Full employment is often associated with structural rigidities. An economy running at full employment and high levels of capacity utilization will have difficulty adjusting to structural changes such as capital- and labor-displacing technical innovations, changes in supply of labor or natural resources, and changes in the composition of final demand [see, e.g., Lowe 1976; Pasinetti 1981, 1993]. Such rigidity is rooted in the structural and technological features of modern capitalist economies.
Modern economies are interindustry systems with complex sectoral interdependencies described in input-output analyses. Capital goods are highly specific and in no way necessarily shiftable between different lines of production. Means of production are neither highly divisible nor substitutable. Economic processes take place in historical time; there are no instantaneous adjustments. There is a significant amount of uncertainty regarding the future, and the past is unchangeable. There are time lags, distortions, bottlenecks, and rigidities that reflect the physical and technical nature of the system.
While standard neoclassical models exhibit flexibility because of unrealistic assumptions, such as perfectly mobile, divisible, substitutable, and homogeneous factors of production, perfectly flexible prices, and perfect information, the primary "real-life" features endowing capitalist systems with flexibility are unemployment and excess capacity. Excess capacity permits firms to respond relatively quickly to unexpected increases in demand. But this ability to respond requires not only reserve capacity in terms of plant and equipment, it also requires the ability to hire additional workers or to add hours of work. A "reserve army of labor," including the unemployed as well as involuntarily part-time and "flex-time" workers, has historically served the function of providing the economy with a pool of unemployed from which firms can draw during expansions.
Unemployment (and underemployment) and excess capacity are thus important sources of system flexibility in capitalist economies. This flexibility, however, comes at a high social and economic cost. Recent proposals have been made that government act as an employer of last resort, hiring anyone who is ready and willing to work at an appropriate money wage rate [Minsky 1986; Lowe 1988; Mosler 1997-98; Gordon 1997; Wray 1997]. This paper investigates the structural implications of "employing the reserve army" and outlines the advantages of the employer of last resort approach in promoting flexible full employment.
Public sector employment has a number of advantages over other approaches in promoting flexible full employment. These advantages include those that relate to not only labor, but to capital goods and natural resources as well. They relate to both the input side and the output side of public sector activity. Key to understanding the flexibility of public sector activity is to recognize the constraints within which private firms operate. Competitive pressures compel private firms to make decisions based on a narrow set of criteria. Firms must make decisions concerning what activities to engage in and what methods of production to utilize based on their best estimate of the profitability of such a move or decision. Of course, there are a number of issues that come into play here, and we would not want to depict these decisions as simplistic. But in a capitalist economy, competitive pressures greatly restrict the degree of discretion that firms have with regard to the line of production they engage in and the methods of production they utilize in any given line of production.
Public sector activity, however, does not have to be concerned with these types of competitive pressures, since government is not in business to make a profit. Government can choose to...