Ending Unemployment. Part 2: Wage Subsidies

Image source

The International Labor Organization (ILO) predicts that millions in the developed and developing nations will lose their jobs in the coming months.

Mervyn King, Governor of the Bank of England, says "the global and UK economies had been turned on their heads in the past three months [and] the situation could be even worse than the Great Depression of the 1930s."

So what should governments be doing?

In an earlier post I advocated a negative income tax, an old idea to combat unemployment and poverty promoted by, among others, the late conservative economist and Nobel Laureate, Milton Friedman.

To anyone whose labor is worth more than absolutely nothing, the negative income tax provides both an incentive and an opportunity to work, since it guarantees anyone with a job, however poorly paid, enough income to live on.

The great defect of the negative income tax is that it requires either that:

any increase in market wage received by a low-wage worker is subject to a claw back of the negative tax benefit equivalent to a marginal tax rate approaching 100%; or

the benefit is extended to those with earnings that well exceed the minimum living wage.

In the former case workers have little incentive to maximize their earnings, in the latter case the program becomes excessively expensive.

Another approach is for government to make wage subsidies available to employers by public auction.

An employer bidding successfully for a wage subsidy would pay for it, cash in advance, the subsidy to be paid to the employee by the tax department over the course of the year.

Amounts bid for subsidies, would depend on the quality of labor available and the profitability with which it could be employed, and thus would range from 0.01 dollar/euro/whatever  per hour to an amount close to the full value of the subsidy.

Subsidies could be sold both singly and in batches via an online E-Bay type auction, the number of subsidies offered varying from week to week according to the unemployment rate. The aim would be to drive that number to the full employment rate of around two or three percent as unemployment is currently measured in the United States.

The program should aim to minimize cost by excluding bureaucratic stipulations about qualifications of either employers or employees other than rules designed to prevent fraud. Thus, for example, subsidies should not be linked to place of work, type of work, type of worker or any of the other annoying restrictions that make employers loathe and detest virtually all of the wage subsidy programs that governments have from time to time tried in the past. The aim should be to minimize the cost of program administration to both government and employers.

How a wage subsidy system would skew incentives in the labor market is not altogether obvious. A counter-intuitive consequence would likely be that, to retain trained workers in a labor market offering many new opportunities for low-wage workers, employers might be compelled to pay a premium to retain experienced unsubsidized workers earning little more than the minimum wage.

A wage subsidy program would have many benefits:

first, it would result in massive savings in the cost of multiple bureaucratically complex welfare programs that supposedly care for those without income;.

second, it would provide a tremendous stimulus to many low-skill labor intensive industries, by making available millions of workers at third-world wages, thereby increasing total output of goods and services, raising the general level of prosperity, and increasing business tax revenues to government;

third, it would largely eliminate the disaffected, criminally inclined underclass, which currently lacks incentive to acquire education or work-place skills, thereby greatly reducing unemployment-related crime and its various policing and prison costs;

fourth, it would reduce the despair of the unemployed and the mental health problems that such despair can create. Currently, something like 40% of Europeans and 20% of Americans are diagnosed with some form of mental ill health at any one time. Much of this illness is related to economic stress, and much of that stress is likely unemployment related.

The cost of subsidizing the 40 million or so jobs required in America would be in the range of $100 to 200 billion dollars per year. Barely a drop in the bucket compared with the seemingly endless bailouts required to maintain the banking class in the style to which they have become accustomed.

With adjustment for differences in population and living costs, the cost of an employment subsidy program in other countries would be comparable: say $10 to 20 billion a year in Canada, or not a whole lot more than the Government of Canada was happy to spend entertaining representatives of the G8 and the G20 for a couple of days.

See also:
How to end unemployment. Part 1: The Negative Income Tax
Why economics is bunk
America's inflationary depression
USA versus China: Wage Convergence, Wealth Divergence and Global Hegemony
US Economy: Expecting the Unexpected
USA Boom or Bust: The Next Decade
Why China Booms While America Slumps
China's Economy Already Larger Than America's
NY Times: The Right Minimum Wage: $0.00