Why is this? Let’s reason about it in a crude way.

It depends on why there is unemployment. It is said that economic policy dictates some buffer stock of unemployed people be maintained to anchor inflation, which is to say that unemployment can be eliminated by inflating. Indeed, at a low enough real interest rate (including negative rate), all work that spans non-zero time becomes “profitable” at wage above zero and there can be no unemployment. So there will be some unstable equilibrium, where there is full employment at just above zero wage and only “unprofitable” work left on the table. For a margin of safety (so as not to overshoot and still leave profitable work at above the lowest wage, which will unanchor the targeted inflation), there will be some unemployment, and therefore always payable yet unprofitable work. If the government offers some delta positive wage, then this excess labor can be used to do the unprofitable work, and we can do away with the technical requirement of excess labor margin and yet get equilibrium without the possibility of overshooting. Effectively, the government inflates the last little bit as needed to pay wages directly … rather than dumping it into the banking system where it will be promptly lent back to the government due to the real interest rate being slightly too high.

Theoretically, this also solves one of the greatest libertarian complaints that the minimum wage causes more unemployment. The theory of minimum wage is that everybody should be able to self-sustain on their wage (which now includes wage from the government as the employer of last resort). Now, by policy, the government can set some minimum wage (but it must be set so low that, it is guaranteed that everybody will definitely spend at least at that wage rate) and pay its own wage at delta below that. Since all of labor now spends at the minimum wage rate, there will be support on the demand side to assure that the full-employment equilibrium is set where the minimum wage cannot be unprofitable. All in all, the government does not compete with the private sector.

Of course there are still practical issues with this. For example, what do you do with lazy workers. So employer of last resort should only be in the sense of employment opportunity of last resort. You should still be fired for substandard work and go without pay at all. Now that’s an incentive to be productive. Another practical issue is churn. Since the government only intervenes at the lower extremum of the wage scale, unemployment higher in wage scale would need to filter down through displacement. I don’t really see a good solution to this. Perhaps there are clever and ethical ways to increase job market liquidity.

I think this is a false argument. Surely, the first approach would mean all parts of the economy suffer together. But it is the wrong assumption to say that the second approach does not have side effects either. In fact, unless sectors of the economy “not in over-capacity” can be clearly identified and capital funneled directly to those parts of the economy or allocated to such by banks, then the injection of capital would simply flow to all parts of the economy, including the parts ostensibly in over-capacity. Look at this complaint:

What really struck me in Skidelsky’s account, however, was the extent to which conventional opinion in the 1920s viewed high unemployment as a good thing, a sign that excesses were being corrected and discipline restored–so that even a successful attempt to reflate the economy would be a mistake. And one hears exactly the same argument now. As one ordinarily sensible Japanese economist said to me, “Your proposal would just allow those guys to keep on doing the same old things, just when the recession is finally bringing about change.”

This is exactly true. As we see over and over, human nature is such that, without pain, we do not learn from mistakes (in general) — since by some definition of “mistake”, things that do not cause pain are not mistakes. Without austerity and pain, it is optimistic to assume the injected capital will not be used to go back to the old investment schemes… and delay restructuring. It is also optimistic to assume politicians beholden to populist wishes will make painful cuts to those sectors in over-capacity, at the same time as they are doling out fresh capital to those deserving capital, both of which are necessary actions for a shortened recession and sustained recovery.

On top of that, what if in the economy, whether due to its interconnections or otherwise, there is over-capacity in every sector? Imagine the world built everything that anybody would possibly want for 10 years, then what, besides unemployment for 10 years? And so what, it isn’t such a bad thing then, is it? Japanese aren’t doing badly, are they? So what if they haven’t been fully productive for 10 years, who cares? If they are happy with their standard of living, they can all work half-time for all I care.