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Abstract
Unemployment exacts a high cost to its victims, not only in lost income, but also in terms of quality of life (insecurity, depression, abandoned families, divorce, suicide and poorer health). It also exacts a high cost to society in terms of lost output, foregone tax revenue, depreciating human capital, and increased costs of welfare, crime and health care. Yet modern wealthy societies have, principally for the sake of price stability and to avoid the budget costs of a full remedy, chosen to tolerate a substantial level of permanent unemployment. This article explores the moral conditions of this social choice and its rationality in terms of social welfare. It makes and develops support for two claims: society's tolerance of involuntary unemployment is morally wrong, and it is socially and economically irrational. It concludes that government should guarantee employment by serving as employer of last resort and where appropriate provide for retraining.
Acknowledgements
An earlier version of this paper was presented at the Twelfth World Congress of Social Economics: Social Values and Economic Life, Amsterdam, 7–9 June 2007. Helpful comments from Jeffrey Reiman and Martha Starr are gratefully acknowledged.
Notes
1 “Discouraged workers” are those who have abandoned hope and thus given up the search for employment. They are not counted as unemployed, and thus not included in the official unemployment statistics. In the US, approximately 20 percent of officially unemployed individuals have been unemployed for at least 27 weeks (Borjas Citation2008: 486).
2 Curiously, Jon Elster (Citation1988) uses the framework of efficiency wage theory to argue against socially guaranteed employment. His argument is based on the mistaken understanding that workers in such a program would be paid the same wage as that received by workers doing comparable jobs in the private sector. For a fuller critique, see Arneson (Citation1990).
3 Although there is debate among labor economists concerning the validity of efficiency wage theory, it has received empirical support by comparing wage and unemployment levels across regions and countries (Blanchflower and Oswald Citation1994; Bellmann and Blien Citation2001; Card Citation1995). Regions with high wages have low unemployment, those with low wages have high unemployment. This empirical relation is graphically captured in the downward-sloping “wage curve,” where wages are found on the vertical axis and the unemployment rate on the horizontal axis.
4 In a sense, so too did the National Labor Relations Act of 1935 (see Spengler Citation1968). Although the Full Employment Act of 1946 proclaimed the right of all Americans “able to work and seeking work” to regular, full-time employment, it stopped short of guaranteeing such employment.
5 By and large, Keynesian economics viewed unemployment as due to inadequate aggregate demand and inflation as due to excess aggregate demand. Thus, it was more-or-less presumed that inflation and unemployment could not occur simultaneously. For them to occur at the same time would be a contradiction: inadequate and excess aggregate demand occurring simultaneously.
6 As Martin Feldstein has put it, “the low private cost of unemployment is responsible for many of the one million unemployed who quit their last job. … It is easy to see how our system of taxes and transfers drastically lowers the relative private cost of unemployment and thereby induces higher unemployment” (1978: 156). The essence of the mainstream solution is to make unemployment hurt to the point that the unemployed are prompted to seek out and accept available jobs. Yet research by William Darity and others suggests that unemployment itself generates debilities that promise to perpetuate unemployment: “We observed that since spells of unemployment and even underemployment produce learned helplessness, low self-esteem, and depression, those spells can lead to reduced intensity and persistence of search, reduced cognitive efficiency, and reduced motivation to acquire skills that might improve prospects for re-employment” (1999: 495). A study by Clark and Oswald (Citation1994), drawing on a British Household Panel Study, also rejects the hypothesis that unemployment is voluntary.
7 Politicians, and even many economists, argue that economic growth is the secret to reducing unemployment. Yet, although unemployment has varied over the business cycle, it has shown no tendency to decline over the long run, suggesting that some level of unemployment serves a functional role in the economy. The focus upon growth to eliminate unemployment as well as other social ills has prompted Richard Anderson-Connolly to note that:
There is some powerful type of irrationality or deception at work when many people can simultaneously recognize that the problems of insecurity and poverty have shown little or no improvement (and perhaps a worsening) over the last, say forty years, despite the enormous growth in the economy, yet at that same time they believe that economic growth in the future will eliminate problems like insecurity and poverty (2006: 113).
8 And, as William Vickrey notes, “under current practices the only way in which fiscal and monetary authorities can restrain inflation is by creating unemployment” (1992: 341). The minimum prudent unemployment rate is frequently referred to as the “natural rate of unemployment,” or more technically expressed as the “non-accelerating inflation rate of unemployment” (NAIRU). Stock prices also tend to fall when unemployment dips dangerously low. Thus, some level of unemployment appears necessary for the well-being of capital markets.
9 Moreover, as Wray and Forstater state “the job of fighting inflation through unemployment is horribly disproportionately shared and is mostly put on the backs of those who have no market power to cause wage inflation in the first place” (2004: 262).
10 The moral claim set forth here is not meant to suggest any particular theoretical foundation for a theory of morality. Instead, it is intended to be consistent with the three major foundations that have been formulated to support moral claims. These are deontological theories that ground morality in duties or proper comportment, as opposed to action that leads to some end such as welfare or happiness; utilitarian theories that view moral conduct as that which maximizes welfare or happiness; and virtue theories that focus on the character of actors.
11 In the US, in addition to the National Labor Relations Act of 1935 and the Employment Act of 1946, the Trade Adjustment Assistance program of 1962 set a precedent for this view of social responsibility. In a 1962 special message to Congress on Foreign Trade, President John Kennedy argued “When considerations of national policy make it desirable to avoid higher tariffs, those injured by that competition should not be required to bear the full brunt of the impact. Rather, the burden of economic adjustment should be borne in part by the Federal Government …” (a special message to Congress on Foreign Trade Policy, 25 January 1962; cited in Mastel Citation2006: 45). The Full Employment and Balanced Growth Act of 1978 set as a national goal “the fulfillment of the right to full opportunities for useful paid employment at fair rates of compensation of all individuals able, willing, and seeking employment.” Further, it specified a dual mandate for the Federal Reserve System: it “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates.”
Other expressions of this moral or social responsibility include: FDR in 1944 calling employment a “basic human right;” and on 1 January 1967, Senator Abraham Ribicoff supporting a government-guaranteed job to all jobless able-bodied workers on the radio show “Meet the Press” on 1 January 1967 (Spengler Citation1968: 195). The idea of a “right to work” (droit au travail) dates back to the French Revolution of 1848 and was embraced by the Enlightenment (Spengler Citation1968). For a recent discourse defending the principle of a right to work, see Harvey (2007).
12 Thus, even if unemployment were good for the economy generally, social tolerance of unemployment violates Rawls's “difference principle,” according to which “inequalities must contribute effectively to the benefit of the least advantaged” (Rawls and Kelly Citation2001: 64; see also Wanberg et al. Citation1997).
13 The unemployment insurance recipiency rate has since fallen in the US. In calendar year 2006, there were 35 unemployment insurance recipients for every 100 jobless workers (US Department of Labor 2007).
14 Benefits are usually extended during recessions.
15 Research by Christopher Whelan concludes, not unexpectedly, that “the major factors leading those located in the lower social classes to experience higher levels of psychological distress are their greater exposure to unemployment and economic deprivation; in particular, exposure to deprivation of an extreme kind which involves the enforced absence of necessities such as food, clothing, and heat” (1994: 58).
16 Social norms refer to beliefs held by members of society.
17 However, studies have shown that recent graduates who find themselves unemployed have far less self-esteem and confidence than their peers who find jobs (Dooley Citation2003). Sen points out that “Youth unemployment can take a particularly high toll, leading to long run loss of self-esteem among young workers and would-be workers” (Sen Citation1997: 162).
18 Andrew E. Clark (Citation2003) examined a sample of British workers over a 7-year period of time and found that “unemployment hurts less the more there is of it around” and thus “the unemployed report higher levels of well-being as others' unemployment rises. The psychological experience of unemployment is tempered by the labor market status of those with whom the individual is in close contact” (p. 326). Thus rising unemployment levels would reduce search efforts and prolong unemployment. The policy implication is that it is important to intervene in labor markets before “a new social norm of higher unemployment becomes established” (p. 346). This social norms hypothesis may also help explain the seemingly more intractable character of high unemployment in many European countries.
19 Yet the authors note that perhaps due to improper research design there is a “failure to find consistent associations between employment and spousal violence” (p. 949).
20 Thus others than the unemployed suffer. As Sen puts it “… unemployment hits the incomes of others in two distinct and mutually reinforcing ways: it cuts down the national output and it increases the share of the output that has to be devoted to income transfers” (1997: 161). He also notes how high unemployment, such as that in western Europe, can lead to conservatism towards technological progress, thereby impairing economic dynamism; and resistance to raising the retirement age, thereby not only constricting potential output, but also impeding an easing of the retirement cost burden facing future generations (p. 165).
21 For surveys of some of this research, see Cameron Citation1988; Freeman 1996.
22 They go on to point out that:
… between 1993 and 1998, victimization rates declined for every major type of crime, with both violent and property crime rates falling by approximately 30 percent. Occurring concurrently … was a marked decrease in the civilian unemployment rate. Between 1992 and 1998, the national unemployment rate declined in each year from a peak of 7.5 percent to a 30-year low of 4.5 percent” (Raphael and Winter-Ebmer 2001: 259).
23 Much of this recent work builds upon Hyman Minsky's development of the ELR concept, beginning in the mid-1960s (1965, 1966, 1986).
24 Or, in technical terms, the program would operate so as to provide an infinitely wage-elastic demand for labor. The price of labor in the program would be set independent of market conditions, and the program would absorb all redundant labor at that price. That is, the market sets the quantity, but not the price.
25 In the U.S., the low level of the current minimum wage does not provide adequate income for a one-earner family to rise above the official poverty level. Although this state of affairs is widely lamented, it is alleged that the minimum wage cannot be raised without causing further unemployment. An ELR could end-run this scenario. In a transitional period, those losing jobs as the minimum wage is slowly lifted would fall back into the buffer-employment sector where training would attempt to raise their skill level such that their productivity would make the higher wages profitable for their future employers (technically, the value of their marginal product would be raised to equal a higher wage level).
26 An ELR program could also be crafted to provide part-time work for those who are only able to find part-time work in the private sector or who can only work part-time due to family responsibilities such as child or parental care.
27 L. Randall Wray refers to a policy of government as employer of last resort as “a public-sector-as-buffer-stock-employer” (1998b).
28 During early capitalism, the household often provided the function of a buffer stock employer of last resort. This is still true in much of the developing world. Those losing their jobs frequently fall back into some form of informal employment in the household. However, households in modern rich economies can no longer generally provide this function.
29 But, in fact, as Wray points out, “… 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” (2007: 3–4).
30 Alternatively, whereas managing aggregate demand to increase employment might be characterized as a “trickle down” approach, an ELR might be characterized, in Hyman Minsky's terms, as a “bubble-up” approach “because jobs are offered to workers at the bottom, whose spending then induces firms to increase production of consumer goods—creating new jobs, some of which can be filled by recruiting out of the pool of ELR workers” (Wray Citation2007: 17).
31 Wray suggests that a potential stigma problem might be dealt with in the US by promoting the program as universal “Americorps” service (2007: 15).
32 Recently, some post-Keynesians have suggested that frictional unemployment is becoming more significant with the quickening of the pace of technological change and globalization. New technology or cheaper foreign producers enable products to be produced with less domestic labor, while on the demand side at some point a sort of satiation sets in. Although workers released from declining sectors could theoretically find employment in new expanding sectors, their skill sets may be inappropriate (Trigg Citation2004).
33 On the other hand, a high level of labor mobility, especially if resulting from a low level of employment protection, could lower individual worker incentives to improve firm-specific skills.
34 The costs of offering health insurance for ELR workers might not substantially add to government spending, as employed workers need less medical attention than do the unemployed and spending on Medicaid and Medicare would be reduced.
35 Critics claim that if wages are set too high in ELR, especially with healthcare benefits, then workers might be drawn out of the private sector, or held there only by inflationary wages. Proponents of an ELR counter that the one-time increase in prices following the introduction of an ELR would draw workers out of the program and prices would then stabilize (Palley Citation2001: 3).
37 “This is [according to Wray] the primary ‘price stabilization’ feature of the ELR program” (1998: 543).
36 Malcolm Sawyer (Citation2003) has argued that inflationary pressures would continue to haunt ELR even after its introduction. For a refutation, see Fullwiler (Citation2007); Mitchell and Wray (2005).
38 “Further, [as Wray points out] reduction or elimination of employment taxes related to the unemployment insurance program will also attenuate pressure on prices, as will reduction of private and social costs of unemployment (for example, reduction of crime will lower business costs)” (1998b: 544).
39 To help offset capital costs, some underused public capital stock might be used. For instance, for the training portion, some of the under-utilized after school, weekend, and vacation capital stock of public schools and community colleges could be used.
40 Forecasting the long run costs of an ELR program would be difficult. It would entail estimating the value produced by ELR workers, the enhanced productivity of ELR-trained workers when they enter the non-ELR work sphere, and the decrease in social costs (e.g. reduced expenditure for unemployment benefits and social support, and reduced cost of crime) currently resulting from unemployment.
41 For a discussion of different ELR program designs, see Wray (2007).
42 Wray offers an extensive list of jobs that might be undertaken by an ELR program (1997: 15–16). He also suggests that in the US, an ELR program might fund “… qualifying non-governmental non-profit organizations, such as Americorps, VISTA, the Student Community Service Program, the National Senior Service Corps, the Peace Corps, the National Health Service Corps, school districts, and Meals on Wheels …” (2007: 11). Wray notes that “Use of existing groups would help minimize start-up costs and duplication of administration costs” (1997: 14).
43 Wray reports that “the program incurred non-labour costs equal to 25% of its budget” (2007: 12).
44 It has been suggested, however, that the WPA slowed a movement of market forces toward full employment. Robert Margo, for instance, claims that “By providing an alternative to the employment search (which many WPA workers perceived, correctly or not, to be fruitless), work relief may have lessened downward pressure on nominal wages” and thus a market led recovery of full employment (1991: 333).
45 “In both Denmark and the UK an employer can dismiss an individual worker with short notice using a written statement and without the involvement of a third party” (Madsen Citation2006: 147).
46 Suppose, for instance, that trade or technology renders jobs obsolete in a certain sector. Rather than being forced to compete for low wage jobs, displaced workers have time to find appropriate jobs that meet their skills or to form new skills.
47 The rights to healthcare, education, pensions, etc. are not based upon an individual's labor market history, but instead are secured merely by their status as Danish citizens (Madsen Citation1999: 10).
48 To qualify for unemployment benefits, a worker must complete 52 weeks of ordinary, unsubsidized employment within three years (Madsen Citation1999: 17).
49 The unemployment benefits replacement rate is 90 percent of previous wages for low-income earners. The average is about 60 percent. The eligibility period for these benefits is now four years.
50 Equally striking is the level of worker satisfaction. As Madsen puts it, “The paradox is that the vast majority of studies of working-life satisfaction (and life-satisfaction in general) come to the conclusion that Danes are among the populations expressing the highest level of job-satisfaction and sense of stability in their working life. With respect to life satisfaction in general, the Danes are simply the happiest Europeans that one can find” (2006: 148).
51 French economists Jacques Attali and Vincent Champain note that a full count of unemployment in France comes to about 19 percent of the workforce and that France spends 4.2 percent of GDP on labor and unemployment support programs. They estimate that an ELR for France would in the end cost about the same amount, or four percent of GDP (2005: 6–7).
52 It might be noted, however, that Attali and Champain report that the ELR model they propose for France was inspired by the Danish model (2005: 5).
53 However, as noted earlier, Wray (Citation2007) estimates that an ELR program for the United States might cost about one percent of GDP, about one-fourth of the costs of the Danish program.
54 Alternatively, Sen (Citation2002) has suggested that welfare be understood in terms of capabilities. He suggests efficiency in freedom space as opposed to efficiency in utility space. Expanding freedom space means increasing the range and significance of the options available to individuals. An ELR could be seen as fitting into this capability approach that focuses on positive freedoms to do and become, as opposed to the libertarian freedoms from (negative freedom).
55 The other four are: to have supportive friends and family, to be reasonably healthy and have treatment available in case of health problems, to have important goals related to one's values, and to have a philosophy or religion that provides guidance, purpose, and meaning to one's life.
56 It is of note, however, that Wray (Citation2007) has found and examined versions of ELR programs that have been successful not only in a middle-income country (Argentina's Jefes programme), but also in a low-income country (India's Maharashtra's Employment Guarantee Scheme).
57 As William Vickrey has put it, “It is one of the awkward facts of current political life that unless unemployment reaches extreme levels, those who tend to regard inflation as a more serious threat to their well-being are likely to outnumber significantly those who think unemployment [due to the inflation threat] is the greater threat” (1992: 341). Wray and Forstater point out that “the original draft of the Humphrey-Hawkins Act contained a job guarantee: however it was dropped in the final version, due largely to fears over costs and possible inflationary impacts” (2004: 270).
58 Consequently, there is no public discourse concerning the functionality of unemployment, no open discourse about whether the unemployed must suffer so that the labor force is adequately disciplined and so that the rest of the population can avoid the inconvenience of greater inflation or the expense of paying for solutions to unemployment. Far from recognizing that the unemployed actually serve a delegated social function, much current ideology encourages people to dwell on what a nuisance they are. Measures that are taken to lend them a hand are resented because this ideology suggests that they cannot really be helped without hurting them—making them welfare-dependent.
59 The choice of the term natural rate of unemployment is lamentable, if not scandalous, “one of the most vicious euphemisms ever coined” (Vickrey Citation1992: 341). It is economics at its worst, economics as ideology. It acts to sanitize the social practice of letting the unemployed pick up the tab for serving as a disciplining device for the labor force and keeping the lid on inflation. It suggests that this is the way the natural world must be. Nothing can be done. It may not be pretty, it may not be fair, but it is what nature mandates.
60 In most countries, the state pays for most of the costs of higher education. Even in the US, with its huge number of private universities and colleges, over two-thirds of all students attend public institutions.
61 Yet still today about 13 percent of US adults have not completed high school. And of these, about half are not employed even when the economy is in a boom phase (Wray and Forstater 2004: 268).
62 And as Wray has put it, ‘‘No other program [than an ELR] can guarantee access to jobs at decent wages'' (2007: 1).