The Martikainen Employment Model

Transcription

1 The Martikainen Employment Model Full employment in Finland Full employment is possible if, unlike at present, employers can also employ people at significantly lower labour costs. If this were so, the employers would be willing to hire a full labour force. Each worker would be paid a reasonable salary by means of a wage subsidy paid by the government to employers who are willing to hire a person on a low wage. So there are two sources that contribute to the salaries in the Martikainen Employment Model: employer and the government. Wage subsidy is distributed accurately to persons on a lower wage. Toward the middle wages subsidy gradually decreases and, beyond a certain wage level, stops, which will control subsidy costs. More income for the government and the communities The Martikainen Model is self-funded, i.e., it pays for itself. As unemployment is reduced, those billions of euros that are currently spent on supporting the unemployed will be saved. Also, as the unemployed become employed, their salaries contribute to income and consumption taxes. So the government and the communities will earn 1.3 billion a year when the Model is implemented. The public sector, including parishes and retirement funds, would gain 5.1 billion a year. This is depicted in the graph below. Those who are currently unemployed would benefit most from the Model, as their true purchasing power would increase by 3 billion. For employees on a lower salary, the increase would be 1.4 billion, and for the entrepreneurs, 0.1 billion. The total profit of the Model would therefore be 9.5 billion a year, an increase in gross domestic income when the unemployed become employed.

2 The benefits Unemployment is eliminated under the Model. Distribution of income is equalised when the unemployed become employed and when the lowest salaries are increased. Crime decreases since it correlates with unemployment. Regional development is balanced. (Unemployment has been an issue especially in eastern and northern Finland). Public economy benefits. The Model has no relevant disadvantages, at least none has been found. It is simply a better alternative than the present model with its high unemployment rate. Low-wage subsidy would benefit both the employers and the employees The Martikainen Model According to the Martikainen Model, the government starts to pay wage subsidy to the low-paid. The subsidy reduces the cost for an employer to hire an employee, but the wage for the employee remains reasonable. Employing an unemployed person becomes profitable, contrary to the present situation. Also, more generally speaking, employment becomes a more profitable option since the subsidy helps to increase the low wages. Since unemployment is an issue mainly amongst the lowest income groups, the subsidy is needed only here. Distributing the subsidy accurately to an affected group would employ efficiently, while the costs would remain low. The public economy would benefit from the Model because increased employment decreases unemployment benefit costs, and there would be a greater tax income from those who were previously unemployed. There would be more money saved and tax income increased than there would be subsidy costs, so the Model would fund itself. All parties would be are satisfied: the unemployed would become employed, employers would have more labour, and the public economy would be boosted as the unemployment rate degreases. How powerful would the subsidy need be to allow full employment? If the subsidy is adjusted so that the lowest cost of labour to the employer is only 2 per working hour, it is reasonable to assume everyone could be employed. I have been informed by the Ministry of Labour that, at such a low cost, an unemployed person could always become employed. The table and chart below illustrate how the cost of labour to the employer and the salary for an employee are related in the Martikainen Model (MM). It is shown that the subsidy is highest for the lowest wages, toward the middle wages it degreases accordingly, and the well-paid do not receive any subsidy. For example, if the wage is 14.28/h, total labour costs together with social security fees are 17.71, of which the employer contribution is 10, and the Martikainen wage subsidy covers 7.71.

3 Cost of labour for different wage classes in the Martikainen Model Total wage (including vacation salaries and other bonuses) /h Labour costs including social security cost /h Wage subsidy /h Cost of labour to the employer under the MM /h Reduction of the cost of labour to the employer Monthly salary (for 34.5 hr/wk and 11 mo/yr, that is 1650 hr/yr, working hours) /mo = % = % = % = % = % = % = % = % 3327 According to the Martikainen Model, subsidy is distributed to all workers on a lower wage. There is no discrimination between who has been recently employed and who is already established in his job. This ensures that there are no unequal positions in competition. The fact that subsidy is given also to the current employees will bring some additional costs. The subsidy costs will not increase too much, however, as there would be only a few employees from the lowest income classes where the subsidy is highest. On the other hand, for those income classes toward the middle wage, which covers a great number of employees, the subsidy is small.

4 Income traps are avoided The subsidy is highest for the lowest paid workers, and it is gradually reduced toward the higher salaries. The subsidy is not reduced too quickly, which eliminates the possibility of so-called income traps. The Model agrees with an important notion in labour market such that the more the employer pays, the higher the salary for an employee will be. In the Martikainen Model, it is in the employee s interest that the employer should pay a good salary with the minimum of wage subsidy, simply because the salary will be greater. This allows the supply and demand mechanisms of the labour market to function normally, and there is no impairment to competition. It is favourable to employees to tender employers, and to be employed in companies where they are paid 22/h, for example, and not where the wage is only 2/h. In the former company, the wage is about 19/h, while in the latter company only 11/h there is a clear difference. It is worthwhile for the workers to keep an eye on the labour market and to change jobs if another company pays more, as is the case even now. Companies that pay too little will be short of labour, or at least skilled labour. A single company, even a big one, cannot pay too little for labour under the Martikainen Model, otherwise its employees will move to other companies, avoiding this company in the future. In the same way, it is not worthwhile for employers to pay more than the actual value of labour either, i.e., it is not worthwhile to employ people uneconomically. Thus, the cost of labour to the employer tends to match its real value on the labour market. The Martikainen Model does not allow the cost of labour to be set too low because competition for labour keeps the cost equal its real value. However, the labour market would have a wider spectrum when cheaper labour could also be bought and sold, which is not currently possible. Not capitalising on this resource has been a significant loss to society and the economy: a notable resource has been left unutilised. The present model In the chart below, which illustrates the present labour market, it is shown that cheap labour cannot be bought and sold. This is because the cost of labour to the employer must be notably high, otherwise the wage would become too small. As if the present model (with related transfer payments) were drawn on a straight line using the origin as a benchmark, without discussing whether the labour market will ever function properly this way or not.

5 The Model does not affect income taxation Under the Martikainen Model, no other transfer payments need to be changed. For example, income taxation for the wage-earner remains the same. According to the Model, a person on low income would pay his/her income tax as usual, in spite of wage subsidy, and the employer would contribute social security fees as normal. In this way, the Model is very simple to apply when the wage subsidy is the only change. It should be noted that, in dealing with unemployment, this method has nothing to do with negative income tax or a civil salary, which are models where people are paid for doing nothing, and where the cost of labour to the employer is untouched. Those models do not increase employment opportunities at all! The civil salary model and the Martikainen Model have totally different implementation mechanisms. The civil salary model is a mere modification of social security, whereas in the Martikainen Model the pricing mechanism for labour is reformed. The minimum cost that the employer must pay for labour, that is, a threshold of employment, consists of the minimum wage of the collective labour agreement for a given field and the other relevant expenses. These costs and expenses are unchanged within the civil salary model. However, with the Martikainen Model, the threshold of employment is lowered to match the amount of wage subsidy given, which will improve the possibilities for employment. The profitable succeed, the least profitable get into working life The Martikainen Model is based on the principle that those people who have the highest salaries are the first to find work. There has always been competition for skilled workers, despite their high salary demands and taxes. Many ask for a wage of 6,000 a month and get it, and still employers consider it worthwhile. The Martikainen Model is not concerned with their section of the labour market, nor need it be.

6 On the other hand, for part of the workforce, the only change is that the cost of labour to the employer is relatively low. How can it be that the current situation of the labour market is such that the employer must pay much in all cases?! And at the same time, the supply of labour is quite heterogeneous, i.e., it consists of a wide variety of people: not everyone can possibly have a place in working life. It is therefore no wonder that there is unemployment in the current system; rather, it is its natural consequence. Unemployment is an issue especially for people with low productivity because it is not economical to employ a person with a low, or even relatively low, productivity. If, for example, a person s output is worth only 5/h, it is impossible to be employed (within the normal labour market) in the present system, but facing long-term unemployment is evident because the cost of labour to the employer would be many times the person s productivity. For such a person, finding a job is highly unlikely, a waste of time, that one cannot stand very long. Besides, if such a person were to find a job, it would pay, at most, the minimum wage, which may also discourage the search for employment. Now, if we were to make it possible to hire labour more cheaply, the labour market would start to work. Aided by wage subsidy, workers would always get at least a decent salary. According to the Model, the minimum total wage is set at 11.1/h (here the total wage includes vacation bonuses and vacation salaries. Excluding these, the minimum nominal wage is about 9/h). However, the lowest wages would be very uncommon because the output for these only needed to be worth 2/h; all who have a higher productivity would move to positions where they are paid better and nearly anyone s output of work is worth much more than 2/h. People with lower income, especially the unemployed, benefit Wage subsidy would increase the salaries of the currently low-paid workers, as it is not granted exclusively to the unemployed who become employed. The lowest salaries would increase by up to 50% or even more. For instance, if the total wage has been 9.75/h (where the cost of labour to the employer is 12/h), wage subsidy will increase it by 6.33/h, giving a total of 15.08/h. The Model would improve the position of the unemployed, all of whom would find employment and status as wage-earners. However, current employees need not fear being passed over by the unemployed in working life. This is because it is illegal to displace labour; besides, current employees are competent in their duties so that those who are currently unemployed could not technically take their places. Is full employment a real possibility? Will there not always be an unemployment rate of at least 2 3 per cent? Under the Model, employing a person would be a very attractive prospect making unemployment less common as plenty of companies offer employment opportunities to an available workforce. Now, if a person went to an employment office to register as an unemployed applicant for work, instead of unemployment benefit, he would be given a list of open positions to be filled immediately. Unemployment would be impossible under the Model. Income for the unemployed would be doubled on average with respect to the present rate. The majority of unemployed people would enter at wage levels of /h (total wage), i.e., /month. Many unemployed people would receive even higher salaries. It is true that by working hard and performing well one can succeed and be confident of having a job, even with a high salary request. Extremely few people have a work output worth no more than 2/h. Consequently, only a few of those who are currently unemployed would receive the lowest total hourly wage of 11.10

7 ( 1523/mo) under the Model. Even such a small salary would be worth nearly three times the current labour market support. (These individuals would not receive salary-dependent unemployment benefit since, most likely, they have been unemployed for years. Who would have hired them? The employer would have had to pay many times the value of their work). Competition between employers is unaffected The possibility of hiring labour at a low cost does not distort competition between employers in any way. Under the Model, everyone is free to hire expensive or inexpensive labour. Since the Model applies to each employer and employee equally, including current workers, no one can argue that someone else has been given preference while one can make use of the same opportunity himself. Each company is free to choose its own strategy: to offer good salaries to attract talented applicants; or to offer lower salaries and consequently have a considerably weaker labour output in return or to be left with no employees. Either way has its advantages and disadvantages, yet no one can argue that the competition is distorted while each company is free to choose and change its own strategy freely. Workers are keen on having positions in companies where they are paid best. Therefore companies must compete in their salary offers. This has a tendency to bring salaries to a level where the cost of labour to the employer is equal to the value of the work, that is, the productivity of the work. To employ is now normally profitable. Generally speaking, being an entrepreneur or an employer does not provide a better living or an easier way of accumulating wealth compared than other positions. If it did, everybody would be urged to employ themselves or expand their businesses. This would lead to greater demand for labour, which in turn would increase salaries, and an equilibrium would be reached eventually. The fact that competition would not be distorted in the Model is the most important difference compared to traditional wage subsidy models. In existing wage subsidy models, supported workers are not freely available for all companies, and subsidy is not directly proportional to the salary. Thus subsidy has brought an undeserved competitive advantage in some cases. Since competition between employers is not distorted under the Martikainen Model in any way, the Model can be put into practice as fully as is necessary without ramifications, up to full employment. The Model is cost efficient The Martikainen Model employs efficiently with the minimum amount of support costs. Several solutions have been applied to make the Model a very cost-efficient way of dealing with unemployment. First, subsidy is distributed accurately to those with the lowest salaries, yet income traps are avoided. If subsidy was granted loosely to people earning average or even good incomes, subsidy costs would explode because of the great number of employees being supported regardless of whether or not they need support. Second, the effectiveness is enhanced by a selected method of taxation, the wage subsidy. The wage subsidy lowers the threshold to employ workers and at the same time increases the salaries of the lowest paid. Lowering income tax, for example, is essentially a more inefficient method since it only increases the net income for the workers but does not lower the threshold for employers; possibilities to employ do not improve because the cost structure of employment is separate from income tax for an employee.

8 Third, with the Model at its strongest, subsidy is distributed based on different regional needs. For each region, subsidy is set at a level according to which everyone could be employed, with various open positions to choose from. This means a significant saving when subsidy in different parts of the country is not set at the level of troubled regions. Fourth, in the Martikainen Model subsidy is increased for the long-term unemployed for a year or two. They are a problem group in the labour market. Greater subsidy for the long-term unemployed would improve their employment possibilities without the need to give enhanced subsidy to all those receiving subsidy. According to the Model at its strongest, increased subsidy is also given to the disabled. Fifth, in the Martikainen Model subsidy is granted exclusively to working people, which reduces the support costs. Subsidy is not given to students or pensioners since they are neither unemployed nor under the threat of unemployment. Sixth, subsidy is based on an hourly wage and hours worked; that is, the subsidy is given to people with a low hourly wage. The subsidy is given per hour of work. If, for example, one works only half of the normal working hours, only half of the subsidy is given. This is fair and encourages full-time employment. If wage subsidy was based on a monthly salary, it would favour part-time employment; a part-time worker has a lower monthly salary because of the shorter working hours, even if the hourly salary is greater. Consequently, wage subsidy would be given to those who do not even need it. If subsidy based on a monthly salary was given to full-time employees only, this would restrict workers because not everybody can or wants to work full time. Nonetheless, it is a good idea to keep them employed. Ultimately, a model based on an hourly wage is the best. Seventh, implementation of the Model would help to establish moderate wage settlements as subsidy is granted only for those sectors that do not make large pay rises. For most sectors, the subsidy would be a much more significant source of income than a large pay rise, so the most reasonable alternative is to keep pay rises moderate and accept the subsidy. This, however, would not help the best-paid sectors, such as the paper industry, to stay at a reasonable wage level since they are not eligible for low-wage subsidy due to their high salaries. It is, therefore, a good idea to make social security fees sector-dependent. For those sectors with large pay rises, social security fees would be raised accordingly, even to the point where employees would lose. These actions would establish the setting of reasonable salaries generally. (Regarding the conditions of the labour market, salaries are free to slide up as much as they will, but not through forced agreements made by trade unions, except for moderate pay rises). Reduction of income tax each year, that has been needed to establish moderate pay rise agreements, is costly and would be spared. The Model is economical The deployment of the labour reserve increases the general production and distributable income within the national economy. If the labour input of the unemployed is of the value as presented in the next diagram, then its potential value is 9.5 billion, the amount by which gross domestic income would increase when the unemployed are being employed. (The chart presents the situation in 2002, updated with the current values). This money would become available to society, corresponding to an average annual income increase of 1774 per capita.

9 The profitability of the Model is not self-evident within the economies of the government and the communities. One must specify how much subsidy would cost, how much would be saved in unemployment benefit costs, and what the tax income would be from those who are currently unemployed when they become employed. The chart below presents the Martikainen Model and all employment-related taxes. It is shown that in almost every salary class there is a greater tax income for society than there are expenses the Finnish tax wedge is large. It is reasonable to assume that most unemployed people would be placed into very reasonable salary classes, where more taxes are paid than subsidy is received. We should also take into account the savings in unemployment benefits (not represented in the chart), confirming that the Model is profitable for the public economy.

10 The economical effects to the national economy, on the condition that no other transfer payment mechanism is changed, are shown in the next diagram (year 2011). According to my calculations, the government and the communities would profit by 1.3 billion a year. The public sector, including retirement funds, parishes, etc., would gain 5.1 billion a year. This is the advantage the public economy would benefit from if the unemployed were employed. If transfer payments were not changed, except the implementation of the Model, the only loser would be the national economy by 460 million. But at the same time, the communities would gain 1.8 billion, mostly in the form of increased tax income. The economies of both the government and the communities are interlinked and cross over quite arbitrarily in our society, however. Let us mention the government share system and the fact that the government decides each year the amount of basic and income reductions for municipal taxation. It is therefore best to consider the economies of the government and the communities together, which, according to my calculations, profit by 1.3 billion as a whole. If we wanted the profit to be shared between both, income reduction could be increased in municipal taxation and decreased in government income taxation.

11 A light version of the Model can be implemented first Initially, it may not be worthwhile to apply the strongest subsidy to reach full employment; instead, the Model could be implemented moderately. The following table and chart present a light version of the Model whereby government wage subsidy covers 37% of the labour cost at a total hourly wage of 9/h. Even at the total hourly wage corresponding to a nominal hourly wage of 8.25/h the reduction in the cost of labour to the employer is 25%. (This is the minimum wage for the metal industry, which is the average among different sectors). Current total wage per hour of work Subsidy per hour* The light Martikainen Model Total wage under the Martikainen model Monthly salary (with actual working hours of 34.5 hr/wk and 11 mo/yr) Reduction of the cost of labour to the employer (government contribution to the labour cost) Increase in wage (if the employer s contribution remains the same) /h /h /h /mo % 58 % % 58 % % 58 % % 34 % % 18 % % 8 % % 0 % % 0 % *A current wage and the support are not combined as a total wage under the MM. As the wage increases, social security expenses to the employer increase as well where a part of the support is consumed. The wages in italics are so low they are negligible because of the minimum wages, among other things.

12 How many would be employed under the light Model? Full employment requires the reduction of the cost of labour to the employer by 85% from the present rate. So, if the cost of labour is reduced by 25%, then 90,000 people could be employed according to a linear interval table. Since subsidy is moderate here, there is no need to extend it to the middle salaries, as was necessary under the strong subsidy to avoid income traps. This is why only 90 million a year is needed to subsidy the current workers under the light Model. The cost is covered quickly when those who are currently unemployed become employed. With 90,000 unemployed becoming employed, the government and the communities would profit by 1 billion. Soon after implementing the light Model, it is justifiable to implement the strong Model because unemployment is detrimental. Requirements of the Model An accounting system for the increased wage can be implemented according to the existing employment subsidy system. Under the present system, the employer pays the salary in full to the employee and collects the amount of subsidy from the labour administration afterwards. This is the same with the Martikainen Model. Now, because the Model can be implemented within the present system, its implementation is technically simple. What do the experts say about the Model? Those experts who have been properly familiarised themselves with the Model seem far more likely to support than to oppose it. Many expert have told me to consider the Model as the best way to deal with unemployment. And what would be a more orthodox method, economically speaking, to deal with unemployment than lowering employment costs?

13 What about the drawbacks? As far as is known, improving employment through low-wage subsidy or increasing low wages should not cause any harm. It is a matter of taste to consider it a drawback when some individuals are employed against their will under the Model. According to the law, an unemployed applicant for work must accept a job offer at the risk of losing unemployment benefit for a period. As employers will make many job offers under the Model, those who are unwilling to work are put into work, some of whom may consider such action unpleasant. But at the same time, the rest of the society benefits when these transfer payment recipients also become tax payers. Members of trade unions will benefit from the Model as low wages are increased and their unemployed members become employed. It is, therefore, justifiable for the trade unions to support the Model, especially because the general terms of employment remain uncompromised. Improved employment, increased general production, an improved national economy, and increased salaries for the low-paid should be enough for a quick implementation of the Model. Income reduction models are weak measures against unemployment Income reduction generally or restricted to low-income groups A key issue for employment is how much labour will cost the employer. The cost is determined by collective agreements and legally prescribed fees. Income tax applies to an employee only, so it does not have any direct effect on the costs of labour to the employer. Thus, reducing income tax cannot directly help the employer to employ. The reduction only helps indirectly if it can be used to establish moderate wage settlements. Nevertheless, this way the effect on the cost of labour is minimal, a few tenths of a percent at a time. Income tax has a very wide tax base, so reducing it is very expensive compared to a resulting positive employment effect. Although reducing income tax is used to motivate the unemployed to apply for work, it is still a poor measure. A one-percent increase in net salaries has an almost insignificant employment effect, yet it costs hundreds of millions if it is done by cutting taxes. Negative income tax and civil salary Negative income tax and civil salary are mutually equivalent models, only presented in a slightly different way. Both share the principle of securing a living for those who have no income or whose income is low by means of a simple system. The main issues are as with the models of reduced income tax: employment is not improved because the cost of labour to the employer is untouched modifying social security for the unemployed and partly-employed is not a central issue in unemployment.