Re: PKT debate

[ECWFM@xxxxxxxxxxxxxxxxxxx]

Saturday evening 30/4/94

Dear paul

here is a more thought out reply to your two emails.

first: on friday you said:

>I have followed, with considerable interest the ongoing debate between
>Paul Davidson and Bill Mitchell (and others) about what is, or is not,
>Keynesianism, post-Keynesianism, post Keynsianism, etc. and, as
>usual, am left somewhat confused.

well i have to say that we haven't really got directly onto that topic yet. the
discussions that i and paul davidson and others (including jim devine) have
been having of late have skirted this direct issue of what is post keynesian
(no capital or hyphens - note!). i think it would be a pretty good
discussion. last week paul d. (to differentiate from the paul phillips i am
replying to here) told me bluntly that despite my desires to be one of the gang
i was not a PK. well i looked up this table in an article that paul d. had
referred us to and lo and behold - in his own words - there i was a PK (with
capital and no hyphen) - under i guess the ALL MARXIST column with some
possibility of also slipping into the neo-keynesian column with my pal geoff
harcourt and some of the italian theorists who demolished neoclassical growth
and distribution theory when i was very young. paul d. fitted into column three
under keynes.

i said i could never fit into that column because it inherently meant that i
believed the capitalist economy required lower real wages to occur as
employment expanded in the short run. How could i ever accept that as a
reasonable description of what happens in the real world out there? I do not
think MPT is the basis of distribution nor employment theory. Also being
tome-bound in the GT leaves one struggling to explain inflation in a non
diminishing returns world, leaves one stranded with respect to dynamics and
growth, and leaves one helpless in explaining profit as a consequence of
porductive relations rather than something that happens in exchange. so we are
yet to have the discussion.


Second, you specifically requested some guidance about the current incomes
policy that we are running in OZ. this morning i told you it was a difficult
question because to answer it in a non-trite manner would require an extensive
background to be developed. this would especially be so to enable the rest of
the list to participate. unlike you they have not had the recent benefit of a
sunny trip to OZ. so i will try to make comments which will be more general.

in this sense, i might be able to offer an opinion about one strand of the
recent debate - about whether capitalism can deliver low inflation and full
employment. paul d's civilised capitalism uses (i presume) similar fiscal and
monetary policies to those which in my pragmatic hat (talking to non-marxists)
i publicly endorse. he "battens down" the supply side with incomes policies.
for him IPs are the inflation control. in a pragmatic sense, i also have
advocated IPs to accompany fiscal and/or monetary expansion when times are
tight. i am one of few australian economists who still publicly and in my
academic writings still push for expansion with all fiscal instruments being
used (that is higher taxes on income if needed along with other instruments). I
n that sense i supported the introduction of the ACCORD which began (see
manchester school article i referred you to this morning) as a full indexation,
and national productivity distribution system of wage determination.

sadly it did not last like that and a sequence of emasculating changes to the
guidelines have converted it into an efficient real wage cutting mechanism to
satisfy the greed of the business sector. The description that Steve provided
this morning is mostly correct. The ACCORD is not what i would call (even
remotely) a post keynesian document (with or without capitals or hyphens).

The important inducement for the unions (and recall this was a labour
government who has been in power since 1983 - the so-called political arm of
the union movement) to comply with the ACCORD was that the government would
provide real wage growth in addition to the formal national productivity
distribution via the arbitration commission (an independent judicial body which
rules over the wage system), via tax trade-offs, fiscal spending on schools
hospitals and etc.

that lasted about i year. a terms of trade shock in the mid 1980s saw the Govt
(G) pressure the TUs to agree on some discounting to the indexation. The
arbitration comm (AC) then ratified the agreement. steadily real wages were
eroded via a series of less than full indexation outcomes and little
productivity distribution. the scum-bag employers opposed alll adjustments
while they banked the UNPRECEDENTED SHIFT in FACTOR SHARES.

the G told the unions that investment would come from the profits and more jobs
and all of that line. of-course, the profits were squandered on America Cup
challenge matches (boats), massive share raids and huge speculation, which
turned sour after the stock crash in 1987. many of the so-called entrepreneurs
of the day who were seen as being almost rock stars are now in jail, or facing
jail for cheating and lying and stealing funds from raided companies etc.

faced with a debt crises (as a result of the private sector borrowing frenzy)
the G tightened interest rates and drove the OZ economy into the ground. so the
workers not only lost 12 per cent of national income in the redistribution from
the ACCORD process but also missed out on the shangri la of sustained high
employment (with unemplyment going the highest since the 1930s).

so steve says it worked (ACCORD). well it did moderate nominal wage increases
during the whole period and i should add in the 1980s (before recession) we led
the OECD bloc in terms of employment growth, although the quality of the
employment was questionable- increased secondary labour market employment.

however, the accord also worsened the size distribution of income and squeezed
the lower income earners severely. managerial income and executives and higher
wage and salary earners could by pass the guidelines with incremental creep and
classification creep. and professionals like doctors lawyers and other creeps
like that were not bound by them. they prospered. so in that sense the accord
has been very ugly.

these problems were not as bad while household income was rising due to extra
part-time work etc. but with the recession - and high unemp. that source of
welfare improvement has gone. companies got huge tax cuts and high income
earners also. i fail to see how these aspects can be seen as being post
keynesian and successful in that context.

and to put a finer point on its inflation fighting potential - sure nominal
wages growth was severely flattened in the 1980s and beyond, but inflation
still persisted at 5-6-7 per cent until the late 1980s. what brought it down? a
good application of the phillips curve. the bosses took the wage restraint and
pocketed the saving via higher margins. it was only when the product market
dried up in late 89 and into the 90s that the firms went broke and price
inflation abated (it is only 1.2 per cent now). so while the workers were
screwed the bosses sailed around in boats, bought land, tv stations, and other
luxuries. productive investment remained (and remains) flat.

this is not a successful outcome.

and  i should say that if the accord had have followed its original concept and
indexed wages and distributed productivity to everyone i so not think the
bosses would have gone along with it at all. they feigned hatred of it but
loved it as they wheelbarrowed the gains in national income to the marinas. in
the seventies we did have a more post keynesian IP (mid 70s) which saw real
wage gains delivered and the result was a capital strike and rising
unemployment. the bosses did not get their tanks out but as a first step they
simply stopped investing.

In your second letter this morning you narrow the question down a bit and refer
to the recent version of the accord. well let me say it is more disastrous than
any before. it allows enterprise bargaining - a buzz word for collective
bargaining based on productivity only. the weaker sectors who have no union
have got buckley's chance of getting a bargain struck so they have to apply for
the safeguard increases via the AC. the distribution of personal income will
worsen. also women and disadvantaged groups are already predominant in the low
productivity service sector. the jobs are increasingly becoming fractionalised
and are low pay. they have no chance of keeping up with the other sectors. they
are the working poor.

the rhetoric is as you say "Putting Jobs First" which returns to the jobs
emphasis of the 1983 Accord.
I should say that at this present time a major policy statement is being made
in this regard - it is to be  a WHITE PAPER ON FULL EMPLOYMENT - the first
since the paper following WWII. i attach for interested readers (at the end of
this email a paper which is to be published in the forthcoming edition of the
AUSTRALIAN ECONOMIC REVIEW which i wrote about the draft WHITE PAPER. it is not
long and maybe of some interest.)

the fact is that there is hardly any jobs in sight in the policy statement. the
G has sold out to the rationalist lobby (which rules the bureaucracy and most
university departments - not my own of-course - we are the reds under the
bed!). they explicitly accept a NAIRU line and believe that fiscal policy
cannot be involved in direct job creation but should pour billions into
pathetic training schemes. and as the USA found in the 1960s - the ghettos
became full of phds!

so the wage moderation intended is to push profits back into the bosses hands.
the G also is pushing a heap of micro reforms ahead which will all push profits
back to the bosses. this is a NAIRU story par excellence. the unemployment is
meant to fall as higher trained, lower wage workers offer themselves to
capital. the lower wages are also reinforced by an overwhelming emphasis on
wage subsidies. a firm can get a worker for a pittance and sack them at the end
of the program and get another. it begs belief!

so paul your idea :

>Implied in the balance of policies is
>stimulating demand for labour by fiscal and monetary policies -- in
>particular tax policies but also infrastructural support and
>industrial policy, but holding down wages to approximately 2% per
>year (higher only with productivity increase offsets) which
>approximates the current inflation rate for the next three years.
>This implies to me a belief that there is no such thing as a NAIRU
>and that unemployment can be combated through traditional macro
>policies of expansion provided that the Phillips curve can be made
>horizontal by wage controls and labour market "flexibility"
>policies, including education and training.  Is that your reading
>of it?

is well of the mark mate. what we have in OZ at the moment is a G who probably
believes in their hearts in civilised capitalism, but given the dimensions of
the system is at the beck and call of the capitalists. if the latter do not
keep getting huge concessions in the form of costs savings etc, they just
refuse to invest. the G is too scared to have some proper PK stimulus because
the capital markets might get angry. dear oh dear.

it goes to show me that civilised capitalism is a pipe dream.   the
distributional struggle can only ever abate temporarily via agreement, or more
permanently by pushing large costs onto the workers. certainly in oz we have
experimented with civilised IP appoaches to resolving conflict. the workers
have taken the hiding not the bosses. whenever it looks like the bosses are to
be threatened (tax rise, pay rise or something), the analysts say the markets
won't like it and the hostage G loses nerve and gives them another tax cut.

for their part the bosses say look how many jobs they have created. some. but
most of them part-time or casual, low pay and unstable. so while the quantity
is below scratch the quality is appalling.

i hope this is a start for you.

Below my signature is the inclusion i mention above.

kind regards

bill

 William F. Mitchell            Telephone: +61-49-215027      .-_|\
 Department of Economics                   +61-49-705133     /     \*<--
 The University of Newcastle    Fax:       +61-49-216919     \.--._/
 Callaghan   NSW  2308                                            v
 Australia                      Email : ecwfm@xxxxxxxxxxxxxxxxxxx

-------------------------------------------------------------------------------
ATTACHMENT STARTS HERE:

Restoring full employment - a problem of policy balance.

William F. Mitchell
Department of Economics
University of Newcastle

1.0  Introduction

The goal of full employment harks back to the period following WWII when
Australia sought, via an expanding public sector, to develop large scale
assembly-based manufacturing with the aim of preventing a recurrence of  1930s
mass unemployment. While the world economy has avoided a return to Depression
levels of unemployment, it has been plagued by persistently high levels since
the mid 1970s. Even though Australia experienced a strong growth phase in the
mid to late 1980s, not enough jobs were created in relation to labour supply.
Further, at the recent G7 Jobs Summit in Detroit, a rising trend in the world
economy termed the new working poor was identified. This refers to the fact
that economies are producing increasing numbers of low paid, service sector
jobs as manufacturing employment opportunities decline.

A focus on the issue of full employment is thus timely and welcome.  Restoring
Full Employment , released by the Committee on Employment Opportunities
(hereafter the GP) brings the issue back into the policy debate after many
economists in the 1980s were content to classify the higher levels of
unemployment as voluntary, search or structural and not amenable to
macroeconomic policy manipulation. To place our discussion of the GP in
context, Table 1 summarises Australian labour force aggregates for period from
1978 to 1993. While there were 1.7 million jobs created over the period,
unemployment still rose by 5 .8 per cent per annum due to the relatively more
rapid labour force growth and more of the jobs created were part time. The
Australian economy thus did not produce enough jobs. Related evidence suggests
that the rising importance of the service sector and part time employment has
resulted in an increasing number of employed persons receiving below average
wages (see Mitchell, 1994a).

TABLE 1. Labour Force Aggregates - 1978 to 1993 - (000s)

                  Labour     Total     Full Time   Part Time    Unemployment
                   Force   Employment  Employment  Employment

1978              6424.8    6031.3      5092.8       938.5         393.5
1993              8664.7    7741.7      5928.2      1813.5         922.7
Absolute Change   2239.6    1710.4       835.4       875.0         529.2
Average Annual
Growth (per cent)    2.2       1.7         1.0         4.5           5.8

Source: ABS, Labour Force Australia, Cat. No. 6203

The GP must also be seen in the context of our current recovery. Recent
National Account figures report a 4 per cent GDP growth rate which provides
scope for a modest diminution in the unemployment rate. But growth driven
largely by private consumption and volatile export growth (with some help from
government spending and stock building) is not likely to be sustained. To
achieve growth rates consistent with rapid reductions in unemployment and to
maintain our competitiveness we need stronger growth in investment. In the
1960s, our investment (private plant, equipment, buildings and other
constructions) to GDP ratio was around 10 per cent. There has been a steady
decline since the 1970s. Between 1990 and 1993, investment in plant and
equipment has averaged around 8 per cent of GDP. Any approach to achieving
full employment must address the reasons for the loss of private capital
formation.

Finally, since 1983, significant structural reform has taken place that has
resulted in job losses, particularly in the textiles, clothing and footwear.
The losses have been exacerbated by demand deficiency in the 1990s. This
combination may have more relevance for the regions than for the economy in
general. At any rate, while microeconomic reform may deliver benefits in the
longer term, it is costly in the short term with respect to jobs and incomes.
It is essential to maintain a strong level of macroeconomic activity while
pursuing structural reforms in order to speed up the absorption of the micro
changes and minimise the adjustment costs. It is not an adequate strategy to
rely on the market to react to an improved microeconomic structure while the
aggregate economy delivers persistently high unemployment. The losses from
macro failure swamp the losses that may arise from micro inefficiency.

While reintroducing the concept of full employment as a policy priority, the
GP unfortunately places an excessive emphasis on microeconomic factors and
sidesteps the macro policy issues. It states that  In order to achieve a
higher growth rate, policies would need to be directed toward increased
flexibility in the labour market, income restraint, accelerated micro-economic
reform and stronger productivity growth. Active labour market programs would
also have a part to play in this process.  (p.43). Not enough recognition is
given to the fact that macroeconommic factors, in particular an excessively
restrictive monetary and fiscal policy in the late 1980s and early 1990s,
caused the current unemployment problem. In this context, expansionary
macroeconomic stimulus accompanied by some micro incentives to influence the
structure of investment would help reverse the damage done by the policy
lapses in the recent past.

In this sense, the GP lacks a vision for balanced policy. I see the GP as
belonging to the same rationalist pedigree which pervaded and hamstrung macro
policy in the 1980s. The GP prescribes no role for an activist macroeconomic
policy, preferring to maintain the view of the 1980s, that continued
micro-economic reform is the solution to the woes that lack of investment and
a shrinking public sector have brought upon us.

More significantly, the GP ignores any consideration of why the economy is
failing to create enough jobs even in times of high growth (as we saw in the
late 1980s). A related issue is the question of sustainable growth and the
concept of green jobs. The GP is content to let the market via price
incentives achieve conservation aims. This is controversial and would take us
beyond the scope of this critique.

2.0  The NAIRU and aggregate demand policy

The GP does not really define full employment. Instead it concentrates on the
related concept of the NAIRU Its focus is about reducing the NAIRU, presumably
as a first condition for restoring unemployment to some frictional and
irreducible minimum. The GP rightly sees a reduction in the NAIRU as being
essential for sustained growth with low inflation. The scope for growth is
reduced if demand pressures impact on prices rather than output. However, much
of the micro policy justification is lost if we have no estimates of the
NAIRU. In the last strong employment growth phase, the unemployment rate fell
to around 6 per cent without any pressure on wages emerging. Had we reached
the NAIRU at that time?

Additionally, we need to be clear on what this NAIRU-constrained world means
(see Mitchell, 1987 for a discussion of terminology). While the NAIRU concept
clearly introduces non-competitive, institutional and structural factors into
the definition of the unemployment rate where inflation is steady, which are
absent in the Walrasian natural rate of unemployment concept, the analytical
conclusions are similar. In both models, the long-run Phillips curve is
vertical and attempts to use aggregate demand policy to permanently reduce the
unemployment below the NAIRU are eventually futile.

The GP adopts this version  of the NAIRU and hence sees  microeconomic  reform
as the path to lower unemployment without inflation (see  pp.50-51).  For  the
unemployed this translates into reductions in their relative wage or increased
participation in training schemes to lift their market productivity. The  fact
that changing relative costs of one group will merely shuffle the positions of
the unemployed in the queue rather than expand the number of jobs is  ignored.
But the important thing for the GP is that the more marketable the  long  term
unemployed can become, the less  pressure  will  come  from  wages  as  growth
occurs.

The NAIRU must be distinguished from the notion of a steady state unemployment
rate which is cyclically sensitive or hysteretic. In this world, the steady
state unemployment rate is not only sensitive to microeconomic changes, but
also to the business cycle. There is nothing in the GP to suggest it has a
hysteretic vision. Had the GP embraced this type of model the policy mix would
have been more weighted to macro initiatives which work more quickly and
involve less adjustment costs. Unfortunately, the GP sees the task as
preparing the unemployed for work, rather than providing the demand necessary
to create the required jobs. The GP should have shown that the NAIRU was a
binding factor and could only be reduced through microeconomic initiatives.
Instead, it relied for its modelling on the Access Economics Murphy (AEM)
model which has a inbuilt neoclassical NAIRU with no scope for macro policy to
permanently drive it down.

3.0  Macroeconomic policies are needed

The sharp rise in unemployment in the 1990s cannot be attributed to excessive
growth of real wages.This recession was the product of demand-deficiency,
deliberately induced by Federal Government policy. Policy makers must decide
on two issues. First, are inadequate skills reducing the employment
opportunities for those recently unemployed. Second, where state dependence
and heterogeneity have reduced the re-employment probability of the long term
unemployed (LTU), what form of special treatment is necessary to improve the
prospects of these individuals?

The GP  eschews direct job creation for newly unemployed. Yet the correct
approach is to get the newly unemployed quickly back into work of some kind so
that they maintain their link with the labour market and retain their current
income levels. They do not lack skills and hence training would be wasteful.
Palliative care is needed until the cycle improves (see Green, Mitchell and
Watts, 1992).

In general, the GP  favours a mix of training schemes and wage subsidies over
direct stimulation. This is consistent with their belief that excessive wage
costs and low skills prevent job expansion. At the present award rates, the
unemployed are too costly to hire. A wage subsidy or a training wage is thus
required to induce employers to hire.

But measures that reduce relative wage costs for one group merely shuffle the
unemployment queue with the net gains being marginal. So a wage subsidy for
one demographic group may only provide work for that group at the expense of
the another substitutable demographic group. Thurow (1975) also showed that
the relative upgrading of skills of one group of workers in the queue via
education and training, will merely amount to a relative downgrading of some
other workers in the queue.

Without rising levels of aggregate demand creating extra jobs, all the
training in the world will come to nothing.

The startling omission of the GP is that they have sourced the problem and
solution of unemployment in the labour market. One of the most striking events
of the 1980s was that the scale of investment in productive capacity did not
reflect the unprecedented redistribution of national income from wages to
profits. Wage inflation was low, the exchange rate had delivered increased
international competitiveness, yet the increased profits were largely wasted
on speculative transfers.

The major problem facing the unemployed in Australia is that the
entrepreneurial class is generally moribund. It exists within a speculative
culture and has not emerged from its cloistered existence under the high
tariff barriers of the past. High productivity, high employment and high wages
are all products of robust investment. Tinkering with microeconomic reforms
cannot hope to deliver the returns that a strong investment rate will provide.
To increase investment we must eliminate the incentives for speculative gain.
Reform to the taxation system is essential. But that takes us out of the
labour market and the GP becomes silent.

4.0  The 1970s and 1980s - a revisionist history

The GP provides a narrow interpretation of recent history. Throughout the
first three chapters it tells us that excessive real wages and market
impediments are largely to blame for the high unemployment in Australia. The
GP does recognise that after 1990  the reduction in employment.was much more
related to a downturn in aggregate demand.  (pp.31-32 ), although there is
virtually no follow up to this point.

The historical summary reads as if there was never a debate in macro-labour
economics following the rapid rises in unemployment in the mid 1970s. It
should be stated that whether the unemployment in the 1970s and early 1980s
was Classical (real wage caused) or Keynesian (demand deficient) is really not
the issue. The emphasis in the GP on establishing that real wages caused high
unemployment is however consistent with a continued focus on microeconomic
factors constraining growth and increased employment rather than macro
factors.

Some of the GP s claims do not fit the facts. It claims that productivity
growth followed the substitution of capital for labour after the real wage
explosions in 1973-74 and 1981-82 (p.29). If the macro economy was subject to
diminishing returns in its usual operating range, then with such an increase
in capital intensity and rising unemployment, productivity growth should have
surged. In fact, since the mid to late 1970s, productivity growth has slowed.
A Keynesian might point out that sluggish demand generates both high
unemployment and low productivity growth.

Also, Figure 1.9 on page 33, charts real wages and employment and is supported
with the statement that  The close link between real wage costs and employment
was particularly evident in 1974-5 when a large increase in labour costs led
to a sizeable decrease in the proportion of the population employed.  (p.31).
Whatever happened to the difference between correlation and causation? While
not denying that wage costs may impact adversely on employment, the figure
reveals nothing causal and is an example of the GPs assertive approach.

For the record, aggregate demand and output were growing by barely 0.5 per
cent per annum by March 1975, following a declining trend beginning as early
as March 1972. Growth did not return until the late 1970s, whereupon
employment duly followed suit. Again, from December 1981 to around September
1983, real output growth was falling and was negative after about September
1982. The employment series reflected this behaviour. In the post 1983 period,
three trends are evident. Demand and employment grew until late 1989, then
both declined dramatically. Real unit labour costs fell almost continuously
throughout the entire period. None of these movements exclusively supports a
neoclassical factor substitution argument.

5.0  The numbers

In Chapter 2, the GP does some Okun type accounting as the basis of its
projected decrease in the unemployment rate. It is hard to agree with their
projections. The projected sustained GDP growth is 3.5 per cent per annum
until the year 2000. Labour productivity is predicted to grow  at around
levels experienced over the 1980s (p.46), which is noted earlier (p.29) to  be
1.0 per cent per annum.

The extent to which the unemployment rate will fall, then depends on the
labour force growth over the same period. DEET (1991) estimates that the
labour force for 15-64s, under conservative net migration, will exhibit an
average growth rate over the 1990s of 1.51 per cent. With these aggregates and
assuming average hours worked remains constant, there would be scope to reduce
the unemployment rate to the target proposed.

Yet how realistic is the productivity assumption? My own estimates (Mitchell,
1994b) show an average rate of around 1.4 per cent since 1980s. Further,with
the policy effort aimed at increasing productivity then we should expect it to
rise. Assume it is a very conservative 1.5 per cent per annum. Then the scope
for reducing the unemployment rate is reduced and by 2000 the unemployment
rate would be around 8 per cent.

The GP goes off the rails when it suggests that a projected participation rate
of 77 per cent is a reasonable working assumption (p.71). This would  yield  a
1.8 per cent per annum labour force growth rate. With 3.5 per cent GDP growth
per annum and 1.5 per cent productivity growth, the unemployment rate is going
to fall by a bare 0.2 percentage points per annum. The situation worsens if
significant productivity growth occurs.

The GDP growth rates to achieve a 5 per cent unemployment rate appear very
high (around 4.75 per cent per annum sustained). But where does the growth
come from? The GP lapses into Says law. The GP says (p.51) that  The
simulations underpinning such a high growth scenario suggest that this could
be feasible with: an acceleration of micro-economic reform and other reforms
designed to increase productivity growth, and associated improvements in the
labour market leading to reductions in nominal wage inflation consistent with
a 2 percentage point reduction in the NAIRU.  And,  Further ahead, the
proposed policies to accelerate the supply potential of the economy would to a
large extent lead to self sustaining growth...  (p.51).

Apart from the logical problem that increases in productivity will reduce the
capacity to decrease the unemployment rate, there is still the problem that
shifting the aggregate supply curve does not in itself increase output. The GP
merely relies on the simulations from the AEM model which has built in
classical long run neutrality. Why should we accept the results of the AEM
model simulations?

It is obvious that if we write out models with cyclically-independent NAIRUs
and then impose some micro efficiency measures which reduce the NAIRU, the
inflation-unemployment trade-off will improve, and price reductions will
stimulate demand via real balance effects. Evidence in the literature (see
Mitchell, 1987; Watts and Mitchell, 1990 for example) is highly suggestive of
a hysteretic NAIRU, which rejects classical long-run neutrality, and on a
practical level, opens up a vastly different policy vista to that proposed in
the GP. Further, how long must we wait for the microeconomic reforms to
stimulate investment. We have had a relatively large degree of micro
improvements over the last 10 years and yet the lack of investment remains a
problem.

What is required to sustain the GDP growth rate at these high levels, Balance
of Payments constraints notwithstanding, is sustained levels of effective
demand. Effective demand focuses on both aggregate supply and aggregate
demand. Policies to enhance both are required. Microeconomic policies alone
will not necessarily improve effective demand.

6.0  The Job Compact

The GP advances the notion of a Job Compact as an essential part of its long
term strategy. The idea that the Government would guarantee a job for everyone
is a lofty ideal. The Job Compact falls short of this and only targets those
who have been unemployed for at least 18 months. The GP says the  major
principle underlying the Job Compact is that of responsibility of both
sides...  (p.10) Both the government and the unemployed have obligations. The
Governmental obligations appear to be to improve the profit margins of the
private sector through wages restraint and deregulation. For the unemployed,
the GP appears to have a model of recalcitrance. They must accept reasonable
job offers. What evidence exists that they havent? They should be prepared  to
work at below award wages with peers who would be receiving award wages. They
must submit themselves to a sequence of programs.

In a philosphical sense, the GP provides a plethora of micro measures intended
to prepare the LTU for work rather than actually give them jobs. In Kalecki's
(1971) terminology, nominal wage restraint requires a large number of
work-ready LTU to discipline wage demands by the employed.

However, the GP says nothing of the obligations of the private sector to use
the redistributed income from wage restraint to invest in productive capacity,
to provide career paths to workers, to ensure that productivity growth is
distributed across all demographic groups, to provide adequate levels of
training to their workforces, and to ensure that discriminatory employment
practices are abandoned.

Further, how does the GP see the conflict between a technological sector with
declining employment and the low productivity service sector with rising
employment being resolved in distributional terms. With decentralised wage
determination, what mechanisms would exist to ensure that workers in the low
productivity sectors actually shared in the spoils? We cannot rely on factor
substitution and changing patterns of demand to resolve this. The service
sector will continue to supply low productivity, labour intensive employment
where the scope for wage gains is limited. The increasingly capital intensive
high productitivy sectors will provide scope for higher wages but fewer will
directly benefit. Markets do not necessarily deliver equity.

Mitchell (1994a) shows that the majority of the extra jobs which will be
created in the next expansion will be located in the industries which are,
relative to average, low productivity, low pay sectors with a predominance of
part-time employment. It is likely that most of the beneficiaries of any
training and other GP initiatives, who actually get jobs, will find themselves
in these sectors. How do they share in the wealth that would come with a 4.5
per cent GDP growth. Certainly not through their pay packets!

7.0  Conclusion

I started reading the GP with a particular view of unemployment. In a society
which defines employment as gainful activity within the market sector and
places a virtuosity on this type of work, unemployment is the largest social
problem faced by the economy. Other social problems which stem from poverty
(like crime, divorce, child neglect etc.) are exacerbated by unemployment.

If unemployment is persistently high, there is a danger that an underclass
forms which is deprived of the material rewards of the production sector and
the social esteem which comes with employment. Endemic poverty and welfare
dependence is all this group can expect for themselves and their children. The
concept of an underclass is generally anathema to our ideals of fairness.

Persistent unemployment implies that the rate of investment in the private
sector is insufficient and suggests that the government must intervene quickly
to resolve the demand-deficiency. I reject the idea that demand is not a
problem when unemployment exists. Waiting for the market to work via
microeconomic reform is equivalent to consigning a large percentage of the
unemployed to long-term gloom. The macro costs are enormous compared to the
smaller micro gains that might be made.

Ross Gittens (SMH, 26/2/94, p.36) says that microeconomic reform has become  a
mantra for the nation s economists.  I must say I don t see economics as a
branch of mysticism. And I am still unconvinced that the gains from
exclusively focusing on the microeconomic sphere will ever outweigh the losses
resulting from long term neglect of the macro sphere.

After all how many Harberger triangles can you fit into one Okun Gap!

References

DEET (1991). Australia s Workforce in the Year 2001, (AGPS).

Roy Green, William Mitchell and Martin Watts (1992), Economic Policy in
Crisis: A Proposal for Jobs and Growth, (Sydney: Evatt Foundation).

William F. Mitchell (1994a).  Upgrading in the business cycle - Who gets the
jobs and where are they?, Mimeo, Department of Economics, University of
Newcastle.

William F. Mitchell (1994b).  Productivity bonuses in the recovery , Mimeo,
Department of Economics, University of Newcastle.

William F. Mitchell (1987).  The NAIRU, Structural Imbalance and the
Macroeconomic Equilibrium Unemployment Rate , Australian Economic Papers,
June.

Michael Kalecki, (1971).  Political aspects of full employment , in Selected
Essays on the Dynamics of the Capitalist Economy, (Cambridge: Cambridge
University Press).

Lester C. Thurow (1975). Generating Inequality, (New York: Basic Books.,
Inc.).

Martin Watts and William Mitchell (1990).  Australian Wage Inflation: Real
Wage Resistance, Hysteresis and Incomes Policy: 1968(3) - 1988(3) , The
Manchester School, June.