Zero marginal product workers

by on July 19, 2010 at 6:40 am in Economics | Permalink

Matt Yglesias suggests the notion is implausible, but I am surprised to read those words.  Keep in mind, we have had a recovery in output, but not in employment.  That means a smaller number of laborers are working, but we are producing as much as before.  As a simple first cut, how should we measure the marginal product of those now laid-off workers?  I would start with the number zero.  If a restored level of output wouldn't count as evidence for the zero marginal product hypothesis, what would?  If I ran a business, fired ten people, and output didn't go down, might I start by asking whether those people produced anything useful?

It is true that the ceteris are not paribus,  But the observed changes if anything favor the hypothesis of zero marginal product. There has been no major technological breakthrough in the meantime.  If anything, there has been bad monetary policy and a dose of regulatory uncertainty.  And yet again we can produce just as much without those workers.  Think of "labor hoarding" yet without…the hoarding.

You might cite oligopoly models and argue that the workers can produce something, but firms won't hire them because they don't want to expand output, due to lack of demand.  That doesn't seem to explain that output has recovered and that profits are high.  And since there is plenty of corporate cash, it is hard to claim that liquidity constraints are preventing the reemployment of those workers.

There is another striking fact about the recession, namely that unemployment is quite low for highly educated workers but about sixteen percent for the less educated workers with no high school degree.  (When it comes to income groups, the lowest decile has an unemployment rate of over thirty percent, while it is three percent for the highest decile; I'm not sure of the time horizon for that income measure.)  This is consistent with the zero marginal product hypothesis, and yet few analysts ask whether their preferred explanation for unemployment addresses this pattern.

Garett Jones suggests that many unemployed workers are potentially productive, but that businesses do not, at this moment, want to invest in future productive improvements.  The workers only appear to have zero marginal product, because their marginal product lies in future returns not current returns.  I see this hypothesis as part of the picture, although I am not sure it explains why current unemployment is so much higher among the unskilled.  Is unskilled labor the fundamental capability-builder for the future?  I'm not so sure.

It's also interesting to look at the composition of the long-term unemployed (not the same as the composition of all the unemployed, of course).  Older workers with a college education are quite stuck, conditional on their being unemployed.  And in this group, more education predicts a longer spell of unemployment.  Is this ongoing "recalculation," optimal search theory, or is the roulette wheel simply coming up zero each time it is spun for these workers?  Maybe a bit of each.  If you want, call some of it age discrimination and relabel the idea "perceived zero marginal product."

In general, which hypotheses predict lots more short-term unemployment among the less educated, but among the long-term unemployed, a disproportionately high degree of older, more educated people?  This stylized fact seems to point toward search and recalculation ideas, with some zero marginal products tossed in.  Do aggregate demand theories yield that same data-matching prediction?  I don't see it, at least not without being paired with a theory of concomitant real shocks.

Nothing in the zero marginal product hypothesis requires that these marginal products be zero forever.  As the entire economy expands more rapidly (when will that happen?), the value of even a low quality worker can quickly become much higher.  If you are opening up a new building, suddenly you really need that extra janitor and he is indeed more productive at the new margin.

Some people identify the zero marginal product hypothesis with the "hopeless dregs of the earth" description, but the two are not necessarily the same.  Complementarity, combined with some fixed initial factors, can yield zero or near-zero marginal products of labor.  (You'll see the phrase "excess capacity" used in this context, though that matches the oligopoly hypothesis more closely.)  The "dregs of the earth" view is pessimistic, but the complementarity version of the zero marginal product idea can be quite optimistic, predicting a very rapid recovery in the labor market, once the interactions turn positive. 

The "dregs" and the "complementarities" views also have different policy recommendations.  The dregs view implies either hopelessness or a lot of fundamental retraining or ongoing assistance, while the complementarity view leads one to ask how we might mobilize positive complementarities (rather than leaving orphaned factors of production) more quickly.  Perhaps there are some fixed factors, such as managerial oversight, and entrepreneurs do not want to strain those fixed factors too hard.  How can we make such fixed factors more replicable or more flexible?

Addendum: Arnold Kling comments.

Andrew July 19, 2010 at 6:45 am

How ’bout some of the employees are an option on future growth and in this regime the price of replacing those options has gone down and the price of holding them has gone up. Damn, I fake more economics before 7 am than most people do all day.

Tom West July 19, 2010 at 7:39 am

My personal experience is that when workers are let go, often the *observed* productivity doesn’t drop significantly. However, many things that are not measured drop significantly over time.

The incidence of food-poisoning in the restaurant creeps up, the failure rate of the manufactured item slows rises, the washrooms in the office become more and more unpleasant until ‘good’ workers start leaving, etc.

All of these don’t immediately show up on the balance sheet, making the fired workers “zero marginal product”.

Or to put it another way, if you fired all the professors and replaced them with lecturers, I suspect that with respect to student graduation rates, the professors would have, by the numbers alone, “zero marginal product”.

However, the numbers alone don’t tell us the whole story.

MikeDC July 19, 2010 at 8:00 am

It’s like turning Atlas Shrugged into a vast discriminatory heuristic choice machine. If I’m an employer, I look for the most productive workers first. The ones that might actually develop new productive advances (business lines, clients, etc) that will enable me to hire less productive workers.

Mario Rizzo July 19, 2010 at 8:07 am

In his 1936 review of the General Theory, Joseph Schumpeter points out that for Keynes “the employment of labor is an ‘adequate’ index of the output resulting from it.” In other words, Keynes is assuming that there is a fixed relationship between aggregate demand, aggregate supply and employment. Therefore, he makes no room in his analysis for the phenomena described above. I believe that many modern day Keynesians do the same. So, for them, the failure of employment to recover is *necessarily* an aggregate demand failure.

Xmas July 19, 2010 at 8:22 am

I’d agree with what Tom said. Plus, productivity stays the same, but if 5% of the staff goes out with the flu, or a plant has to shut down for maintenance, or whatever, you take a much bigger hit than before. Suddenly, you got guys working 30 hours of overtime a week, equipment maintenance is made a lower priority, and you’re generally burning off muscle mass instead of fat.

In answer to your questions, there have been a few stories about businesses sitting on large piles of cash. They are uncertain about the future of the economy, and would rather sit on the cash than spend it in the “wrong” way. Uncertainty is a killer.

On the flip side, I’ve heard this from other consultants (and the CEO of a big consulting company), businesses that can spend the money are spending it on infrastructure improvements. They’re beefing up their IT networks, management software, and tools/machinery now to pull away from their stumbling competitors.

Jim B. July 19, 2010 at 8:50 am

I’ll keep it short: Hours worked matters for measuring the number of labor “units” and wages earned matter for productivity per worker employed.

Pat July 19, 2010 at 9:09 am

“Matt Yglesias suggests the notion is implausible, but I am surprised to read those words.”

You’ve been posting a lot of Yglesias and Klein links. I’m surprised that you’re surprised.

Charlie Wood July 19, 2010 at 9:41 am

I’m just an econ undergraduate (hook ‘em horns!) so I don’t know how to formally describe it, but here’s my theory:

Let’s say Jack and John are both employed doing the same work while employment is high (and fear of unemployment is therefore low–if either loses his job he can likely find another one). Then the economy craters and Jack loses his job. John’s fear of unemployment is now higher than it was, since he seen not only his colleague Jack get laid off but also dire unemployment figures in the news. Now fearful, John works harder to keep his job than he did when the economy was good, and by so doing makes up for the productivity lost by Jack’s layoff.

To management, who measures only total productivity and not per-worker productivity, it looks like Jack was a zero marginal productivity worker. As the economy rebounds they’re under no pressure to rehire Jack, so unemployment stays high.

I’d be interested in any reactions to this theory, and in finding out how one would formally describe it in economic terms.

Thanks,
Charlie

Scoop July 19, 2010 at 10:14 am

Tyler,

How do you reconcile your belief that many American workers are now zero marginal product with support for reasonably open borders and many of the immigration slots allotted to folks who are not extraordinarily smart/educated/productive etc.? Moreover, how can you do it looking forward, when technology is only going to make zero marginal product workers of more unskilled immigrants (and unskilled Americans)?

We’re not that far (a decade?) from seeing technology destroy the two biggest jobs for unskilled folks: cashier and driver. RFID has come slower than expected, but it continues to progress, and as you can see from the video Alex posted yesterday, we’re not that far from autonomous vehicles.

Ted Craig July 19, 2010 at 10:15 am

I’m not sure how you measure productivity in the service sector. Retail sales are way down. Most of that’s attributable to lower demand, but some it could be due to a lack of customer service.
Just being able to make the same amount of stuff isn’t a good measure.

Nattering Nabob July 19, 2010 at 10:38 am

we want workers to live with the fear even in good times

Nice to see some honesty from the right-wing economics crowd.

Also: my impression is that many people here in Australia who remained employed started working significantly longer hours as unpaid overtime during the recession of the early 1990s, for fear of losing their jobs. (Some evidence for this can be found at http://www.aph.gov.au/library/pubs/rn/1999-2000/2000rn27.htm under the heading “overwork”.) What would once have been seen as unacceptable has become the new normal. This isn’t an increase in productivity in the sense of production per hour worked, but it is an increase in production per worker, which at least partly compensates for the marginal product of the worker laid off.

Michael Foody July 19, 2010 at 11:03 am

In many, but not all, businesses you can get more work out of someone by firing someone else. Many people slack to a certain degree, once you fire some of the worst slackers other people will work harder to avoid being among them. I think the unemployment has moved us closer to something like a national efficiency wage. We have a relative deflationary pressure so people who are employed are making more than before but because of anxiety they are working harder than before to avoid being one of the big losers who is unemployed.

Bobby R July 19, 2010 at 11:12 am

…[W]e want workers to live with the fear even in good times, or some kind of carrot, either way – its a shame that productivity wasn’t higher before….”

Maybe my irony detectors are down today but it strikes me the writer hasn’t experienced downsizing from the survivors’ point of view. Measures of productivity go up, but quality declines, margins of error go down, planning and preparation for rare but nasty events falls away, exempt workers are pushed for yet more unpaid overtime, people who can leave voluntarily (often but not always the best) do.

Jacqueline July 19, 2010 at 11:57 am

Older, highly educated workers probably had high salaries before they were laid off. Rules vary from state to state, but I think that most allow someone to refuse a job offer too far below their previous salary and still collect unemployment benefits.

Matt July 19, 2010 at 12:16 pm

Interesting thoughts, both in initial post, as well as the comments.

Regarding “zero marginal product workers”, on top of discussion so far, it can help to look at the price versus volume effect – volume of output may be same as before, but price (in its fullest sense) may not be the same.

It is possible that the current output is at a lower quality (which can only be determined with respect to a higher future cost, shorter replacement cycle, greater replacement rate, increased service requirement, higher environmental cost, etc.) – were that to be fully provided for today (including all externalities and as yet unknown future liabilities) then maybe today’s output would be valued lower.

Such an outcome, where organisations try to. get more for less, is perhaps not implausible.

Lord July 19, 2010 at 12:30 pm

Repeat after me, output has not returned to prerecession levels. We are not producing as much as before. Output has not recovered, it is only recovering. When people are confused as this no wonder what nonsense is uttered.

E. Barandiaran July 19, 2010 at 12:44 pm

Tyler, your readers, Arnold Kling and you may benefit greatly from reading Prof. Walter Y. Oi’s “Labor as a Quasi-Fixed Factor” published in the Jo. of Political Economy in 1962. See
http://www.ppge.ufrgs.br/GIACOMO/arquivos/eco02268/oi-1962.pdf

Andrew July 19, 2010 at 1:27 pm

Moreover:

* An estimated 854,000 people, nearly 1.5 times as many people as live in Washington, D.C., hold top-secret security clearances.

http://projects.washingtonpost.com/top-secret-america/articles/a-hidden-world-growing-beyond-control/?g=0

We should recalculate these f#@#er$

Josh July 19, 2010 at 2:13 pm

Can anyone explain complementarity in this context? I get that with products it means that that selling less of one good would lead to selling less of another good. Ie. iphones and iphone cases. Sort of the converse of substitutability.

With labor complementarity, what happens? Something to do with the type of products being demanded? That doesn’t seem too match. Are high marginal product workers driving out zmp workers because of low complementarity with them? Is there an introduction to this somewhere or anyone have examples?

Thanks.

Charlie Wood July 19, 2010 at 3:01 pm

Anon-

I wrote:
As the economy rebounds they’re under no pressure to rehire Jack, so unemployment stays high.

You wrote:
Um, no. If the economy does recover, then John will perceive that he is no longer overpaid relative to his outside options, so his productivity will slacken.

I disagree. Since John is now working extra-hard and making up for the productivity lost when Jack was laid off, Jack’s “outside options” remain slim, and unemployment remains high.

Basically I’m claiming that productivity can ratchet up in an economic downtown, and unemployment along with it. As long as the productivity gains remain, there’s no downward pressure on unemployment.

Regards,
Charlie

Chris T July 19, 2010 at 4:01 pm

“Matt Yglesias suggests the notion is implausible, but I am surprised to read those words.”

Why? Yglesias appears to believe the fantasy that everyone can be retrained for anything. Come to think of it, most economists seem to believe it too.

Adam July 19, 2010 at 4:36 pm

Does this mean the “growing income gap” is justified? Don’t tell Krugman.

quadrupole July 19, 2010 at 4:51 pm

Mark,
I’m in a similar position. I hire in tech, mostly software developers, guys down on the line writing code day to day. It’s still pretty bleak hiring folks, and we are paying *much* higher wages than what you were quoting for your lab tech. It’s just virtually impossible to find decent developers.

engineer27 July 19, 2010 at 5:48 pm

How about the time lag between the worker’s efforts and when the fruit of those efforts is measured as “output”? In many businesses, a substantial portion of the workforce has their primary focus on products or services that won’t hit the market for 1-2 years or more. Looking at very uncertain demand, employers can lay off the future-focused portion of their staff, retaining only those that maintain offerings already in the market. Measured productivity will shoot up, and stay up until today’s offerings are obsolete, at which time it will drop like a rock as the employers scramble to hire extra staff in an attempt to catch up (a la Kling).

Perhaps the (measured) Present Value of Marginal Productivity is very near zero, but the correct measure for these workers was always Future Value; employers just use an unjustifiably high discount rate.

Albert Farangh July 19, 2010 at 6:39 pm

This is only the tip of the iceberg.
BTW, the title should say ‘zero marginal product employees’, not ‘workers’.
There are lots and lots of jobs out there whose very existence reduces productivity. Not all of them are government jobs.
Hence, it is quite likely that you could increase productivity by permanently eliminating jobs.
The implications are staggering.

OutlierView July 19, 2010 at 8:59 pm

Perhaps it would be more useful to think of them another way: as buffers. You can push the current workers to produce the same output, /at the cost of much higher stress levels, burnout, physical wear and tear, and possibly other serious health problems./

Perhaps they can only produce this much for so long before it starts impacting their ability to produce at all. A single factory worker may be able to work an assembly line alone at the productivity of 3 for a while; eventually they may just fall over and die, however.

dickson2675 July 20, 2010 at 2:43 am

I think the reason why output remains steady despite a higher unemployed is because the still employed is doing more work now than before. It is not that the laid off has 0 marginal productivity, I believe it’s just that the work of these used-to-be-employed has been shifted to the still employed. It might just be that the employed did not perform at full capacity before

The sad thing is that once positions are eliminated, sometimes they dont come back even in boom years.

Mark July 20, 2010 at 9:43 pm

Kevin K wrote:
“All – I mean ALL – professors here complain about how hard it is to find skilled employees. ”

Are you talking about post-docs or just someone with a bachelors degree?
— I meant technicians and post-docs. A beginning tech here earns more than a postdoc, an advanced tech earns much, much more.

Jacqueline wrote:
“…how hard it is to find skilled employees. And I am talking about generally held, but very quantifiable, scientific skills like: ability to make figures acceptable for publication in a journal, ability to write a scientific paper, ability to read a scientific paper and explain the main results and methods.”

My institute just hires editors like me for 1/2 the cost to clean up after the scientists.

— Jacqueline, two pieces of advice from an academic: evidently, you are getting an MBA (from your site). Post some sort of contact information online so that if someone wants to “throw you business” as in editing, you can be contacted. This will generally be more lucrative than your current job and could open other possibilities. Second, as someone getting an MBA… c’mon, you might think about your situation in economic terms, right?

Jon July 21, 2010 at 8:39 am

One note on the speculation here: the data does not support a proposition that people are working longer hours. The data does not support this. Avergae hours worked fell during the crash, and since then has fluctuated a bit, but not increased by any major amount.

arup July 23, 2010 at 1:40 am

just like the vast volume of indian agricultural labourers. their mp is 0 and are employed only because they are part of the family

Merijn Knibbe January 15, 2011 at 5:31 pm

I advise you to take a hard look at the data of the thirties. Back then, the same thing happened – but much more extreme. Productivity growth is the rule – even in depressions.

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