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Creative destruction of 'government as employer of last resort'.

Musgrave, Ralph S. (2009): Creative destruction of 'government as employer of last resort'.

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Abstract

The claim that the unemployed should be allocated to ‘government as employer of last resort’ schemes (like the WPA in the US in the 1930s) has major flaws. One flaw is the assumption that public sector work of this sort is less inflationary than private sector employment. A second flaw is the idea that WPA type schemes should be separate from existing employers. Once these two flaws are removed, WPA turns into a temporary employment subsidy that creates jobs with existing employers public and private.

A second argument leads to the same ‘temporary employment subsidy’ conclusion: as unemployment falls, the marginal product of labour falls, till NAIRU is reached. The above subsidy compensates for this fall, and thus reduces NAIRU.

Yet a third argument leads to the same conclusion: this temporary subsidy imitates a perfect labour market, a zero unemployment scenario. Thus this subsidy should facilitate a move towards zero unemployment.

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