Economics,  Markets and economy,  Modern Monetary Theory

MMT and unemployment

MMT views unemployment as an entirely philosophical choice, since there are technically no financial constraints on a government that can issue its own currency.

It’s not a particularly controversial argument that human capital is the most valuable resource in any economy. The potential contribution a person can make to an enterprise or an economy is what drives productivity, innovation and, ultimately, improvements in our collective wellbeing. That contribution is usually even more valuable if the person has specialist skills acquired through education and/or experience.

By contrast, neoliberal economics tells us there is a ‘natural rate of unemployment’, which is supposed to be where an economy strikes the balance between maximising employment while not sparking inflation. It finds its expression in the Philips Curve, which is now thoroughly discredited given the experience of the pre-COVID period where the unemployment rate consistently declined yet inflation was nowhere to be seen.

In other words, neoliberalism accepts and expects that some level of human talent will go to waste, which will almost inevitably skew to the most economically disadvantaged. By contrast, MMT considers unemployment to be an underutilisation of resources, and therefore sub-optimal.

The solution to full employment proposed by MMT scholars is for the government to provide an employment guarantee. Under this model, the government would employ anyone who wants to work at a set, market-based wage. They would be employed to do any work that a government legitimately needs done, which could be anything from clerical positions, to working in national parks, or aged care, health services, infrastructure construction, cleaning up beaches, etc.

The wage would be set at what’s determined to be a socially acceptable minimum, but a long way above the poverty line, and well above the dole, since it is not intended to be anything like a work for the dole program. These people are fully fledged government workers. Let’s say that wage is set at $50,000 per year. Any private enterprise that requires workers then knows it would need to at least match what the government is paying. MMT is acutely aware of the risks of inflation, which could well be stoked if private enterprise had to enter a bidding war for labour. The idea is the government would readily surrender workers to a business paying a higher wage.

This model has a few significant benefits:

  • Workers gain experience and skills, not just manual skills but those gained from learning how to hold down a job, like showing up and paying respect to managers. It is well established that workers with even a rudimentary CV are more easily employed.
  • The Reserve Bank has been complaining for years that wages growth has been insufficient, this is a way to address that. The government would be setting the general minimum wage, which empowers workers to leave underpaying jobs.
  • Work that needs to be done, but currently doesn’t attract interest because the wage is too low, could be covered.

There are many other aspects to making the most of human capital in an economy where the government is not financially constrained, such as ensuring education standards are high by attracting talented teaching staff that are paid sufficiently to reflect the importance of the work they’re doing; or providing access to free child care so parents are able to work if they choose to do so; and providing free tertiary education to maximise the workplace skills available.

The question of jobs is also relevant to the climate change politics that’s been playing out in federal parliament. MPs that represent fossil fuel workers, such as coal miners, are obstructing progress on a host of energy related fronts on the understandable basis that they are protecting jobs. However, solutions are readily available that don’t require compromising the climate: the government could spend billions of dollars establishing a Renewable Energy Institute, that would undertake research into potentially lucrative renewable energy technology and projects, which could explicitly provide jobs for coal workers.

At an extreme, the government could even close coal mines down and continue paying workers the same wage until they are reemployed.   This is the power MMT brings to an informed debate: put simply, it’s not a question of how to pay for what needs to be done, but how to resource it.

This information is of a general nature only and nothing on this site should be taken as personal financial or investment advice, or a recommendation to buy or sell a particular product.

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