Monday, 18 August 2014

Hourly averaging and the need for a job guarantee scheme

One of the proposals I make in Rethinking Taxation which I did not list as one of the innovations presented in the book is that of a guaranteed job scheme. I did not list it as an innovation because such a notion—that the state should be the employer of last resort—has existed for a long time. After all, since unemployment is an evil, it is not a huge leap to think that the state should do something to respond to it.

Involuntary unemployment is a very important issue and there are various responses to it. These can be understood in terms of their conditionality. At one extreme no conditions could be placed on unemployment payments: there could be a guaranteed basic income for all. At present the conditions in the UK for “jobseekers allowance” is that claimants attend regular meetings, actively seek and apply for work, and sometimes that they undertake training or (otherwise) unpaid work. The strongest (reasonable) condition available is that claimants should have to do work appointed by the state in order to qualify for assistance.

If the state insists upon the strongest conditions then it should have to provide work. My hourly averaging proposal takes account of the amount of time that people work when calculating their tax rate, with lower taxes for those who work more hours. This makes it highly important that everyone should be able to get work, and that those who receive hour credits should have to work in order to obtain them. A guaranteed work/training scheme obviously follows and I therefore include one as a necessary component of my CLIPH-rate tax proposal.

This position sets me in opposition to “basic income” supporters, and I have blogged about this previously. However, I wanted to discuss here some of the complaints about guaranteed work programmes and why these are not too much of a problem for my hourly averaging proposals.

My response to a lot of these complaints will make reference to a point that I should explain beforehand. As part of my hourly averaging proposals I suggest that workers on very low wages should be provided with an earnings subsidy. This means that the minimum wage can be reduced (for most employers at least) without jeopardising the standard of living for workers. Removing the minimum wage should open up a lot of possibilities for types of work that would not be economical at the minimum wage. This means that the involuntary unemployment rate should be relatively low as there should be more work options.

One complaint about guaranteed work programmes is that they would effectively undermine certain forms of paid work. A common example is that if unemployed people are tasked with cleaning up the local streets then this will take away the need to employ streetsweepers. These workers would end up doing the same work for less money as unemployed workers rather than provided with secure employment. Unions are therefore sceptical of proposals.

My response to this is to argue that in the first instance job schemes should design specific projects that may not be undertaken otherwise. Furthermore, other employers could request spare workers to undertake work for which they have a shortage of workers. However, this leads on to the second complaint.

The second complaint is that firms can take advantage of the scheme in the same way that occurred with the streetsweepers. They could lay off their workers and then request to have free work from the guaranteed work scheme. In order to counter this I would suggest that workers should only be lent from the scheme to profit-seeking businesses if the business in question pays the lent workers (or compensates the state) at a suitable rate. This rate should perhaps be set at the hourly amount at which workers would receive no earning subsidy. Employers would then consider employing people at a lower rate than they would have previously, no doubt making industries and products competitive that were not at the previous minimum wage.

The third complaint I will mention is an economic one. This is the argument that having a reserve of unemployed (or underemployed) workers is good for the economy as it keeps inflation low. The main reason for this is that the spare workers add flexibility into the job market. If there were full employment then industries looking to expand would have to pay a significant premium in order to attract workers. These industries would then be less competitive than they would otherwise be, and the companies involved will pass these costs on to their consumers.

Would the guaranteed work scheme therefore cause inflation? Some economists have argued that full employment would not cause inflation, and if they are correct this worry does not apply. However, what if they are wrong and some products would increase in price due to the changes I advocate? In this case, I would suggest that the price increases indicate that the products are currently too cheap; the desperation of the workers in the industry is what is keeping the price low. For egalitarians such as myself, it is simply unfair to cause misery to a few in order to improve the position of everyone else (or a small group).

Furthermore, another important point is that hourly averaging would reduce some prices as well. By enabling a reduction in the minimum wage, some types of work could be done for less money, with the saving passed on to consumers. For some items, prices would drop, while for others prices would rise.

I feel confident that a bit of price inflation would be an acceptable price to pay to greatly reduce the misery caused by involuntary unemployment. I don’t deny that my fundamental tax system proposals would alter prices throughout the economy. Some items would increase in price will others would decrease. Given that the increases would arise from an improvement for low-paid workers who are usually in the worst position in society, the changes would clearly be a moral improvement overall. 


Physiocrat said...

These proposals ignore "tax incidence". "Gross Pay" is a purely notional amount. The incidence of employee related taxes eg Income Tax and National Insurance, is on the employee, regardless of who is nominally responsible for paying them. It would make no difference if employees were paid net and the tax liabilities grossed up and labelled "Payroll Tax". Functionally it would make no difference, but there would be advantages in that it would simplify the system and make it clear what is really going on here. We have a situation where the principal source of public revenue is a Jobs Tax. And then wonder what can be done about unemployment?

The present system is a deception that leads to confusion. It infects public debate and makes it difficult to launch proposals that would improve matters.In the public sector, it leads to an apparent inflation of costs as taxpayers' money is paid to public authorities so that they can pay it straight back to the government.

dougbamford said...

Hi Henry, thanks for the comment.

I agree that tax incidence is exactly what matters morally.
This is why you should tax people on their comprehensive income - we want to get tax revenues where this does not affect behaviour (what economists currently refer to as 'economic rents'). These sometimes come in the form of capital gains, sometimes as labour income, sometimes as rent on property, sometimes as share dividends...

If you have progressive comprehensive taxation you capture all of these forms of income as it won't matter who gets it - the banker or the landowner (or both).

Regarding a 'jobs tax' I propose to drop the minimum wage (for most profit-seeking employers at least) and replace it with an earnings subsidy, so this should increase the amount of jobs on offer that provide a reasonable amount of net pay.

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