The Economics of a Job Guarantee: Wage and Employment Effects
Why, one might ask, is the idea of a federal job guarantee (JG) being revived now, when unemployment is at a 50-year low? This two-part series frames an answer in terms of three gaps that JG advocates see as persisting, even in today’s tight labor market:
- A hidden unemployment gap: A gap between the number of people now working and the number who would work if jobs were available at a living wage.
- A pay gap: A difference between what people are now paid and the maximum that their employers would be willing to pay if necessary.
- A public service gap: A large, unmet need for labor-intensive public services that would generate benefits equal to or greater than the cost of providing them.
Part 1 of this commentary addressed the hidden unemployment gap. In this part, we turn to the remaining gaps. We first examine why the pay gap is important to understanding how a job guarantee would affect wages and employment in the private sector. We then explain how the size of the public service gap is important for knowing whether new, guaranteed public-service jobs would actually add value to the economy.
The pay gap and labor migration
An essential part of the case for a job guarantee is a large gap, at the margin, between what workers are now being paid and the maximum that private sector employers would be willing to pay to keep them on the job. Without such a gap, private employers, if forced by external circumstances to increase wages, would reduce the number of workers they hire or the hours of work they offer. The result could be large-scale migration to guaranteed public-service employment (PSE).
In Part 1, we examined two leading JG proposals, one by Mark Paul, William Darity, Jr., and Darrick Hamilton (PDH), detailed in a report commissioned by the Center on Budget and Policy Priorities, and the other by L. Randall Wray, Flavia Dantas, Scott Fullwiler, Pavlina R. Tcherneva, and Stephanie A. Kelton of the Levy Economics Institute. Both propose wage and benefit packages of more than $20 hourly, well above current minimum standards in the private sector. A 2015 study by the National Employment Law Project estimated that about 42 percent of the U.S. labor force, more than 65 million workers, earned less than $15 per hour. That is several times more than the uptake of 11 million to 18 million workers envisioned by the PDH and Levy Institute proposals.
JG advocates do not dispute that a few low-wage workers might make the switch to public-service employment. The Levy Institute proposal estimates that 80,000 to 160,000 minimum-wage workers would make the switch. But that is less than 2.5 percent of the total estimated JG uptake, and less than 0.2 percent of private sector workers who now earn less than the proposed JG compensation. That kind of small-scale migration to public-service jobs is not alarming. As L. Randall Wray, one of the Levy Institute team, writes in a response to critics, “Firms with business models that require that their workers live in abject poverty should find a new business model — or be driven out of business.”
In defending the notion that most employers of low-wage workers would respond to JG mainly by raising wages rather than cutting payrolls, both the PDH and Levy Institute teams rely on studies of minimum-wage increases. Those studies have used data from changes in the federal minimum wage and also cross-border data from similar states and cities where the minimum wage differs. Although there are exceptions, the consensus of the literature seems to be that recent changes in minimum wages have caused little if any change in employment.
However, there are caveats in applying those studies to a broad federal job guarantee. One is that most recent changes in minimum wages have been relatively small. In a comprehensive review of the literature for the Center for Economic and Policy Research, John Schmitt notes that although “the minimum wage has little or no discernible effect on the employment prospects of low-wage workers,” the most likely reason is that “the cost shock of the minimum wage is small relative to most firms’ overall costs and only modest relative to the wages paid to low-wage workers.”
By comparison, the cost shock of a broad JG policy would be massive. The federal minimum wage currently stands at $7.25 per hour, with no requirement that benefits be paid. The version of JG outlined by the Levy Institute envisions a wage of $15 per hour and benefits equal to 20 percent of the wage. The version presented by PDH calls for a starting wage of $11.83 per hour and an average wage of $16.25, with benefits equal to 30 percent of the wage. Both would represent more than a doubling of the current federal minimum — a far greater increase than those considered in the empirical literature.
Effects of JG on state, local, and nonprofit employment
Another caveat is that the minimum wage literature is mainly concerned with effects on private-sector employment. However, a JG wage of $15 an hour plus benefits would also have a big impact on workers in state and local government and in the nonprofit sector. Together, these sectors employ almost 35 million workers, many of them in the same kinds of public-service jobs that a JG program would offer. The migration of even a small percentage of these workers to newly created guaranteed jobs could be quite disruptive.
As of 2019, state governments employed some 5.3 million people and local governments 14.7 million. According to another study from the CEPR by John Schmitt, when differences in age and education are taken into account, those jobs pay about 4 percent less than jobs in the private sector.
JG advocates recognize the potential conflict between existing government jobs and newly created, guaranteed public-service positions. PDH, for example, caution that “it is vital that the program is designed to avoid state and local governments utilizing the program to pay for existing state and local government jobs which would normally be financed through local tax revenues.”
In practice, though, it might not be easy to maintain a clean wall between the existing state and local workers and newly created guaranteed jobs. For example, it is hard to imagine that currently employed teachers’ aides or custodians would continue to work contentedly at $11 per hour, elbow-to-elbow with newly hired JG workers doing similar work for $15 an hour and more generous benefits.
What is more, unlike a fast-food restaurant or retail stores, state and local governments could not simply raise the wages of existing employees and then pass the increase along to customers. Instead of customers, the sources of government revenues are voters. Voters might not agree to having their taxes raised in order to allow states and localities to raise wages to match those of federally-funded guaranteed jobs.
A similar situation exists in the nonprofit sector. Nonprofits currently employ some 14 million workers, nearly as many as local government. Although some workers in this sector are well paid — for example, health care professionals at nonprofit hospitals and professors at private colleges — others are not. According to Nonprofit Quarterly, pay is especially low in the large social-assistance sector, which includes community, food, child and youth, elderly, and disabled services, and in arts and entertainment organizations. The reported average pay for such workers falls well short of that envisioned by the PDH and Levy Institute JG proposals. Yet JG advocates specifically single out this sector as a source of employment opportunities.
Like state and local governments, nonprofits would be unable simply to pass the cost of higher wages and benefits through to their customers. Instead, they would have to solicit additional donations, a task that might be no easier than for state and local governments to raise taxes.
The public service gap
We turn now to the third feature of the labor market model used by JG advocates — the public service gap. This gap posits a large, unfilled need for public services that could be filled at a cost per job at least equal the benefits produced.
To be sure, it is easy to believe that some potentially worthwhile public-service jobs now go unfilled. In the government sector, that might occur because median voters in state and local elections are insufficiently sensitive to the needs of their communities. For example, voters without young children, a majority in many communities, might be reluctant to approve spending on schools. In the nonprofit sector, it might be that wealthy donors like to contribute to prestigious causes like art museums and elite college endowments rather than to less glamorous but possibly more urgent needs like soup kitchens and hospice care.
The real question, though, is not whether some worthy public-service jobs go unfilled, but how many there are. Both the PDH and Levy Institute proposals envision that the new JG positions would be created by local governments and nonprofits. Those two sectors together currently employ in the neighborhood of 30 million workers. Could they really create half-again as many new positions with value-added equal or greater to their cost?
Remember, those jobs do not come cheap. The PDH proposal estimates the cost of each new PSE position to be about $56,000 per year, including wages, benefits, payroll taxes, capital, and supplies. The Levy Institute, which uses lower estimates for benefits and overhead, estimates the cost per job at $45,800. As noted before, these estimates do not include costs of administrative support or case work with hard-to-employ job candidates.
Neither proposal offers an explicit estimate of the value added by new PSE jobs. However, we can get an idea of what to expect if we look at some of the projects that the Levy Institute gives as illustrations:
The city mobilizes men and women with varied skill levels for a cleanup of vacant lots and abandoned public spaces, rehabilitation of infrastructure, and reclamation of materials. People with disabilities who may have difficulty with physical work but have basic computer skills create a database, documenting the cleanup efforts, cataloguing the reclaimed materials, and offering office-based logistical support. At-risk youth help with park cleanup and apprentice with skilled workers in building, painting, and landscaping skate parks and basketball courts.
A former coal-mining community experiences city blight, mass unemployment, and a high incidence of health problems. The PSE program organizes a comprehensive project for restoring the natural habitat based on existing best practices. Workers are employed to plant appropriate tree species that restore the ecosystem, stem soil erosion, and reintroduce important lost wildlife to the region. The municipalities organize food insecurity, water quality, and malnutrition surveys. They launch a comprehensive community garden program.
It is easy to imagine that some of the jobs described in these examples would produce benefits in excess of their $40,000 to $50,000 annual costs, while others would not. Until JG advocates provide more convincing support for the idea that the backlog of cost-effective but unfilled public jobs is commensurate with the number of jobs their programs aim to create, the verdict regarding the public service gap must be, “not proved.”
Our three-gap model of the labor market shows how a job guarantee would work if everything went as hoped: The guarantee would attract millions of long-term unemployed, together with others who have dropped out of the labor market but still want to work. The wage for guaranteed public service employment would be high enough to lift participants out of poverty. Private sector employers would raise the pay of their own employees to match. Services rendered by JG workers would improve the lives of the vulnerable, strengthen communities, and safeguard the environment. The program would pay for itself through an expanding economy and decreased welfare spending.
However, if things were to go wrong — if the gaps were not as large as advocates think — the results might fall well short of expectations.
First, as discussed in Part 1, although no one disputes that many people remain on the fringes of the labor force even when official unemployment is low, not all of them fit the target profile for guaranteed jobs. While a job guarantee would raise some people from poverty to self-sufficiency, it would also attract other applicants who are not financially stressed and still others with characteristics that make them hard to employ. Too many of the former would reduce the benefits of the program as an antipoverty measure; too many of the latter would lower retention rates and raise administrative costs.
Second, the success of a JG program would depend heavily on the assumption that employers would increase the pay of their current low-wage workers without greatly reducing their payrolls. JG advocates justify that assumption by reference to the literature on the effects of past minimum-wage increases. However, a full-scale JG program would represent a greater raise for low-wage workers than most recent changes in minimum wages. That could lead not only to more layoffs by private employers, but also to adjustment problems for local governments and nonprofits. Larger-than-expected migration from existing low-wage jobs to guaranteed employment would increase the costs and reduce the benefits of a JG program.
Third, the entire rationale of guaranteed jobs rests on the assumption that there is a large, unfilled need for public services that could be produced by low-skilled workers at a cost per job that would at least equal the benefits produced. JG advocates have not adequately demonstrated that such a backlog exists on the required scale. Large numbers of hard-to-employ applicants; inadequate budgets for administrative support, training, and case work; and restricted allowances for capital and supplies would make it all the more challenging to create 10 to 15 million new, cost-effective, public-service jobs. If pressures to meet employment targets were to lead to the creation of unproductive, make-work positions, the entire rationale for a job guarantee would collapse.
In short, although a strong case can be made for improvements in America’s social safety net, there are many reasons to question how large a role guaranteed jobs should play. Even the most detailed plans, like those from PDH and the Levy Institute, raise more questions than they answer. Perhaps some of those questions might be addressed through small-scale demonstration projects. Meanwhile, it would seem wiser to focus limited resources on more conventional policies like tax credits, training, employment subsidies, and reductions in the work disincentives inherent in traditional in-kind welfare.
See this slideshow for a graphical version of the three-gap model.