Zero Unemployment and Stable Prices

By Wray, L. Randall | Journal of Economic Issues, June 1998 | Go to article overview

Zero Unemployment and Stable Prices


Wray, L. Randall, Journal of Economic Issues


The 1946 Employment Act committed the U.S. government to high employment and stable prices, while the 1978 Humphrey-Hawkins Act strengthened the government's commitment by setting a goal of "full employment," defined as an adult unemployment rate of 3 percent. Paradoxically, neither accepted economic theory nor practical experience indicates that high or full employment is even possible with stable prices. As a result, for at least the past two or three decades, monetary policy generally has been geared toward raising the unemployment rate as a means to achieving stable prices; unemployment is perceived as the inevitable cost of price stability.

Recently, however, the U.S. economy seems to have approached both full employment and low and stable inflation. While Chairman Greenspan has been hinting for months that the low unemployment rates achieved during 1997 are not sustainable and that inflation must be around some corner, he has been prevented from tightening policy because there is little evidence that inflationary pressures exist and - perhaps more importantly - because of the recent financial instability in Asia. Although some "cracks" in the "new world economy" are beginning to show, many pundits have proclaimed that we are finally reaping the benefits of Reaganomics and Volcker-Greenspan monetary policy finesse. Thus, while NAIRU still lurks somewhere in the minds of analysts, it is believed that we have achieved the best of all possible worlds: "full employment" and more-or-less stable prices.

If this is the case, why does any sentient observer notice widespread insecurity, dissatisfaction, and even suffering in the United States? Has the population at large failed to notice the "new economy"? If things have never been better, why do fringe economists bemoan the current situation and even, heaven forbid, dare to compare our economy unfavorably with the early postwar economy? And why would any respectable economist suggest that we should turn to the Kennedy-Johnson years or, worse yet, to the New Deal for inspiration to guide economic reform?

Perhaps the U.S. population understands that low, measured unemployment rates cannot tell the whole story. Flows among the categories - officially unemployed, employed, and out-of-the-labor-force - are large: of those unemployed in November 1997, 45.6 percent were job losers, 11.2 percent were job leavers, and 43.2 percent came from out-of-the-labor-force [Bureau of Labor Statistics 1997]. Those who find jobs typically come from out-of-the-labor-force. Even if we agreed that the 6.2 million officially unemployed in November 1997 represented a small "cost" of price stability, there are another 67 million adults older than 16 years of age (or, 10 times the number of unemployed) who are out-of-the-labor-force. While it is impossible to calculate how many of these would work if jobs were made available, there are no doubt millions of potential workers. In addition, "welfare reform" is designed to force millions of "welfare morns" into the labor force. Current policy thus guarantees that millions, in addition to the officially unemployed, will be without work.

Here, I summarize an employment program that will guarantee true, full employment (or zero unemployment) for all; it is much like that advocated in the early 1980s by Hyman Minsky [1986] and more recently by Warren Mosler [1995], Philip Harvey [1989], and Wendell Gordon [1996]. I will show that true full employment is not "inflationary" and could even reduce inflationary pressures. Indeed, full employment can be sold as a means to stabilize prices, which is close to the position taken by Minsky and Mosler. Further, the full employment policy would help to reduce economic fluctuations (the "business cycle") through a powerful built-in automatic stabilizer.

Government as Employer of Last Resort

The first component of the proposal is relatively simple: the government acts as the employer of last resort (ELR), announcing the wage (say, $6. …

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