Internalizing the Social Value of Employment: A New Approach to Employment Policy in a Globalized Economy

In modern societies, employment has not only economic functions, such as income creation, but also social functions, such as alleviating inequality or enhancing social stability (high unemployment threatens social stability). Since utilities stemming from the social functions of employment cannot be exclusively enjoyed by the firm making the employment decision, externalities arise in the firm’s employment decision. Even without employment’s social function, employment externalities can arise when there is government expenditure against unemployment and/or deficient aggregate demand with involuntary unemployment. Particularly, corporate globalization raises the possibility of employment externalities emerging as it brings about discrepancies more often between private firm’s profit maximization and national economy’s welfare maximization. Existence and properties of employment externalities offers a new rationale and means for employment policy. Since a precise estimation of the scale of externality is extremely difficult, a practical remedy for externality is a ‘standard and price’ approach where a socially agreeable target (standard) is set and an appropriate subsidy or tax (price) is implemented to attain the target (Baumol and Oates 1971). We can think of two kinds of policy based on such an approach: a price-setting policy (carbon tax type) and a quantity-setting-flexible-price policy (emission trade type). Since the latter type of policy seems to be more appropriate for our case, this paper introduces and investigates the ‘employment credit trading system (ECTS),’ a tradable-credits approach to employment targeting. Under this system, firms that hire employees are given the right to issue a corresponding quantity of employment credits, which they could then sell on the credits trading market. Firms that lay off their workers would be required to purchase the corresponding credits. The government would administer a market for trading employment credits and participate in the market as a credit consumer by setting a job creation target. The price of credits would be determined by market supply and demands for credits that reflect the labor market conditions and government’s job creation target. This paper explores the strengths and weaknesses of the ECTS approach and identifies the implications it carries for policy.