How the unemployed became a tool to discipline workers and keep wages down, and why it doesn’t have to be this way

The evidence that unemployment has a significant and long-lasting impact on well-being is overwhelming. It goes far beyond the purely financial consequences of not being able to find paid work . It is one of very few life events to which most people never fully adjust. Loss of self-esteem, identity, interaction and a sense of purpose, alongside a crushing uncertainty about the future which can become hopelessness. These are corrosive to mental health, family relationships and local communities. Unemployment has been compared to an epidemic, with consequences which can last a lifetime.

It is within the power of national governments to end this epidemic. They have done it before, with involuntary unemployment virtually eliminated for thirty years after 1945. But in the mid-1970s, aided by geopolitical factors, the unemployment epidemic escaped from the economics departments of a number of (mainly North American) universities. It took the form of a virus named monetarism, and since then governments have chosen to live with it rather than to invest in a return to full employment.

There are good reasons for thinking that the permanent elimination of this viruslies in the development and implementation of a federal Job Guarantee. Proposals for a Job Guarantee, as an effective vaccine against involuntary underemployment, have been around for many years, with more recent versions described by economists such as William Mitchell in Australia, and Pavlina Tcherneva in America and their colleagues. Large-scale employment programmes sharing some of the features of a Job Guarantee have been introduced successfully in India and (temporarily) in Argentina. Almost all governments have run programs of one kind or another with the aim of supporting the young or long-term unemployed. Tragically, none have guaranteed all those wanting to work the right to a socially productive and rewarding job, at a fair wage and with good working conditions, for as long as that job is needed. As a result, in Australia, as in other countries, the unemployment epidemic has been allowed to persist for more than four decades.

Imagine instead that Australia had in place a locally managed, but federally funded Job Guarantee. Anyone looking for employment could turn up at their local Job Guarantee office, see a counsellor and select a suitable opportunity from the local ‘job bank’. The job bank would be based on a federal template but amended by local authorities in consultation with their communities to fit local needs. Participants might work in a local community garden; on environmental restoration projects; might be involved in mitigating bushfire risks; or could be helping in schools, libraries or local charities. They might be supporting the elderly to remain living independently. They could be working in local recycling centres. They might be participating in community arts and cultural projects. They might be taking advantage of opportunities to train in areas of local skill shortages. The range of opportunities would depend on the local community.

The job bank would always be available to those who needed it, or who just wanted to work in activities supporting the local community and environment, with good working conditions and at a fair minimum wage. But enough activities would be scalable so that the program could easily expand during an economic downturn and contract when the economy was booming. Done correctly, this would have eliminated both involuntary unemployment and underemployment, and helped match those working in the pool of Job Guarantee workers with vacancies in the private sector (and non-Job Guarantee public sector) as those opportunities arose. 

Instead, for more than forty years, job seekers have been left to compete with each other for jobs which have always been in short supply.Those not fortunate enough to find a vacant seat in a great game of musical chairs are described as ‘leaners’ rather than ‘lifters’. All they are offered is a harsh and punitive regime of searching for non-existent jobs, going on poorly designed training courses and being forced onto often pointless work-for-the-dole activities.

Perhaps the best month to have been looking for a job in Australia in the last forty years was February 2008, when the unemployment rate dipped very slightly below 4.0% of the labour force – the only time this has happened since the mid-1970s. Even then, there were about 450,000 people actively looking for work and not enough suitable jobs to go around. And although Australia officially escaped a recession during the Global Financial Crisis, the number of unemployed persons was about 50% higher than this by June 2009.The unemployment rate has been nowhere near its 2008 level since.

However, we really should not be focusing on the unemployment rate any longer, given the state of our insecure twenty-first century labour market. It is a wholly inadequate measure of the unmet need for jobs, and has been at least since the millennium, when the number of underemployed workers edged above the number of officially unemployed for the first time.

To be officially unemployed, you must be seeking work, available to start right away, and currently have no paid employment at all. One hour of paid employment is enough to disqualify you from the statistic, regardless of how much you need more hours. In a country where more than 30% of those in work are in part-time jobs, and where underemployment has been decisively above unemployment for nearly two decades, we ought to shift our gaze. 

Most analysts agree that the underutilisation rate, which combines unemployment and underemployment, is a better measure of the success or otherwise of employment policy, and it tells a sorry tale.

Australia’s underutilisation rate has been below 10% of our labour force only twice since 1982, and then only marginally and fleetingly. Essentially, for four decades, we have failed to create enough jobs to meet the needs of those looking for work, leaving hundreds of thousands searching for jobs that do not exist, and millions in insecure employment. And all the while, politicians of both major parties have boasted about job creation, occasionally even claiming to have achieved full employment. They have tolerated unemployment while at the same time implementing and then maintaining a punitive approach to the unemployed, as though the main problem was with the motivation of those looking for work. It was not and it is not. The problem is a lack of accessible jobs and the cause of this problem is the failure of successive governments to ensure those jobs are available, itself a consequence of an adherence to an outdated and discredited economic paradigm.

It was not always this way.

On the issuance of its 1945 White Paper, the Australian Commonwealth Government accepted responsibility for the achievement and maintenance of full employment.

This meant “a secure prospect unmarred by the fear of idleness and the dole”. The use of unemployment as a mechanism to intimidate workers and depress real wages was to be a thing of the past. The Commonwealth Employment Service was established the following year to support those looking for work, to liaise with local employers and to analyse and react to skills shortages. By 1948, the Government could with justification claim a real commitment to article 23.1 of the newly proclaimed Universal Declaration of Human Rights, which states “everyone has the right to work, to free choice of employment, to just and favourable conditions of work and to protection against unemployment”.

There followed the most successful decades in Australian economic history. The economy grew faster than ever before or since. Inequality and relative poverty continued to fall. Genuine full employment was maintained for thirty years, with the unemployment rate typically between 1 and 2%, and a slight uptick above 2% in 1962 almost costing the Menzies Government a federal election. By 1974, Australia was a country with Scandinavian levels of inequality.For a generation, workers shared in the benefits of rising prosperity through increased real wages, without the threat of the sack leading to prolonged unemployment and poverty. There were plenty of jobs for the young and long-term unemployment was insignificant.

Then all this was given away, when it need not have been.

As in many other countries, Australia’s politicians reacted to an inflation spike caused by the efforts of a cartel of oil exporting nations to drive up the price of oil. They abandoned our long national commitment to full employment and embraced monetarism and neoliberalism in its place. They chose to react to a problem in the world energy market by using mass unemployment to drive down wages, and recession as a blunt implement to attack inflation.

In place of full employment, policy makers borrowed Milton Friedman’s notion that there was a “natural” rate of unemployment which could only be reduced by policies that increased inequality, shifted bargaining power from labour to capital, and punished the unemployed.

Later, essentially the same concept was called the “non-accelerating inflation rate of unemployment” (or NAIRU), and the use of unemployment to discipline workers and keep real wages down became permanent government and central bank policy. Policy makers were persuaded that pushing the unemployment rate too low would be unsustainable and inflationary, and that 5% or even 8% unemployment could legitimately be described as “full employment”. This is a very attractive notion to any politician who wants an easy life. It means that whatever the official unemployment rate happens to have been in the recent past can be defined as full employment. It means that policies to favour major donors and political insiders, and which appear to shift the blame for unemployment onto the unemployed themselves, can be portrayed as sound common sense.

It seems absurd to manage the economy on the basis that it is essential to create a scarcity of available jobs to limit inflation, while portraying those who are unable to find jobs as ‘dole bludgers’, or at least as people lacking in employment skills.

And yet that is what happened, firstly under Paul Keating and then later and more fully under John Howard and Peter Costello. Over time, the Commonwealth Employment Service was transformed from an institution designed to support jobseekers, to one with a focus on enforced job search and concerning itself with employability rather than genuine employment opportunities. The logical endpoint was reached when most of its functions were privatised, leading to the much maligned Jobactive network.

The years of full employment between 1945 and 1975 were based on a Keynesian approach to economic policy. In its crudest form, this meant ensuring total spending in the economy was always high enough to ensure that there were sufficient employment opportunities for everyone, with the public sector standing by to mop up anyone who missed out.

Based on the budget papers as published at the time, rather than later amendments to the accounting, this involved Governments planning for budget deficits every year from the early 1950s into the 1970s, with discretionary increases in deficits when unemployment threatened to breach 2% and lower deficits when the economy was closer to its full employment ceiling.

The risk of rising inflation due to a wage-price spiral in a fully employed economy was not ignored. It had been discussed in the 1945 White Paper, where it was argued that the difficulties of managing inflation in a full employment economy were worth it, given the importance of full employment for individual well-being and social prosperity. This risk was contained, with the cooperation of unions, employers and government, until the mid-1970s, and that spike in oil prices.

The “Phillips Curve” relationship between inflation and unemployment may have become more difficult to manage over time, even if the oil price shock had never happened. Structural unemployment can raise the NAIRU, due to an increasing mismatch between the skills required to compete for jobs in the modern economy and those possessed by people looking for work. But this did not suddenly become an issue in 1975.

The American institutional economist Hyman Minsky, writing in the 1960s, had a more sophisticated analysis. The apparent success of the Keynesian revolution after 1945 was contingent on a particular financial and industrial structure, state of technology, institutional set-up and set of social attitudes and historical experiences which was likely to break down over time. Keynesian stop-go policies would become less effective as time went by, and more inflationary and prone to financial crises. Minsky’s institutional analysis was far more grounded in realism than Milton Friedman’s abstract monetarism, but less susceptible to mathematical modelling, and less attractive to fellow-economists and their conservative supporters.

As the Keynesian consensus of the early post-war decades crumbled, the world had a choice between Friedman’s abstract monetarism and Minsky’s institutional analysis. Minsky never had a chance.

Minsky believed that genuinely full employment could only be sustained in the long run if the federal government acted as an employer of last resort. Just as the central bank can always rescue the banking system, should it be short of liquidity, the federal government is always able to rescue job seekers, should the economy be short of jobs. If banks could have a lender of last resort in the interest of financial stability, workers could have an employer of last resort, in the interest of macroeconomic stability and social justice. Minsky recommended that the federal government offer a perfectly elastic demand curve for labour at the federal minimum wage. 

Many of the modern proponents of a Job Guarantee are former colleagues or students of Minsky or are at least heavily influenced by his work. This includes leading American modern monetary theorists, Randall Wray, Stephanie Kelton and Pavlina Tcherneva.  Minsky himself saw Keynes as his greatest influence. The proposed Job Guarantee developed by economists at the Centre of Full Employment and Equity in Australia did not have its roots in Minsky, but in the work of William Mitchell, who is more influenced by Kalecki and Marx than by Keynes. Mitchell is one of the original developers of modern monetary theory, alongside the fund manager Warren Mosler and Wray. Not all proponents of a federal Job Guarantee are modern monetary theory economists, but the increasing prominence of this school of thought within macroeconomics, and particularly the success of Kelton’s best-selling book The Deficit Myth, has certainly helped to promote it. 

The modern monetary theory federal Job Guarantee establishes an effective minimum wage, as opposed to one which is conditional on the recipient being able to obtain employment in a labour market with insufficient jobs to go around. It is funded by the currency-issuing federal government. Estimates of the fiscal impact of the Job Guarantee are consistent with there being no need to raise taxes or introduce new taxes to offset any inflationary impact from associated spending. It is genuinely universal, and available to all who are not already in full-time employment. It is voluntary, as a right which is accessible to all, but compulsory for none. It does not require the elimination of other programs. It is designed to be a permanent feature of economic management. It is to be administered locally, reflecting local needs and the skills of local workers. It is not intended to involve for-profit organisations, but to be for the benefit of participants and their communities. It should not compete with local firms or involve any substitution of conventional public sector jobs. It is green, in the sense that the jobs should ideally enhance the environment and assist with a transition to a zero net-emission economy, or at worst have a neutral impact. 

To introduce a Job Guarantee is to move away from an approach to managing the economy based on the maintenance of a buffer-stock of involuntary unemployment towards one based on a Job Guarantee pool enjoying the benefits of participating in social provisioning, with a fair wage and decent working conditions.

The Job Guarantee is a superior counter-cyclical stabiliser than the one currently provided by our tax and welfare system.

While implementation would be an administrative challenge, there are numerous examples of similar programs being introduced quickly and effectively in the historical record. Given an appropriate investment in administrative capacity we could run a national employment service as efficiently and effectively as we run healthcare, education or national defence.

Econometric studies indicate that the fiscal impact of a Job Guarantee is far smaller than that of a universal basic income.They show that It is not inflationary, not in any sense unsustainable, and that a Job Guarantee can set at the margin the appropriate level of the fiscal deficit (or surplus) to maintain non-inflationary full employment. 

Perhaps best of all, a Job Guarantee can remove the threat of the sack from those in poorly paid, insecure jobs with poor working conditions. It can begin to correct the excessive inequality which has been allowed to develop in Australia over almost half a century. It can permanently eradicate the non-financial costs of unemployment, improve social well-being, and have a diverse range of benefits beyond ending the waste of resources which goes with forced idleness.

Surveys indicate that this policy option is popular with voters right across the political spectrum, with people of all ages and genders. It is being discussed increasingly widely by policy makers in Washington DC and elsewhere, and in Australia has been supported by the majority of branches of Young Labor, and by a motion passed through the Tasmanian Parliament in 2020 by the Greens political party with ALP support. 

We live in an environment where jobs are under threat from automation or the need to reduce or eliminate some activities to limit climate change, and where the implications of dividing up a society between those in secure jobs and those who no longer have easy access to employment are well understood. It is inevitable that the role a Job Guarantee could play in a transition to environmental sustainability and social justice will come increasingly under the spotlight.

Dr Steven Hail is a lecturer in economics at the University of Adelaide, a research scholar at the Global Institute for Sustainable Prosperity and founder of the Modern Money Lab think-tank and the Sustainable Prosperity Action Group. @StevenHailAus

Publication Information:

ISSN: 2652-9076-02

Series: Australian Fabians Review - Issue 2

Author: Steven Hail

Year: 2021