‘Smart’ Employment Policy: The Tradable-Credits Approach to Full-Employment Targeting

This paper discusses the idea of applying an artificial trading market approach, commonly used in environmental policy, to employment policy as a means of creating jobs more effectively. Artificial market approaches, as exemplified by the emission permits trading system, theoretically represent the most efficient means of attaining quantitative targets. At the same time, the policies based on such an approach have a constraint inherent in the trading market that they, to be effective, need to be implemented on an ongoing basis for a substantial period of time. Employment policy seems to be a promising area for the application of artificial market approaches, since it has an explicit quantitative target - full employment - and since circumstances with under-employment arise frequently. Specifically, this paper proposes a policy tentatively called an “employment credit trading system”, which is an employment targeting policy based on the combination of tradable credits and hiring subsidy, and investigates its expected effects. Such a system would be structured to provide subsidies for hiring, and the sizes of unit subsidies to attain employment targets would be determined as the prices of credits that clear the credits trading market where the government participates as a credit consumer. This paper shows that such a system would not only enable more precise targeting, but would also achieve employment targets at minimal social costs. Given the aforementioned constraint, such a system would have comparative advantages over existing policies, particularly in economies struggling with persistent unemployment or in societies that attach strong social value to employment (i.e. ones with an ambitious employment target).