120 - Josh Hendrickson on Using Monetary Policy as a Jobs Guarantee

Episode Summary

Executive Summary: Josh Hendrickson argues that a central bank could, in principle, create a “jobs guarantee” by targeting nominal wages rather than inflation—using market-based convertibility (like a gold standard) to let traders discipline policy. The discussion compares this to Scott Sumner’s NGDP targeting, emphasizes money/base control over interest-rate targeting, and criticizes the Fed’s reliance on rates and interest on reserves.

Main Topics: Monetary “jobs guarantee” concept (Priority: 5/5): Hendrickson explains a monetary-policy version of a jobs guarantee: the central bank would stabilize nominal wages so anyone willing to work at the target wage could find employment, making employment guarantees arise from monetary rather than fiscal policy. Gold-standard analogy and nominal anchors (Priority: 5/5): The paper frames labor targeting like the gold standard: by fixing the nominal price of gold, real adjustments happen through prices; similarly, fixing the nominal wage would force other prices to adjust while anchoring wages. Indirect convertibility and market implementation (Priority: 5/5): Because labor is heterogeneous and not traded in a spot market, the Fed would use an indirectly convertible asset (e.g., gold) and rebate/fee mechanisms to keep that asset aligned with a target quantity of labor, making policy market-driven. Comparison with Scott Sumner and futures targeting (Priority: 4/5): The proposal resembles NGDP futures targeting in that market participants create the signal; the Fed passively accommodates trades at a fixed rule, effectively outsourcing monetary policy to the market. Nominal wage targeting vs. discretionary central banking (Priority: 4/5): Hendrickson distinguishes his automatic, rule-like market mechanism from proposals by Mankiw and Reis, which support wage targeting but still rely on discretionary central-bank decisions. Money, monetary aggregates, and the Fed’s instrument (Priority: 5/5): He argues the Fed should think in monetary terms, not just interest-rate terms, and prefers base-money control plus Divisia aggregates as intermediate indicators because simple-sum aggregates mismeasure money. Critique of interest-rate targeting and interest on reserves (Priority: 5/5): The conversation ends with a critique of the current regime: interest rates are influenced by many nonpolicy factors, and the Fed should move away from interest on reserves toward traditional balance-sheet and money-based operations.

Key Arguments: A jobs guarantee can be reframed as a monetary policy rule: if the Fed stabilizes nominal wages, it can eliminate involuntary unemployment without a large fiscal program. A fixed nominal wage would make the labor market the nominal anchor; other prices would adjust, just as the price level adjusted under the gold standard. Directly buying and selling labor is impossible, so implementation must be indirect, using a tradable asset like gold whose value is linked to a fixed labor quantity. The mechanism is self-correcting: if people expect wages to rise above target, they buy the asset, the Fed sells, and the resulting monetary contraction pushes wages back toward target. Nominal wage targeting is conceptually similar to NGDP targeting, but a wage target may be more robust in practice and better aligned with the Fed’s employment mandate. Market participation is an advantage of this proposal because it uses a liquid international asset rather than requiring the creation of a new futures market. Standard simple-sum monetary aggregates are flawed; Divisia aggregates better capture money demand and restore the empirical relationship between money, inflation, and nominal income. Interest-rate policy is a poor guide because rates reflect many forces besides policy; the Fed should instead control instruments it directly owns, like the balance sheet and base money. The Fed should stop acting as if it merely “fights” inflation; it creates inflation over the medium run and should own that responsibility. Interest on reserves distorts the banking regime and should be removed as part of normalization.

Data Points: Nominal wage example: $15 per hour - Used as the illustrative target wage in the labor-standard example. Gold price example: $1,500 per ounce - Illustrative price of gold used to show how an ounce could correspond to 100 hours of labor. Labor quantity example: 100 hours of labor - An ounce of gold at $1,500 paired with a $15/hour wage implies 100 hours of labor. Wage deviation example: $1,650 per hour - Used to show how a 10% higher-than-target wage would trigger rebates/fees under indirect convertibility. Wage deviation example: 10% higher - Describes the increase from the $1,500 implied wage to $1,650 in the example. Inflation target discussion: 2% target with a 1.5%–2.5% range - Hendrickson suggests thinking of inflation targets as ranges rather than exact point estimates.

Pivotal Quotes: "if you define the dollar being equal to four minutes of labor" — David Beckworth: Introduces the labor-standard intuition using a fixed nominal wage benchmark. "you could just have monetary policy set up so that the central bank is willing to buy and sell labor at some fixed price" — Josh Hendrickson: Core claim that a monetary jobs guarantee is possible in principle. "we need to get back to a monetary policy where the Federal Reserve is taking credit for its actions" — Josh Hendrickson: Critique of passive, reactionary Fed language and a call for more explicit control of inflation.

Implications: The episode argues for a more rule-based, market-driven central bank focused on money, nominal wages, and balance-sheet policy. If adopted, it could reduce unemployment volatility, improve transparency, and move the Fed away from interest-rate fixation and interest on reserves.