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“Above all things I hope the education of the common people will be attended to, convinced that on their good sense we may rely with the most security for the preservation of a due degree of liberty.” Thomas Jefferson
Ralph Musgrave - Ralphanomics

If the market can’t allocate the unemployed to jobs, why not have the bureaucracy do it?

In a perfect market, a surplus of people with a given set of skills and experience (i.e. a particular “type” of labour) would cause a drop in the wage for that type of labour. The market would clear, and all members of that type of labour would find employment. So given a perfect market, there’d be no unemployment.

At least that would be the case assuming there is nothing of a macro-economic nature preventing full employment. E.g. let’s assume the above wage cuts result in instantaneous price cuts, which increases the value of the monetary base and national debt. That in turn means a rise in value of private sector net financial assets, which in turn raises aggregate demand. (That’s the “Pigou” effect.)

So perfect market = full employment. Imperfect market = unemployment. That’s the problem. Now for the solution – well, an improvement on the current situation anyway.

The market and the bureaucracy.

There are two ways of allocating economic resources: allocation by the market and allocation by the bureaucracy. Since the market can’t allocate the unemployed, what system should the bureaucracy adopt in order to do the allocation? How about this.

Assume that given a decline in unemployment, every employer would expand numbers employed in the same proportion. That is a crude assumption. But it’s very roughly correct.

So assuming the objective is to expand numbers employed by each employer in the same proportion, employers need to be told, “You can expand your payroll by X%, and the additional employers will be free. Moreover, this is something you really ought to do because your competitors will probably be doing it, which will cut their unit costs. I.e. if you don’t do likewise, your competitiveness will decline.”

Hey presto: unemployment falls.

Well that’s the theory. Now for the possible problems.

Would the free employees displace regular employees?

Obviously it’s impossible to guarantee that out of the millions of employers in the country there would never be an instance of regular employees being displaced.

But the more important point is to consider the main “overall” or macroeconomic effects. And the important point here is that the above mentioned rise in aggregate demand would mean that OVERALL, there’d be no net displacement. That is, on balance, there’d be a net rise in numbers employed. (Incidentally, in the real world, there’d be no need to rely on the Pigou effect: governments can of course raise aggregate demand whenever they want).

Moreover, there are several measures that can be taken to dissuade employers from using free employees as substitutes for fully viable employees. For example if the time that a given free employee stays with a given employer is limited to a few months, that induces employers to claim the subsidy only in respect of their LEAST PRODUCTIVE employees: no employer wants to lose their MORE PRODUCTIVE employees.

And finally.

And finally, smart readers will have noticed that the above system comes to the same thing as a “Government as Employer of Last Resort” system, of a particular type. It’s an ELR system under which the unemployed are allocated to EXISTING employers, public and private, rather than allocating them to SPECIALLY SET UP EMPLOYERS doing just public sector type work (which is what the WPA and numerous other ELR systems have consisted of).

In other words, the above is a piece of theory which underpins the idea: “allocate ELR employees to existing employers, public and private.”


Ralph Musgrave - Ralphanomics

Author: Ralph Musgrave - Ralphanomics

I wrote a book on unemployment recently with James Galbraith, and others. Galbraith is one of Obama's economic advisers. I love the different cultures that exist in this world. I took an interest in them long before the daft word 'multiculturalism' was widely used. I want to see these cultures preserved. I want to see Tibet staying Tibetan, and Britain staying British.

2 comments to If the market can’t allocate the unemployed to jobs, why not have the bureaucracy do it?

  • Ralph,
    I had to read this three times to even begin to make sense of it and the first two times I thought it was a satire on bureaucracy, only on the third read did I realize you were seriously suggesting that government take an active role in managing and determining the allocation of the work force in the free market.

    Please tell me Ralph, when has any government had success in managing anything. You actually suggest using the most inefficient system of management ever concieved, government bureacracy, as a way to manage the work force in private industry. Your concept has so many flaws I don’ t know where to begin.

    First off, although you refer to them as free employees, the reality is that they would in effect be the most expensive in the workforce! Their wages, training, and benefits would be paid by the taxpayer, who would also be responsible for the costs of maintaining the massive bureacracy needed to shuffle these “free” employees around every 90 days , actually monitor them, and to police the system to ensure that neither employer or employee is falsely claiming government funding. Based on previous examples of government efficiency in employment subsidy programs you would have unscrupulous individuals making claims for employees whose names came off of tombstones. In fact government bureacracy certainly manages to keep a tight rein on fraudulent claims made through Medicare don’t they?

    Secondly, the very suggestion that you would limit these “free” employees stay at any one job to a period of a few months suggests to me that you have probably built yourself a career in academia or the very bureacracy you apparently have so much faith in. Those of us in the private workfforce who have been involved in hiring and training employees realize that in most cases an employee has limited value in the first few months, depending on the particular job it may take longer than that just to get them up to speed. In fact in some cases, particularly in small business the process of training new hires actually decreases a businesses efficiency and output as it is generally the most productive and experienced employees that are assigned to train the new hire.

    I could go on for days about how impractical, naive, and just plain ludicrous your ramblings on this subject are, but I suspect you will simply counter with this or that theory, the key word being “theory”. You remind of a communist party member that wiill tell you what a wonderful political concept ommunism is and how it is the end all be all solution to societies problem. Yet when you ask them for an example of this wonderful concept in practice, they change the subject or pummel you with quotes from Karl Marx or Lenin.

    I can only prayer that you are in fact a bureaucrat, and not involved in academia in any way, hale, or form as it sends shivers down my spine to imagine someone teaching this drivel tou our youth.

  • By the way, please excuse any spelling errors. I am writing this on an IPad and am still adjusting to screen size and the lack of a tactile keyboard, on top of that it’s spell check often takes liberties that I don’t catch before hitting the send button.

    However I suspect that if your “free employees” we’re being utilized by Apple I would be writing this using a mallet, a chisel, and a piece of sandstone.

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