cost of the materials for the programs and administration of the program itself. Even assuming some opt for part-time positions, and ignoring the non-labor program costs, we are talking about a gross cost of up to around 2.4 percent of GDP, significantly higher than the existing Medicaid program (2 percent of GDP).

The net cost on these assumptions will be lower, of course. People who take jobs will require less in welfare payments and pay some back in taxes. Some might wisely consider it a risk for their employment fortunes to be tied to the whims of politicians and their willingness to fund this program, and so remain in the private sector. But even taking this into account, and assuming the policy generates the macroeconomic bounty that the Levy researchers expect, they still think the annual net cost will be between 0.8 and 2 percent of GDP, with the program employing up to 10 percent of the workforce. That would in itself be a huge new commitment to finance at a time when the long-term fiscal outlook is already dire, and the short-term deficit already expected to balloon to over 5 percent of GDP in the coming years.

Crowd-out

In reality, the fiscal costs are likely to be much, much higher, and the economic welfare losses even more significant, because in the labor market and broader economy, a public jobs guarantee program would significantly crowd out productive private sector activity. This type of policy will radically alter behavior of both workers and businesses, and so the supply and demand for labor.

The Census shows that, among those who worked in 2016, 70+ million Americans earned under $32,500 (the full-time job guarantee salary would be $31,200). Yes, not all of these would seek out positions on the jobs guarantee program. But a large proportion would, especially those employed in uncertain roles with low levels of job security.

In fact, some even paid more than $31,200 might consider leaving their jobs to pursue guaranteed roles if they perceive better working conditions or an easier worklife (asked under what conditions someone would be fired from such a role, the Levy Institute paper suggests that you would be sacked for failing to go to work, but that your performance would not be judged by “private sector ‘efficiency criteria’”, for example.) It’s not inconceivable then that over 25 percent of the labor force could find itself part of the scheme.

This crowd-out is likely to be particularly acute in low productivity regions, and (ironically) after economic downturns. A nationwide jobs guarantee program paying $15 an hour will be particularly attractive to workers in low wage regions, and by setting a de facto wage floor the program will prevent private investment in regions on the basis of cheap labor.

Though no doubt there would be some demand spillovers from well-paid jobs, the net consequence is highly likely to be weaker private sector job creation in poor regions, which has been the experience of countries such as Britain with a nationwide minimum wages and public sector national pay bargaining. Proponents of the scheme see “higher labor standards” as a good thing, but absent productivity improvements, policies which raise labor costs significantly will reduce the quantity of workers demanded.

There’s good reason to expect the policy will reduce the efficiency and productive potential of the economy too. Taxes will eventually need to be raised to cover the net cost of the program. In infrastructure and care giving provision, costs will rise – because nobody would now work in these directly substitutable sectors for less than the wage and conditions offered in the job guarantee program. This will waste resources, and there’s highly likely to be overinvestment in lots of relatively low value ventures and programs to ensure workers are employed, especially given the explicit aim is to provide employment rather than deliver projects at low cost.

Throwing resources at regions with higher levels of unemployment and after recessions too will work directly against market signals and deter the mobility of labor (in geographic and industrial terms) and capital to its most productive uses given prevailing market conditions. This is important: yes, employment is highly likely to have some positive externalities; but the real driver of better living standards over time are productivity improvements, discovered by market-based activity. 

Proponents of this policy seem to put an enormous weight on the idea that time out of the labor market has huge scarring consequences which could be ameliorated by any type of temporary employment. But the literature on this shows that temporary jobs do not provide the workers with skills to improve longer-term labor market outcomes.

Corruption and incentives

As if all these consequences were not bad enough, such a program will be ripe for corruption and political interference at the government, provider and individual level. Senator Sanders’ plan would be administered by the Department for Labor, with local and state governments submitting projects to regional offices for consideration. There’s a huge question mark on whether projects will be considered on economic grounds, when there might be an incentive for make-work schemes to aid particular politicians or indeed to put resources towards “public good” causes or NGOs more in line with the ethos of the governing party. For Democrats this might be for environmental issues. For Republicans it might be, say, for a wall on the southern border.

NGOs and local public bodies themselves will have incentives to apply for federal funds for projects that would otherwise have occurred anyway, and to maximize the number of applications. Pork barrel projects would proliferate. What is more, at the individual level, the guarantee coupled with the purported unwillingness to judge worker performance on a commercial basis will incentivize low levels of work effort on the margin.

Conclusion

The Jobs Guarantee then is an extremely large and costly endeavor, which would have major economic consequences and risk a large federal politicization of the labor market and public project delivery. 

The US does have serious labor market issues to contend with - not least depressed labor participation and a weak productivity outlook - but are things really so bad that they require such a risky and extensive policy response?

Well-paid jobs and low levels of real unemployment are outcomes desired by all. But attempting to achieve that through this program amounts to cracking a nut with a sledgehammer, undermining what matters far more for living standards: efficiency and productivity.