Full Employment along with Price Stability

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MMT 101

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Modern Money Systems
The Real Economy
Money, Government and Banking
The Role of Government Deficits
Full Employment along with Price Stability



MMT proposes a Job Guarantee program (JG) in which the government unconditionally offers a public sector job at the minimum wage to anyone willing and able to work.

This effectively creates a peg for the currency, fixing its value in relation to the market value of unskilled labor. The government offers to purchase idle labor for a fixed rate and lets the deficit float. This is akin to a gold standard, where the government offers to purchase gold that is "idle" (for sale) for a fixed price, and lets the deficit float.

The deficit automatically adjusts to achieve full employment, no more and no less.

This stands in stark contrast to traditional Keynesian general demand stimulus, in which aggregate demand is stimulated by the government buying resources and labor on the market, potentially bidding up prices and entire wage structures in the hope that demand should "trickle down" and ultimately create new jobs.

The JG program avoids the resulting inflationary effects by instead stimulating the economy directly at the "bottom", hiring at a minimum wage so that market wages are not chased after in upwards spirals.

In addition, contrasted with today's approach which uses a buffer stock of unemployed to control prices but results in staggering social costs, a JG program has better inflation fighting effects and is beneficial in many other ways.


In modern society, employment is necessary for earning the income that individuals and families require for sustenance and participation in society. There is ample evidence that mass unemployment results in huge permanent losses every day in foregone output and income. The macroeconomic losses from unemployment are just the tip of the iceberg. In addition to lost output, other real costs are suffered by the nation, including the depreciation of human capital, increasing family breakdowns, child abuse, crime, medical costs, skill loss, psychological harm, ill health, reduced life expectancy, loss of motivation, racial and gender inequality and loss of social values and responsibility[1]:129[2]. These costs are enormous[2]. The personal, family and community losses are very large and persist across generations[3].

MMT proposes a Job Guarantee program, JG, in which the government unconditionally offers a public sector job at the minimum wage to anyone willing and able to work.

Job Guarantee Deficit Spending

MMT states that unemployment occurs when government deficits are too low to compensate for the demand leakages occurring due to non-government net saving[4]. Under a Job Guarantee program, a non-government desire to net save (i.e to net hoard financial assets) that would otherwise have resulted in unemployment will instead result in additional labor being hired by the government for the specified JG wage. This increases the government deficit, allowing actual non-government sector net saving to increase to the desired level. Exactly the needed deficit is created automatically. The nation always remains fully employed, with only the mix between private and public sector employment fluctuating as it responds to the spending decisions of the private sector.

The JG program is designed to ensure that the deficit will rise only to the point that all involuntary employment is eliminated; once there are no workers willing to accept JG jobs at the JG wage, the deficit will not be increased further. Thus, the design of the JG guarantees that the deficit will not become "excessive", that is, it will not exceed desired net saving; or, more simply, it will not increase aggregate demand beyond the full employment level.[5]

Job Guarantee Implementation

The Job Guarantee could be executed through public or semipublic bodies in cooperation with the private sector in public-private partnerships[6]. Workers could remain employed for as long as they wanted the work. There would be no compulsion on them to seek private work. They could also choose full-time hours or any fraction thereof. Many would of course opt-out, for example those being between jobs, those having negotiated sufficient privately supplied unemployment benefits, those having amassed sufficient savings to live off, or those otherwise unwilling to work for the designated wage[1]:126-127.

The JG would be integrated into a coherent training framework to allow workers (by their own volition) to choose a variety of training paths while still working in the JG. However, if they chose not to undertake further training no pressure would be placed upon them[3].

Wage Level

To avoid disturbing private sector wage structure and to ensure the JG is consistent with stable inflation, the JG wage rate is best set at the minimum wage level. The wage should be determined by what is deemed by the electorate to be the lowest acceptable standard of living, defining a basic but decent wage-benefit package as a standard for the economy as a whole[6]. It would functionally become the national minimum wage, as firms would have problems attracting labor if not offering a deal at the same level or better.

Minimum wage legislation would not be needed.[3] On the contrary, some jobs might still pay a wage below the JG wage if they are particularly desirable (for example, because the work is pleasurable, or where large wage increases are possible for a lucky few – as in sports or arts)[5].

Public unemployment benefits schemes could be abandoned. A JG wage could be paid to anyone who turned up at a designated JG office even if the office had not organized work for that person yet[3].

Employed Versus Unemployed Buffer Stock

By means of the JG program, a buffer stock of employed workers is established and maintained. This should be contrasted against today's approach that uses buffer stocks of unemployed to maintain price control. It is a policy that leaves many individuals willing and able to work in idleness and often for long periods of time, wasting human potential[6]. It pays people for not working, generating obvious incentive problems. It allows labor to depreciate and in some cases develop behaviors that act as barriers to private sector employment[1]:129.

A buffer stock of employed would, if properly maintained, work with considerably better condition and liquidity, as employment maintains and enhances human capital.

Both forms of buffer stock has beneficial counter-cyclical effects, working as an "automatic stabilizer" for the economy. When private sector employment declines the buffer stock increases, and thus automatically stimulates the economy via increased government spending on JG wages. Correspondingly, in times of high private sector activity, more workers find employment outside of the buffer stock, and the resulting decrease in payments dampens down inflationary pressure.

Inflation Fighting Effect

Furthermore, either form of buffer stock has an inflation fighting effect by being a competitive threat to privately employed workers, as they face the risk of being replaced. This disciplines wage demands, and thus contributes to keep prices under control.

However, the inflation fighting effect of an unemployed buffer stock has been shown to deteriorate over time as the capacity of unemployed workers deteriorates. The buffer stock also shows a hysteresis effect in business cycle downturns, meaning that yet more workers finally become unemployable, or give up seeking work, effectively dropping out of the buffer stock at "the bottom". Therefore, ever larger numbers of fresh unemployed or underemployed are required to maintain the inflation fighting effect of the buffer stock.

With a buffer stock of employed, the general threat of unemployment is replaced with the safety net of a guaranteed job, which may result in less incentive for workers to moderate wage demands. However, just as workers have the alternative of JG jobs, so do employers have the opportunity of hiring from the JG buffer stock. If the JG pool is properly maintained, the workers in a buffer stock of employed will be more productive than the unemployed. The superior quality of the buffer stock is a benefit to business. JG workers would constitute a more credible competition to the current private sector employees.

Thus, if the wage demands of workers in the private sector exceed by too great a margin the employer's calculations of their productivity, the alternative is to obtain JG jobs workers at a mark-up over the JG wage. When wage pressures mount, an employer would be more likely to exercise resistance if she could hire from the fixed-price JG stock. Social policy and training could be geared toward enhancing human capital of the JG buffer stock, strengthening workers' skills and productivity, to improve the inflation fighting effect further.

Job Guarantee versus General Demand Stimulus

An important question concerns the impact this program would have on aggregate demand. Is full employment going to increase aggregate demand sufficiently to cause accelerating demand-pull inflation[5]?

JG is fundamentally different from the blunt job creation tool of traditional Keynesian general demand stimulus (sometimes called "pump priming"). There, labor from all levels of the productivity spectrum is hired (sometimes the most technically proficient ones), taking away these workers from private sector activity. The government competes for these workers in the market with the result of bidding up wages, a process that can drag up the entire wage structure. The hope is that some of the added demand will "trickle down" (via spending multipliers) to ultimately create new jobs for unemployed.

It is true that as long as there is considerable slack in the economy, firms tend to meet increasing demand by increasing output rather than prices, for various reasons[7]. This results in decreased unemployment without much inflation.

But to induce firms to hire the least skilled or otherwise least desirable workers would require very high levels of aggregate demand[1]:134. As aggregate demand increases, some sectors will reach bottlenecks before others, so that they can not increase output further. From that point they will instead meet increasing demand by raising prices. Inflationary pressure therefore arises long before full employment has been reached. In summary, general aggregate demand stimulus can not achieve full employment with acceptable levels of inflation.

This is not to say that aggregate demand stimulus is never appropriate. For the many grossly over-taxed economies of today it certainly is. But that is a different policy option, independent of the issue of Job Guarantee.

With JG in place (after initial prices disturbances have stabilized), aggregate demand is kept at just the right level. There is no indirect general demand stimulus to "trickle down" via spending multipliers. The economy is instead stimulated at the "bottom" by employing the unemployed directly. They are hired at a constant price so that market wages are not chased further and further upwards.

This is all a result of automatic policy. At the point of full employment, JG raises aggregate demand no further. If private demand were to rise, JG employment – and government deficit spending – automatically falls.

Real Costs of the Program

The JG program should not compete with private sector output, as it should be designed to meet unfilled needs, providing public goods and services that the private sector does not supply.[6]

Also, the government would not be competing with private sector input either, as it would be offering to purchase a resource for which there is currently no market price – a zero bid input[3]. It expands its spending not by competing with other resource users but by utilizing an unemployed resource. The "financial cost" of doing this is zero for a modern money regime (as it is not financially constrained).

However, workers' spending power will increase as they get employment, which lets them claim more real resources than when unemployed. Also, a JG program requires capital and materials, and some supervision and other office- and management support. This constitutes the real costs of the program.

Therefore, at the point when a JG program is introduced, aggregate demand for real resources will probably increase to a new level (although some of the increase in aggregate demand would lead to more workers being hired by the private sector, reducing the number of workers supported by the government). This could result in a once-off increase in prices for certain goods and services. The government could optionally offset the once-off aggregate demand increase by raising taxes or cutting non-JG spending.

Stability Effects

Spending by the JG program would be targeted directly to households. It is a genuine bottom-up approach to economic recovery that does not chase wages upward – it never competes with higher and rising private sector wage offers. The program stabilizes the incomes and purchasing power of individuals at the bottom of the income distribution, so that demand bubbles up and stabilizes the rest of economic activity. Strong and stable demand means strong and stable profit expectations. By stabilizing employment and purchasing power the program stabilizes cash flows and earnings. Stable incomes through employment also mean stable repayments of debts and greater overall balance sheet stability.[6]

Still, the JG program will not completely eliminate the business cycle. When private expectations are low, net nominal saving increases. Private sector workers lose their jobs, of which many will be replaced by JG jobs. The government deficit increases. Since the JG jobs are lower paid than the private sector jobs, aggregate demand will be lower. The business cycle therefore persists, but with smaller amplitude.[1]:138

The program will also not completely stabilize the overall price level. On the contrary, all other prices but the JG wage, including asset prices, will be constantly changing as the market allocates via price. They result from the forces of supply and demand settling on nominal prices that reflect a value relative to the JG wage.[8]

Labor as Currency Peg

The buffer stock of employed is maintained much in the same way as a buffer stock of gold under a gold standard. The value of a currency is determined by what the government demands the private sector must do or sell to obtain it. The currency can therefore be said to be defined by – or pegged to – the value of the labor that the private sector can purchase by offering a the JG wage or above.[8]

A gold standard implies that gold is always "fully employed", as the government always offers to buy "idle" gold (not desired by the private sector for using or hoarding) at the fixed price. In a JG program, it is labor that is fully employed. MMT suggests that this is preferable.[1]:136

The JG program would be considerably more difficult to implement if the currency of issue was already pegged to gold (or a foreign currency or something else or relatively fixed supply). During a crisis, the government could not hire all unemployed and let deficit float anymore. If it did there would be a risk of a "run" on the currency (meaning that currency holders would lose faith in that the value of the currency would be maintained, and thus rush to convert its currency holdings into gold).[1]:138

Unemployment compensation is payment for not working. If everyone could simply stay home and collect a government check, and thereby obtain all currency necessary to pay all taxes due without stigmatization, the currency would have no value. Therefore unemployment compensation must be limited, temporary, and an insufficient source of revenue for the private sector to meet its tax obligations and desired net saving.[8]

If unemployment compensation were replaced with a JG program, all these disadvantages would disappear. The JG program requires the employee at a minimum to sell his time, and need therefore not be limited. The currency will maintain its value – the effort necessary to earn the JG wage – regardless of the quantity of JG spending[8].

Currency Fluctuations

Unlike a buffer stock of gold, the labor buffer stock is not homogeneous. Fluctuations of the quality of the labor that the JG wage purchases will by definition correspond to fluctuations of the value of the currency. For example, as the buffer stock of JG workers shrinks, the remaining workers would be increasingly unattractive to the private sector, and the currency accordingly gets redefined downward. As the JG buffer stock increases, the value of the work that the currency can buy increases.[8]

That results in a counter-cyclical effect. Layoffs in the private sector would result in additional JG workers of higher quality than the existing buffer stock. This would enhance the investment environment, as better workers could be hired for the same nominal wage. Also, any increase in the attractiveness of the JG buffer stock as a whole, such as a higher level of education, would both increase the purchasing power of the currency and increase the value of the currency in the foreign exchange markets. A well thought out JG plan would include a well-organized program to educate, upgrade skills, and make productive use of JG workers.[8]

The fluctuation of the value of the currency corresponding to the quality of the labor available for the JG wage does not necessarily represent an increase in price volatility of goods and services over the current system (which uses a buffer stock of unemployed to stabilize prices). Nor does it imply that the resulting deflationary effect (the value of the currency increases) due to an increase in the general level of education, is undesirable.[8]

Appropriate Size of the Buffer Stock

The question of the appropriate size of the buffer stock of workers would be somewhat analogous to the debate over the natural rate of unemployment, NAIRU (Non-Accelerating-Inflation Rate of Unemployment)[8]. The Job Guarantee economy thus has some new policy choices to make.

A large JG buffer stock has a better inflation fighting effect, but will lower overall productivity growth as resources are transferred out of the higher productivity, non-JG sector. It is possible that productivity growth in the non-JG sector itself will also fall as scale declines. Trade problems may also arise.[9]

The government can run deficits to reduce the size of the JG buffer stock. At some point, the remaining JG workers will have little value to the private sector. Continued shrinkage of the JG buffer stock will become increasingly difficult. The inflation fighting effect of the buffer stock will decrease with the competitiveness of the remaining workers. Attempting to reduce the size of the JG buffer stock further might result only in a devaluation of the currency, an economy-wide demand-pull inflation. If government overspends so that all workers in the buffer stock are hired by the private sector, then the market price of the JG labor has risen beyond the JG wage, and the currency has been redefined downward accordingly. It is the equivalent of the government losing its buffer stock of gold under a gold standard.[8]

In a situation where the buffer stock has become too small, the government could act to restore the JG buffer stock to a desired level by cutting spending or raising taxes. Such efforts would be designed to trigger a deflationary private sector slowdown that would result in a reduced demand for private sector workers above the JG wage, and workers finding their way back to the JG payroll. If this were deemed too disruptive, an option would be to instead adjust the JG wage upward. This would correspondingly redefine the currency downward. Prices would then stabilize around the new anchor.[8]


  1. 1.0 1.1 1.2 1.3 1.4 1.5 1.6 Wray, L. Randall (1998). Understanding Modern Money. Edward Elgar Publishing Limited. ISBN 978 1 84542 941 6. 
  2. 2.0 2.1 Bill Mitchell, The Daily Losses from Unemployment. http://bilbo.economicoutlook.net/blog/?p=7308
  3. 3.0 3.1 3.2 3.3 3.4 Bill Mitchell, blog post... (fixme!)
  4. [|Mosler, Warren] (2010). 7 Deadly Innocent Frauds. http://moslereconomics.com/2009/12/10/7-deadly-innocent-frauds/. Retrieved 24 May 2011. 
  5. 5.0 5.1 5.2 Wray, L. Randall (2000). The Employer of Last Resort Approach to Full Employment. http://www.cfeps.org/pubs/wp/wp9.html. Retrieved 29 May 2011. 
  6. 6.0 6.1 6.2 6.3 6.4 Tcherneva, Lessons from the Great Depression
  7. Blinder, Alan S.; Canetti, Elie; Lebow, David (1998). Asking about Prices: A New Approach to Understanding Price Stickiness. Russell Sage Foundation Publications. ISBN 978-0871541215. 
  8. 8.0 8.1 8.2 8.3 8.4 8.5 8.6 8.7 8.8 8.9 Warren Mosler; Full Employment AND Price Stability ; http://moslereconomics.com/mandatory-readings/full-employment-and-price-stability/
  9. Mitchell, William F. (1998). The Job Guarantee Model and the NAIRU. CofFEE, Centre of Full Employment and Equity. http://e1.newcastle.edu.au/coffee/pubs/wp/1998/98-01.pdf. Retrieved 29 May 2011. 
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