Development, 2007, 502), (96-102) © 2007 Sctety for Inernatons! Development 1011-6370)07 ‘wi sid orgldevelopsent Dialogue Employer of Last Resort: Strategies for combating poverty L. RANDALL WRAY aastract Randall Wray looks at how to solve the problem that market economies do not provide jobs for all who want to work. He argues that joblessness is usually concentrated among groups that suffer other disadvantages: racial and ethnic minorities, immigrants, younger and older individuals, women (especially female-headed households with children), people with disabilities, and those with lower educational attainment. He underlines the need to generate a broad public understanding of the responsibility of government to secure the right to employment. KEYWORDS human rights; workers’ rights: jobs; wages; unemployment Justification for employer of last resort ‘The United Nations Universal Declaration of Human Rights includes the right to work, not only because itis important in its own right, butalso because many of the other eco- nomic and social entitlements proclaimed to be human rights cannot be secured with- out paying jobs (Harvey, 2004). Joblessness creates @ long list of problems ~ both for the individuals and for society as a whole: self-pity, self-loathing, and rage at society (Harvey, 2002); absolute and relative poverty; damage to social status and self- respect; adverse psychological and physical health effects; stress; suicide; crime; and other anti-social behaviour. Amartya Sen (1999) supports the right to work because the economic and social costs of unemployment are staggering with far-reaching con- sequences beyond the single dimension of a loss of income (Rawls, 1971). The problem is that market economies do not provide jobs for all who want to work. Indeed, public policy is often biased against full employment on the belief itis not consistent with price stability. However, joblessness is usually concentrated among groups that suffer other disadvantages: racial and ethnic minorities, immigrants, younger and older individuals, ‘women (especially female-headed households with children), people with disabilities, and those with lower educational attainment. Hence, at the very least, safeguards are required to protect the minority that suffers consequences of policy that imposes large concentrated costs for the benefits of lower inflation that accrue to society as a whole (Harvey, 2004, forthcoming: Wray and Forstater, 2004; Mitchell and Wray, 2005). Development (2007) 50(2), 96-102. doi:10.1057/palgrave.development.1 100365,‘There are avariety of approaches to the problem oflong-term joblessness, of which the most impor tant are behaviouralist (problems with the indivi- duals who are unemployed), structuralist (e.g. skills mismatch), and job shortage (Harvey, 1999, 2000). In the US, with the exception of the New Deal experience, public attitudes and policy em- phasize behavioural and structural problems. This generates policies that try to motivate and trein the unemployed, together with promotion of greater ‘flexibility’ that would reduce labour mar- Ket ‘frictions. However, if the problem is a job shortage, all that such policies can dois to redistri- bute unemployment among the unfortunate, who are blamed for their joblessness. Especially in ‘an expansion, those left behind generally do have characteristics identified with the behaviouralist and structuralist arguments, hence concealing the true problem ~a chronic job shortage. A key justification for employer of last resort (ELR)is that no capitalist society has ever operated at anything approaching true, full, employment on a consistent basis without direct job creation on a large scale by government. Further, the bur- den of joblessness is borne unequally, always con- centrated among groups that already face other disadvantages. Finally, only the government can offer an infinitely elastic demand for labour (offer- ing to hire all who cannot otherwise find employ- ment) because it does not need to heed narrow market efficiency concerns. Private firms only hire the quantity of labour needed to produce the level of output expected to be sold at a profitable price. Government can take a broader view to include promotion of the public interest, including the right to work. For these reasons, government should and must play a role in providing jobs to achieve social justice. Programme design For the past decade, researchers (many of whom are associated with the Center for Full Employ- ment and Price Stability, CFEPS, at the University of Missouri-Kansas City, USA, the Centre of Full Employment and Equity (Coflee) at the University of Newcastle, Australia, and the Levy Economics Institute of Bard College) have advocated a job Wray: Employer of Last Resort creation programme variously called the ELR, job guarantee, public service employment, or employ- ment assurance policy. Argentina adopted a job creation programme explicitly based on these proposals. A job guarantee programme fs one in which government promises to make a job avail- able to any qualifying individual who is ready and willing to work. Qualifications required of participants could include age range, gender, f@- mily status, family income, educational attain- ment, residency, and so on. The most general programme would provide a universal job guaran- tee, in which government promises to provide a job to anyone legally entitled to work. This is what ‘we will call an ELR programme. ‘There are different versions of ELR. Harvey (1989) seeks to provide a public sector job to any- one, with the pay approximating a ‘market wage, whereby more highly skilled workers receive high- ex pay. Argentina’ Jefes programme targets heads of poor households only and offers a uniform basic payment for half-time work. I prefer Hyman Min- sky's (1965) proposal, developed further at CFEPS and Coffee, in which the federal government pro- vides funding for a universal ELR programme that would offera uniform hourly wage with a package of benefits (Burgess and Mitchell, 1998; Wray. 1998), The programme also provides part-time and seasonal work, as well as other flexible working conditions as desired, Benefits include health care, child care, payment of Social Security taxes, and usual vacations and sick leave. The wage would be set by congress and fixed until congress approved a rate increase ~ much as the minimum wage is currently legislated. The programme wage would provide an income floor and limit competition with. other employers as workers could be attracted out of the ELR programme by paying a wage slightly above the programmes wage. Proponents argue that no other means exist to ensure that everyone ‘who wants to work will be able to obtain a job. So- cial benefits include poverty reduction, ameliora- tion of many social ills associated with chronic unemployment (health problems, spousal abuse and family break-up, drug abuse, crime), and en- hanced skills due to training on the job. Forstater (2000) emphasized the use of ELR to en- hhance economic flexibility and the environment 97Development 00(0): Dialogue 98 ‘More generally ELR can provide goods and services that markets donot provide at all, or that are too ex- pensive for poor households. Examples include so- cial services (child and elder care, tutoring, public safety), small-scale public infrastructure provision or repair (clean water and sewage projects, roads), low-income housing, food preparation (‘soup kitch- ens, local bakeries), and handicrafts (school uni- forms, toys). Private sector employers would have to offer wages, benefits, and working conditions comparable to those offered by the LR programme. ‘The informal sector would shrink as workers inte- grate into formal employment, gaining protection provided by labour laws. Racial and gender discri- mination would be reduced because unfairly trea- ted workers would have the ELR option; however, ELR by itself cannot end discrimination. Still, ithas Jong been recognized that full employment is an im- portant too! in the fight for equality (Darity, 1999). Critiques of ELR Critics argue that a job guarantee would be infla- tionary, using some version of a NAIRU-Phillips Curve approach according to which lower unem- ployment necessarily means higher inflation (Sawyer, 2003). Some argue that ELR reduces work incentives, raising private sector costs since ‘workers would no longer fear job loss. Workers ‘would be emboldened to ask for greater wage in~ creases, Some argue a universal programme ‘would be so big that it would be impossible to man- age it; some fear corruption; others argue that it would be impossible to find useful things for BLR workers to do. It is said to be too expensive, caus- ing the budget deficit to growon an unsustainable path (Aspromourgos, 2000; King, 2001). Finally, some argue that it will cause currency deprecia- tion by worsening the trade balance (see Mitchell and Wray (2005) for details on critiques). Approperly designed LR programme would mi- tigate or eliminate these problems. Supporters em- phesize that the uniform ELR wage actually promotes domestic economic and price stability. ELR will act as an automatic Stabilizer with em- ployment in the programme growing in recession and shrinking in expansion, counteracting private sector fluctuations. The government bud- get will become more counter-cyclical because its ELR spending will likewise grow in recession and fall in expansion. Furthermore, the uniform basic wage will reduce both inflationary pressure in a boom and deflationary pressure in a bust. In a boom, private employers can recruit from the ELR ‘reserve army’ of the employed, dampening wage pressures as private employment grows. In reces- sion, workers down-sized by private employers work at the ELR wage, putting a floor to how low ‘wages and income fall. Further, to the degree that wages are stabilized by ELR, production costs will be more stable, ELR will directly stabilize income and consumption of ELR workers, and if other wages and incomes become more stable, that will further enhance macroeconomic stability. Critics argue that ifjobs are created that provide income to the poor, consumption will rise, includ- ing purchases of imports. This will worsen the trade deficit, depreciate the currency, and possibly lead to accelerating inflation through exchange rate ‘pass through’ (import prices rise as the cur- rency depreciates, adding to inflation of prices of the domestic consumer basket). In other words, unemployment and poverty are the soctal cost of maintaining low inflation and the value of the currency. Two kinds of responses can be provided. The first is ethical. Should a nation attempt to maintain macroeconomic stability by keeping a portion of its population sufficiently poor that it cannot afford to consume? Are there other tools, available to achieve these ends? If not, should policymakers accept some inflation and currency depreciation in order to eliminate unemployment and poverty? There are strong ethical arguments against using poverty and unemployment as the primary policy tools to achieve price and ex- change rate stability. And even if currency stabi- lity is highly desired, itis doubtful that a case can be made for its status as a human right. However, we can challenge the notion that ELR actually threatens price and currency stability ‘Tobe clear, Ido not argue that ELR would have no effects on a particular index of prices (such as the CPI) or on the exchange rate. I argue instead that ELR provides an anchor for the domestic and foreign value of the currency, hence, actually increases macroeconomic stability. ELR will notcause domestic inflation, although it can lead to a one-time wage and price increase, ifthe ELR wage is initially set above the prevailing minimum mar- ket wage. Similarly, if ELR does increase income when implemented, this can lead to a one-off in- crease of imports. Even if the exchange rate does decline in response (and even if there is some pass-through inflation), the stable BLR wage will prevent a wage-price spiral by acting as awage an- chor Ifa nation is not prepared to allow its trade deficit to rise with higher employment and income in the ELR programme, it still has all policy tools available at its disposal with the lone exception of forcing the poor and unemployed to bear the en- tire burden: trade policy, import substitution, lax- ury taxes, capital controls, interest rate policy, ‘turnover taxes, and so on. Binally, some critics worry that an ELR pro- gramme will cause a growing budget deficit, How- ever, ELR spending will fluctuate with the cycle, automatically shrinking when the private sector grows. In recession, workers shed by the private sector find ELR jobs, increasing government spend- ing and thereby stimulating the private sector so that it will begin to hire out of the ELR pool. In any case, estimates by Harvey (1989) and Wray (1998) putnet spending by the government on a universal ELR programme at well under 1 per cent of GDP for the US. Indeed, on plausible estimates of the so- cial costs of maintaining a large unemployed popu- lation (unemployment compensation, welfare payments, costs of crime, and s0 on), a universal employment programme will almost certainly re- duce total government spending. Argentina’ Jefes programme peaked with 5 percent of the popula- tion employed in the programme and with gross spending at just] percent of GDP (this figure over- states net spending because in the absence of the Jefes programme, government would have had to provide alternative social spending) (Tcherneva and Wray, 2005, www.cfeps.org). Developed nations typically spend three times as much on anti-pov- erty programmes. ELR for a developing nation ‘A small developing nation presents several challenges. First, it may produce a small range of Wray: Employer of Last Resort commodities and import a large number of goods it does not produce, while exporting few commod- ities. Second, the formal sector could be small, with most production and employment in the informal sector ~ and with a large disparity be- tween formal and informal wages. Third, adminis- trative capacity of the national government might be limited, with inadequate infrastructure to allow significant expansion of productive capa- city. Finally, its exchange rate is likely to be pegged — perhaps to the currency of its former colonizer. Creation of an EER programme with a wage equal to the minimum wage in the formal sector could generate a flood of workers from the infor- mal sector. Monetary incomes would rise and de- mand for consumption goods — including ‘luxury’ imports that had been beyond reach for most of the population - would increase. The trade bal- ance would deteriorate and the government ‘would lose international reserves. Domestic prices would rise (although direct pressures on prices of domestically produced goods would be limited if these were mostly purchased by poor families), but more importantly, import prices would rise as the currency depreciates. An exchange rate crisis would be likely to trigger an economic crisis. Is there any way to avoid these consequences? First, let us see how this nation can reduce im- pacts on prices, the exchange rate, and the trade balance. It will need to limit the programme’ im- pact on monetary demand, which can be done by keeping the programmels monetary wage close to the average wage earned in the informal sector. Poverty still can be reduced if the ELR total com- pensation package includes extra-market provision of necessities, including domestically produced food, clothing, shelter, and basic services (health- care, childcare, eldercare, education, transporta- tion). Because these would be provided ‘in kind, ELR workers would be less able to use monetary in- come to substitute Imports for domestic produc- tion. Further, production by ELR workers could provide many or most of these goods and services ~ minimizing impacts on the government's budget, as well as impacts on the trade balance. If the BLR programme directly provides basic necessities as well as monetary income equal to 99Development 00(0): Dialogue that previously earned in the informal markets, there will be some net impact on monetary demand. Further, production by ELR workers might require imports of tools or other inputs to the production process. Careful planning can help to minimize impacts. For example, imports of required tools and materials can be linked to ex- port earnings or to international aid. Because pro- duction techniques used in an ELR programme are flexible (ELR production need not meet usual market profitability requirements ~ Forstater, 2000), government can gradually increase capital ratios’ in line with its ability to finance imports. Further, BLR projects can be designed to enhance the nation’ ability export. The most obvious example is provision of public infrastructure to reduce business costs and attract private investment. A phased implementation of the programme will help to attenuate undesired impacts, while also limiting the impact on the government's bud- get. Further, starting small will develop compe- tence to manage @ larger programme. Argentina limited its programme by allowing participation by only one head of household from each poor family. The programme can start even smaller than that, allowing each family to register a head of household, but allocating jobs by lottery so that the programme grows at a planned pace. The best projects proposed by community organizations (eg. at the village level) can be selected to employ a given number of heads of households from the community (again, with selection by lottery) Decentralization of project development, supervi- sion, and administration can reduce the adminis- trative burden on central government while also ensuring that local needs are met. International aid agencies can provide finan- cing for the ELR programme. However, borrowing should be avoided unless the ELR programme will directly increase exports to service international debt. Some ELR programme output can be sold in domestic and international markets to generate revenue, For example, Jefes workers produce cloth- ing and furniture that is sold in formal markets. Further, some of the output of the programme can substitute for government purchases; for ex- 100 ample, jefes workers produce uniforms. Generally, however, ELR production should not compete with the private sector. Finally, government can use traditional meth- ods of protecting its trade balance and exchange rate: tariffs, import controls, and capital controls. Tb the extent that ELR raises monetary wages and monetary consumption its impact on the trade balance and exchange rates is similar to the impact of domestic growth more generally. The ar- guments for and against ‘intervention’ in the area of international trade and capital flows are well- known and need no further discussion here. While there has been a strong bias against such inter- vention. the consensus has shifted in recent years toward the view that protection is ecceptable ona case-by-case basis. Conclusions Jobs are critical for development and for poverty reduction. According to the International Labour Office, global unemployment hit an all-time high of nearly 200 million in 2006; another 14 billion worked for less than the equivalent of USS2 daily. ‘The ILO emphasizes that the creation of decent, jobs is a precondition for future development and economic growth. While world productivity has been rising (26 percent over the last decade), fuel- ing economic growth, employment growth is lag- ging far behind (just 16.6 percent). The problem is most obvious in the developing world, but the link between unemployment and poverty is also strong in developed nations. For example, in the USA, families with no members working have a probability greater than 25 percent of falling be- low the offictal poverty line; for black families, the probability is nearly 60 percent. On the other hand, if family has at least one member working. full-time, the poverty rate falls to 3.5 percent for all families and to 73 percent for black families (Bell and Wray, 2004) ‘The links clear, but private markets do not pro- vide enough jobs ~ and the right kinds of jobs — even in an economic boom. For example, at the peak of the US Clinton-era expansion, only about, one-third of prime age (18-44 years) black males without @ high school degree were employed (Wray, 2000),While numbers are hard to estimate,itis possible that even during the best labour mar- ket the US had experienced since the 1960s, as many as 25 million Americans were involuntarily jobless ~ many of these with low education and spotty job experience, As Minsky emphasized, jobs are needed that will ‘take workers as they are’ ~re- gardless of level of education or job experience ~ and tailor the jobs to their characteristics, some- thing the private sector cannot do. There have been many jobs programmes imple- mented around the world, some narrowly targeted while others were broad-based, The American New Deal included several moderately inclusive pro- grammes such as the Civilian Conservation Corp and the Works Progress Administration. Sweden de- veloped broad-based programmes that virtually guaranteed access to jobs, until government began to retrench in the 1970s (Ginsburg, 1983). In the aftermath of its economic crisis that came with the collapse of its currency board, Argentina created Planjefes yJefas that guaranteed a job for poor heads of households. The programme successfully created 2 million new jobs for poor families, while also pro- viding needed services and free goods to poor neighbourhoods. More recently, India passed the National Rural Employment Guarantee Act (2005) to provide employment in public works to any adult living in a rural area within 15 days of registration, for a minimum of 100 days per year (Hirway, 2006, wwwlevyiorg). The Jefes experience, in particular, allows us to move from the realm of theory to the reality of References Wray: Employer of Last Resort practice (Tcherneva and Wray, 2005). Many of the fears of critics have been shown to be falla~ cious. Job creation, even on a massive scale and under difficult circumstances, can be successful. Participants welcome the chance to work, viewing participation as empowering. The programme can be democratically implemented, increasing political participation, and with relatively litle corruption or bureaucratic waste. Even with a hnuge programme that employed 5 per cent of the population, communities were able to find useful work for participants. Jefes reduced social unrest, and provided demand for private sector production. Could a programme like Jefes work elsewhere? At the very least, we can learn from the pro- gramme’ successes and failures. As an Argenti- nean activist told me, ‘The people that actually hhave the answers are the ones with the needs, those that suffer from starvation. If you target your policies to these people you cannot go wrong. ‘This government did a good job; they addressed the root of the problem... They didnt look to the top; they went straight to the bottom However, because Jefes was viewed as a temporary pro- gramme to deal with an economic and social cri- sis, rather than as a commitment to a job guarantee, support among officials declined as the crisis passed. The future of fees is now uncer- tain. This indicates how important itis to generate public understanding of the responsibility of government to secure the right to employment, Aspromourgos, Tony (2000) ‘Is an Employer-of-Last-Resort Policy Sustainable? A Review Article, Review of Political Economy 12(2}:141—55. Bell, Stephanie A. and L. Randall Wray (2004) “The Ware on Poverty After 40 Years: A Minskyan assessment, Public Policy Brief;The Levy Economics Institute of Bard College, no. 78. 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Harvey, Philip (2000) ‘Combating Joblessness: An analysis of the principal strategies that have influenced the development of American employment and social welfare law during the 20th century! Berkeley Journal of Employment and Labor Law 21(2): 677-758. Harvey, Philip (2002) 'Human Rights and Economic Policy Discourse: Taking economic and soctal rights sertousty, Columbia Human Rights Law Review 33(2) 364-471 Harvey, Philip (2004) Aspirational Law: Bufialo Law Review $2(3}:701~26. Hervey. Philip (forthcoming) ‘Benchmarking the Right to Work, in Alanson Minkler and Shareen Hartel (eds) Economic Rights: conceptuel, Measurement and Policy Issues, Cambridge: Cambridge University Press. Hirway, Indira (2006) ‘Enhancing Livelihood Security Through the National Employment Guarantee Act: Toward eliective implementation ofthe act. The Levy Economics Institute Working Paper No 437, January, available online. King, JB 2001) “Phe Last Resort? Some Critical Reflections on ELR,, journal of Economic and Social Policy 5(2): 72-6. ‘Minsky, Hyman P. (1965) ‘The Role of Employment Policy’, in Margaret S. Gordon (ed) Poverty in America, San Francisco, CA: Chandler Publishing Company. Mitchell, William E and L. Randall Wray (2005) "In Defense of Employer of Last Resort: A response to Malcolm Sawyer, Journal of Economic Issues 39(2}: 235-48, Rawls, John (1971) Theory offustce, Cambridge, MA: Harvard University Press Sawyer, Malcolm (2003) ‘Employer of Last Resort: Could it deliver full employment and price stability” Journal of Economic Issues 37(8): 881-908. Sen, Amartya (1999) Development as Freedoms, New Yor’, NY: Alfted A. Knopf ‘Teherneva, Pavlina and L. Randall Wray (2005) ‘Gender and the Job Guarantee: The impact of Argentina’ Joes programme on female heads of poor households, Center for Full Employment and Price Stability Working Paper No. 50, December, available online. 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