How to solve the problem of full occupation and price stability

- Personal considerations about Modern Money Theory -

Why and how is possible to solve the main problem of this century: employment?
How currency stability can be achieved ?

Before starting, the following statements must be clear in every mind:

  • regulating interest rates does not regulate the inflation;
  • regulating the minimum wage of people does regulate the inflation reaching at the end the “full occupation”;
  • a State with sovereign currency can extend its deficit spending according to its needs, especially if the goal is to reach "full employment".

INTRODUCTION

Why employment is the main problem in XXI century?

The amount of information we can access today is so big that we are discovering different problems about us and other populations around the world and I am not talking about famine, people with no access to water, pollution, diseases, or corruption. World population passed 7 billion in 2016 and it is growing, but the problem is that everyone wants to live like wealthier countries: owing and doing the same things.

Everyone knows the lifestyle of wealthier countries, Internet helps to spread and share pictures of the “best” way of living. Notwithstanding only a few are aware that this lifestyle cannot be reached by the whole humanity, because it is unsustainable on this planet: to make the world population live like the “best”, it would need from 3 to 7 planets Earth according to which nation it wants to be like.

There are people that can choose their way of living and others not, but everybody needs the means to afford goods and services, so everybody in the world needs a way to buy them: in a word they need money. How can people earn money for the things they want? Having a job.

But what everyone is searching for is a dignified life. How to reach it? Everyone needs a sufficient wage to guarantee it. Today, as we know, it is not like this. Every employer decides the wage of the worker according only to its needs, having only other employers as competitors. So wages follow the offer/demand law of whom can to offer a job: when a lot of people are unemployed, companies can hire at lower wages. On the other hand, when only few people do not have a job, for example during an economic expansion, companies should offer higher wages to fill their occupation gaps.

The downturn in both situations is that prices to afford goods could be the same, because they do not change following the minimum wage. The companies are not guilty of this, because they try to have the best with the minimum expense, in order to maximize earnings. This is in the DNA of any company.

The real problem for workers is not losing a job, but to have a chance to find another one, in a reasonable time and at the right wage. But who may have the power to decide how much a person should earn to have a good minimum standard of life?

The State.

A WAY TO ACHIEVE FULL OCCUPATION…

The politicians of any nation think to solve the problem of a high unemployment rate with the usual “welfare programs”, but just giving money to people until better times come is not the solution. It is a waste of State resources, our resources. Summarising, to be hired is a matter of:

  • TIME - no one knows when companies can hire people at adequate wages and at a constant rate, especially during a period of economic contraction;
  • AGE - if some people are “out of age” for being re-hired, giving some money to them would not make them young, especially if the population has a high rate of elderly;
  • SKILLS – some people could not have the right skills to be competitive in the job-market, but to improve the competences of people is expensive for any company especially the small ones;
  • RESEARCH – job seeking is not an easy thing and people should know how to market themselves, in order to be chosen by head-hunters.

Anyway it is difficult for employers to find the right person they need, it means that a lot of workers are in the wrong place. An experienced head hunter told me that only 20% of hired people occupy the right position in a company. This happens because of a lot of factors, so even if a person has all four of the above requirements, it does not mean that he, or she, will get a job, or the place suited for him / her.

Any State with a sovereign currency can improve this situation adopting the Base Employment Program (BEP) to achieve the full occupation. The statement of this policy is as follows: the State must hire any person ready, able and willing to work, who accepts the minimum salary defined by the State as the minimum amount of money in order to live a dignified life.

The minimum requirements for a State to apply the BEP are:

  • fiat money system (no gold standard): thus improving the ability of spending, without the constraint of having enough gold reserves equating the money spent;
  • money sovereignty: thus having the ability to increase or decrease the deficit, without the constraint of borrowing money from foreign Central Banks and exposing the State to the risks of the open market;

What people can be in the program?

BEP can be assigned only to people who are ready, able and willing to work, so those who have critical diseases, disabilities or simply do not want to accept this job parachute will not be in the program. Since the State offers a real job, with minimum performance standards, the Base Employee, who does not satisfy them, can be fired. However these people could be re-hired under some restricted conditions, or rely on Social Services.

The choice to stay in the BEP is totally free, it must be a voluntary acceptation of the above mentioned conditions. People excluded from this program are those who are not normally counted as unemployed:

  • unable to work, because of diseases or disabilities;
  • unwilling to accept the established minimum wage, because of any personal reason (BEP is not slavery);
  • those who have enough savings to pursue a full-time job search and do not want to rely on the Base Employment Program.

What jobs will be assigned?

The State can offer to people labour not provided by the private sector, because it is too expensive, there is not enough profit-margin, or it is considered useless by common thinking. Moreover people can be trained and instructed in finding jobs more suited to their skills and personality:

  • job-seeking can be assisted and monitored;
  • some courses for on-the-job training are important to widen and improve people skills and have better choices for the future;
  • some people can attend educational programmes to get certified qualifications.

Since the State would train workers for future jobs improving their skills, companies of public and private sectors will hire these people saving money and time for not teaching them how to do the job: doubling the advantage.

The Buffer Stock of Workers

The ultimate objective of the full employment program is not being a competitor of the private sector but to create a Buffer Stock of Employed People. This buffer stock would have a fixed price “minimum wage”, but a floating quantity. The government does not have to pay the market price, if it stabilizes the price it offers for a commodity, because this stabilizing force would affect market prices. 

The buffer stock would increase during economic crisis and would reduce during economic expansions, thus releasing the population from the stress for finding a job and building a buffer of workers that may live their life even in hard times. This is better than having a buffer of unemployed people with families that, fearing to fall in poverty, would accept any wage, job and working conditions. This situation raises psychological pressures of people and as a consequence the anger that can fall into episodes of domestic and public crimes.

Since freedom is at the base of this program, there can be a flow of workers as follows:

  • from the Buffer Stock of the BEP to private sector and vice versa;
  • from unemployed to BEP and vice versa;
  • from unemployed to private sector and vice versa.
BEP contraction bufferstock
BEP expansion bufferstock

The State assumes the role of Employer of Last Resort, becoming a safety for its population during hard times. For example, when big companies close their facilities in order to transfer them abroad to increase profits, a lot of people remain without an occupation, this destroys the equilibrium of the whole community who lives in that geographical area. If these people had the opportunity to be in the Buffer Stock of Workers they could pass over this situation avoiding side effects.

…AND PRICE STABILITY

To put the Base Employment Program into practice, the main parameter to set is the minimum wage, so the State must decide the minimum standard of life that any person should have and translate it into an hourly/yearly pay. So the State would guarantee the least dignified life that is possible to live in that nation/region/area.

To give an example, the hourly pay can be set at a price between 6 € and 7 €, for a more precise value some parameters must be considered, like cost of food, home expenses (rent, electricity, services…) and health insurance (for countries where healthcare is not managed by the State). Once the Base Employee Wage is set, it becomes the minimum offer that any employer should consider in hiring people.

It will be very difficult for any private company to hire workers at worst economic conditions. Staying in the Base Employment Buffer Stock, people can take their time to evaluate better choices in the whole hiring market, without the stress of accepting any job just to pay the bills. At the same time private companies would reduce their costs for improving and coaching fresh hired workers.

The State would take the responsibility to maintain a minimum standard of life for its population, where anyone can choose how to live: being employed in the public or private sector, taking part to the Buffer Employment Program, or staying unemployed. We are living times in which the real crisis stays in the socio-economic system and this program is a big leap towards a better society.

The Base Employment Program may have an impact on prices of goods at the beginning, but it will also help to increase efficiency in companies, that now have a hypothetical lower limit of cost for each person hired. But higher prices would mean better profits for companies that can invest money in new projects hiring new workers.

Can this situation lead to inflation?

The fear of inflation

A lot of people may think that putting this program into practice would rise the deficit spending of the state, so much to stir up worrying inflationary episodes. But we must remember that the deficit spending may be extended to raise the good of the population. Moreover we must consider the positive effects of this program in reducing other expenses for welfare, fighting crime and improving health of people.

Can this situation lead to inflation?

Inflation definition: is the continuous rise in price level. It means that the price level has to be rising each period you observe it. A constant rise per period of a price level or a wage means to have an inflationary episode. On the contrary you have a deflationary episode when the price level is continuously falling.

Remember that currency depreciation does not constitute inflation, even if it might stimulate it. It is also not inflation when the exchange rate falls pushing the price of imports up a step (not continuous). So the event of a price rising can become inflation, but it is not necessarily inflation. If prices of goods rise continuously, the situation can be dangerous for people as they must spend more and more to obtain the same things. This leads to a bad situation especially for workers paid low wages.

The driver of inflation is the chronic excess demand in comparison to the real capacity of the economy to produce. The minimum wage of the BEP is a good point to avoid inflation, because it stabilises the power of purchase of people, also those in the Buffer Stock of Workers, stabilising the demand for products. When the BEP is put into practice, people can afford a dignified life in a period of economic contraction too. So except for a little adjustment in prices at the beginning, on the long run BEP will stabilize prices.

What is the parameter to watch to reach full employment

To have an idea of the spending limit for this program, it is better to use a formula.

Private and Public Sector Income - Public Sector Spending + Private Sector Spending + Involuntary Unemployed People = Desired Net Nominal Saving

It is clear that the Desired Net Nominal Saving is the limit to reach in spending to obtain full employment. The ideal situation is to match Desired and Actual Net Nominal Saving, so when Public and Private sectors cannot spend enough to give people a job, unemployment is generated. Additional government deficit is run only to create a Buffer Stock for employing those people who, belonging to the Involuntary Unemployed Group, want to accept the conditions of a Base Employment.

As government is filling up the Buffer Stock of workers, the aggregate demand will increase, thus stimulating the private sector employment and reducing the total amount of Base Employees defined at the beginning. This is the desired effect of the whole program.

The State acts as an employer of last resort and it raises debt spending on a price rule (the Base Employment Wage), not on a quantity rule, because the quantity is let to float by market forces and, as discussed, it varies according to the aggregate demand of goods and services.

The debt of a State with a sovereign currency can be extended to reach the desired Net Nominal Saving. Moreover setting the minimum wage, would push up those wages that are lower, because a person would prefer to receive a BEW than being employed for less money. These constraints avoid inflationary episodes.

CONCLUSIONS

Nowadays States prefers to help only a very few people and not their whole population, for this reason they prefer to approve ineffective welfare programs which create Unemployed Buffer Stocks. The best thing for most politicians is not solve problems, but to make people believe they can solve them. In this way, the same politician are re-elected, perhaps not in the command position, but they obtained their goal: to hold the seat and to help the same few people for years.

States pay people for remaining unemployed, thus depreciating labour and damaging human capital: if a person stays without a job for a long time, it loses productivity, self-esteem and may be induced into crimes, or to accept a degrading job at a ridiculous wage.

  • BEP is adaptable to any form of government, any geographical area and any attitude of people; so changing the main parameters, base wage and amount of people in the buffer stock, the results will be always those described above.
  • This Program avoids the side-effects of maintaining an Unemployed Buffer Stock and lowers the social costs caused by society instability, helping and teaching people how to improve themselves.
  • The Base Employment is a real job, it has minimum performance standards and the worker can be fired. This stimulates the brain and the to-do-attitude of people, raising their self-esteem and making them aware of their capabilities. This is exactly the opposite effect of today's welfare programs.

Private companies would take advantage of BEP.

  • If the State spends money to increase people skills helping them to diversify their attitudes, the private companies would reduce their costs hiring fresh, trained and skilled workers.
  • The BEP can employ people in activities with too low profit-margin for private companies, but required by society and useful for private companies as well.

The State may decide how much to extend its debt by fixing the Base Employment Wage.

  • Setting a BEW means to know what the State wants as the minimium standard of life for its population, this reduces the deep gap between rich and poor people and has the positive effect to stabilize prices and prevent worrying inflationary episodes.
  • Keeping the actual Net Nominal Saving monitored and extending public debt according to its value, full employment and price stability can be reached.


Bibliography:

"Understanding Modern Money - The Key to Full Employment and Price Stability" - Author: L. Randall Wray

"The State, the Market and the Euro - Chartalism versus Metallism in the Theory of Money" - Edited by Stephanie A. Bell and Edward J. Nell

"Modern Monetary Theory and Inflation" - Author: Bill Mitchell

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