Asia Times: On offer: A full employment program for


	March 30, 2002	atimes.com

China

On offer: A full employment program for
By Henry C K Liu and L Randall Wray

Hong Kong's jobless rate in February hit a historic high of 6.8 percent with a further 9,200 people joining the ranks of the jobless, bringing the total to 228,000 out of a workforce of 3,456,000. It surpassed the highest jobless level since November 1998, when unemployment reached 6.4 percent. Unemployment is expected to climb unabated at least through the end of 2003, both from global trade sluggishness and from local economic restructuring. Goldman Sachs predicts an unemployment rate of 9 percent within three years as Hong Kong restructures toward a knowledge-based economy.

Reports of massive layoffs are appearing weekly. Pacific Century CyberWorks (PCCW), Hong Kong's equivalent of AT&T and AOL, laid off 858 workers on Monday. PCCW says it will save HK$260 million (US$33.3 million) a year as a result despite a one-time charge of HK$110 million to cover the costs of the layoffs. Another 1,400 employees are expected to be let go by the company within weeks. Since the HK$218.4 billion merger between PCCW and Cable and Wireless HKT in August 2000, the company had already laid off more than 1,400, or 10 percent of its workforce. The staff union has threatened industrial action in protest.

In his 2001 Policy Address, Chief Executive Tung Chee-hwa pledged to create more than 30,000 job opportunities in the public sector. He said: "Unemployment is the foremost concern of our community. The creation of job opportunities should rest mainly with the private sector so the government is making great efforts to improve the Hong Kong business environment. In the meantime, the government understands the employment problems facing our people. With due regard for our long-term development needs, the government will seek to create more short-term jobs. After much deliberation within government, we are able to create over 30,000 job opportunities."

Among the 30,000 job opportunities, only 7,900 will have been created during 2001-02. These include jobs for works-related personnel, public housing estate management and maintenance personnel, cleaners, community workers and teachers. The rest of the 30,000 new jobs are expected to be created over the remainder of the five-year period.

To the government's credit, education funding has surged from HK$37.9 billion in 1997 to HK$55.3 billion in 2002, a 46 percent increase. The government intends to increase the number of post-secondary places, so that 60 percent of senior secondary graduates can attain post-secondary education. Tung acknowledges that Hong Kong lags behind developed countries in terms of average educational level. At present, only 18 percent of the population aged 15 and above has at least post-secondary education, while 48 percent have an education level of Secondary Three or below. To catch the train of the New Economy, Tung said Hong Kong must hurry to increase the number of places above junior secondary level to double the number of senior-secondary graduates receiving tertiary education from 30 percent to 60 percent within 10 years. In other words, Hong Kong needs to increase the number of tertiary education places by about 30,000 within the next decade. At the present time, because of overcrowding, only 48 percent of primary students attended whole-day schools. The government's target is to extend this to almost all primary students by 2008.

This year, job openings for college graduates have dropped 73 percent to 303 jobs - merely 2 percent of the 1,400 graduating. The starting salary is expected to be HK$8,000 per month in an economy where the monthly rent of a studio apartment can be more than HK$16,000.

For long-term development, the government, together with the two quasi-public railway corporations, will invest a total sum of HK$600 billion in infrastructure in the next decade and beyond.

While certainly beneficial, these latest government efforts are not likely to resolve Hong Kong's unemployment problem in the face of challenging global forecasts. Further, government efforts to restructure the economy will put sustained stress on unemployment as the private sector restructures its labor needs. Not only do unemployed individuals incur high social and economic costs, unemployment represents a waste of resources that could be put to use constructively in the economy.

We have an alternative proposal that will help the Hong Kong economy eliminate this waste by adopting a comprehensive full-employment program while at the same time preserving the government's commitment to the principles of a free-market economy. The basic idea is for the government to offer a job at a basic fixed wage to anyone ready and willing to work. When private demand is slack, workers shed by the private sector flow into the government's employment program. When private demand is robust, private employers hire workers away from the government's employment pool. Government's total spending on wages of workers in this pool would fluctuate counter-cyclically, adding a powerful feature to help stabilize the economy with a stable consumer demand base. Private employers would find it more efficient to hire workers from this pool than to recruit from among the ranks of the unemployed, who may be scarred by socio-economic pathologies associated with long-term unemployment. In addition, because the wage rate would be fixed in the government employment pool, it would contribute to a stabilization of private-sector wages - moderating inflation in boom times and deflation in recession.

The PSE program

Full employment with price and currency stability can be achieved with a Public Service Employment (PSE) program in which the Hong Kong government funds a job offer for any legal resident who is ready, willing and able to work, regardless of education, work experience, or the performance of the economy. At a minimum, the Hong Kong government must provide the wages and benefits for the program, although this does not actually mean that PSE must be a government-run program.

PSE should hire off the bottom of the labor market. It works as an employment safety net. It should not compete with private-sector employment or even with non-PSE employment in the public sector. It is not a program that operates solely by "priming the pump", that is, by raising aggregate demand, though it may have some pump-priming benefits. Trying to achieve full employment simply by "priming the pump" could generate inflation if it hires off the top of the labor pool. But by definition, as PSE hires off the bottom, it is a buffer-stock policy that must stabilize the price of the buffer-stock - in this case, wages at the bottom. Therefore, it will not generate wage-push inflation even in boom times. In slumps, the fixed wage will help to moderate deflation and demand contraction.

The goal is full employment, but with all the advantages of flexible labor markets. This is virtually guaranteed if PSE hires off the bottom. With PSE, labor markets are flexible because there is always a pool of labor available to be hired out of PSE and into private firms. Without PSE, flexible labor markets can only be maintained by keeping people out of work as a reserve pool of labor.

The PSE compensation package should provide a decent standard of living even as it helps to maintain wage and price stability. For Hong Kong, an appropriate annual wage can be readily determined. It would become the effective minimum wage for the economy. A package of benefits could include health care and other benefits appropriate to local conditions.

PSE experience should prepare workers for post-PSE work - whether in the private or public sector. Thus, PSE workers should learn marketable skills, develop work ethics and job discipline. Training and retraining will be an important component of every PSE job, in support of the government policy objective of restructuring the Hong Kong economy in order to move up the value-added ladder.

Finally, PSE workers should do work that is economically productive, focusing on provision of public services, public construction, health and social services, crime prevention and education. PSE workers should do useful work, but they should not duplicate work already being done by ongoing programs, and especially should not compete with the private sector.

These features generally determine what a PSE program ought to look like. This still leaves a lot of issues to be examined to fit specific Hong Kong conditions. Who should administer the program? Who should do the hiring and supervision of workers? Who should decide exactly what workers will do? There are different models consistent with this general framework, and different communities might take different approaches. The only essential feature is that funding must come from the government, that is, from the issuer of the currency with tax authority. A PSE program can work even under Hong Kong's linked exchange-rate mechanism, although it will work even better with a floating currency.

People may wonder about the cost. Can society afford full employment? To answer this, it is necessary to distinguish between real economic costs and financial expenditures. Unemployment has real costs - the economic output that is lost when some of the labor force is involuntarily unemployed, the burdens placed on employed workers, part of whose output is consumed by the unemployed, the personal suffering and social ills generated by unemployment and resultant poverty. And unemployment reduces aggregate demand at a time when demand is already weak, creating a downward spiral. Providing jobs for the unemployed will reduce real costs and generate net real benefits for society in excess of the cost of maintaining full employment. Indeed, it is more rational to argue that society cannot afford any unemployment, rather than to suppose that it cannot afford full employment. With PSE in place, there is no economic reason to have unemployment, as it achieves the benefits of loose labor markets, but without all the costs of unemployment.

Some may be concerned with the financial cost of government-supported full employment, or, more specifically, with the impact on the government's budget. Currently, the Hong Kong government is running an annual budget deficit of HK$45.26 billion, with expenditures of HK$254.86 billion against revenue of HK$214.6 billion. If a PSE program were to employ 300,000 under the worst-case conditions, and if the wage were HK$6,000 per month, the annual cost would total around HK$21.6 billion. But full employment has a positive impact on government revenue by offsetting economic contraction and can reduce budgetary outlays on unemployment, welfare and crime prevention programs. As the economy revives, employment in PSE would decline, and so would government spending, while government revenue would increase. Hence, longer-run net budgetary impacts may even be positive.

Economists often fear that providing jobs to people who want to work will cause inflation. Thus, it is necessary to explain in more detail how a PSE program will actually contribute to wage stability and promote price stability. The key is that a PSE program is designed to operate like a buffer-stock program, in which the buffer-stock commodity is sold when there is upward pressure on its price, or bought when there are deflationary pressures. A PSE program treats labor as the buffer-stock commodity, and as is the case with any buffer-stock commodity, the program's buffer-stock feature will stabilize the commodity's price. The government's spending on the program is based on a "fixed price/floating quantity" model, hence, cannot contribute to inflation.

Note that the government's spending on the full employment program will fluctuate counter-cyclically. When the private sector reduces spending, it lays off workers who then flow into the buffer-stock pool, working in the full employment program. This automatically increases total government spending, but not wages and prices because the wage paid is fixed. As the quantity of workers hired at the fixed wage rises, this results in a budget deficit. On the other hand, when the private sector expands, it pulls workers out of the buffer-stock pool, shrinking government spending and budget deficits, and may even produce a surplus. This is a powerful automatic stabilizer that operates to ensure the government's spending is at just the right level to maintain full employment without generating inflation.

The implementation of a PSE program in Hong Kong will require political courage to challenge the fallacies of neo-liberal market fundamentalism. Political courage is of course the hallmark of leadership.

Henry C K Liu is chairman of New York-based Liu Investment Group.

L Randall Wray is a professor at the Center for Full Employment and Price Stability, University of Missouri, Kansas City.

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