Cowen and Lemke, on employment

by on January 6, 2011 at 12:15 pm in Economics | Permalink

The problem:

…Before the financial crash, there were lots of not-so-useful workers holding not-so-useful jobs. Employers didn't so much bother to figure out who they were. Demand was high and revenue was booming, so rooting out the less productive workers would have involved a lot of time and trouble — plus it would have involved some morale costs with the more productive workers, who don't like being measured and spied on. So firms simply let the problem lie.

Then came the 2008 recession, and it was no longer possible to keep so many people on payroll. A lot of businesses were then forced to face the music: Bosses had to make tough calls about who could be let go and who was worth saving. (Note that unemployment is low for workers with a college degree, only 5 percent compared with 16 percent for less educated workers with no high school degree. This is consistent with the reality that less-productive individuals, who tend to have less education, have been laid off.)

In essence, we have seen the rise of a large class of "zero marginal product workers," to coin a term. Their productivity may not be literally zero, but it is lower than the cost of training, employing, and insuring them. That is why labor is hurting but capital is doing fine; dumping these employees is tough for the workers themselves — and arguably bad for society at large — but it simply doesn't damage profits much. It's a cold, hard reality, and one that we will have to deal with, one way or another.

The solution?  Here is a paragraph which did not make the final editing cut:

…being unproductive in one job doesn’t mean a lifetime of unemployment. A worker who wasn’t worth much sweeping up the back room is suddenly valuable when new orders are flowing in and he is needed to ship the goods out the door. And if all those new orders require keeping the warehouse open late, the company may need to bring in a new night watchman. To paraphrase a common metaphor, a rising tide eventually lifts most boats. When the economy’s expanding, a worker who previously was worthless will at some point become valuable again. But this means that workers at the bottom of the economic ladder will have to wait until the entire economy has mended itself before they have the chance to improve their lot: That can be a painstakingly slow and uncertain process.

1 nelsonal January 6, 2011 at 8:22 am

The issue I take with that analysis is that an awful lot of low productivity jobs have been automated.

2 Err January 6, 2011 at 8:28 am

sweeping the floors of a new warehouse is not automated, or cannot be at a low enough price. (are there industrial roombas?) This could actually be used for an argument in favor of stimulus spending. As long as there is no inflation the money pumped into the economy will actually move many structurally unemployed into employable people. The jobs may be inferior but there will be jobs. Start the helicopter drops until we start to see inflation, then put a light hand on the breaks.

3 Andrew January 6, 2011 at 8:45 am

I might take a pay cut to keep my job. But I'm not sure I'd take a pay cut to keep YOUR job.

4 Doug January 6, 2011 at 9:22 am

"Employers didn't so much bother to figure out who they were. Demand was high and revenue was booming, so rooting out the less productive workers would have involved a lot of time and trouble"

Do these employers compete with anyone?
New entrants?

5 Andrew January 6, 2011 at 9:24 am

What would a better educated/skilled workforce lead to in a recessionary situation? Would the threshold for holding a job rise if MPL rises across the board? Or how about using education to boost employment? Would there just not be enough jobs at this point?

6 Andy January 6, 2011 at 9:25 am

Too bad we can't offer sweeper guy his old job back at $4 an hour (or whatever gives him positive marginal production). Seems the minimum wage is hurting more than its helping in the current economic climate.

7 Adam January 6, 2011 at 9:55 am

I'm pretty skeptical about this narrative, which smacks of blaiming the unemployed, and in particular the suggestion that they are all people who should have been let go anyway.

I don't have numbers to quantify, but many unemployed are that way because entire industries disappeared or shrunk drastically (for the former, think structured finance and for the latter think home construction). And in legal world, at least, there may be low unemployment, but there is lots of underemployment because of these changes.

8 Kent Guida January 6, 2011 at 10:03 am

Is there any reason to think the current recession is unique in this respect? Isn't it likely that this happens in all rescessions, and really in all downturns in business, even if limited to a single industry or even a single firm?

9 gorpnik January 6, 2011 at 10:10 am

Adam,

The fact that the industry disappeared quickly is to blame because it should have disappeared much earlier. Industry protections or regulations that prevented more "brutal" competition actually hurt the workers by fooling the investors and bosses into thinking that the industry was viable for much longer. Perhaps a more gradual disappearance or an ease in restructuring or even outsourcing would have pinched a lot earlier but it also may have enabled smoother labor market adjustment.

Of course, in the extreme case, you don't get the US, but Greece and the rest of the PIGS.

10 Philo January 6, 2011 at 11:17 am

Andy and Master of None hit the nail on the head. Marginally productive workers have a hard time finding new jobs because the costs of employing a worker are so great. Why did you not point out explicitly that the fault lies with much of our labor legislation–minimum wage, social security, mandatory health insurance, anti-dicrimination, etc.?

11 Floccina January 6, 2011 at 11:36 am

@mulp

You need to consider the discount rate and depreciation. Mostly a cheaper item that last 50 years is better than a more expensive item that lasts 100 years.

12 dirk January 6, 2011 at 2:15 pm

Sounds like it's time to start paying people per rat they kill.

13 dirk January 6, 2011 at 2:49 pm

Since we don't know how many people with college degrees are now under-employed it is hard to say for sure that the less skilled have in fact suffered more, at least in arithmetic terms.

@Lord makes a good point about constant productivity gains.

We don't know how much productivity gains from new technology has occurred in the past 2 years. Perhaps recessions catalyze productivity gains in a mother-of-invention sense. If so, one might still retrospectively say the lost workers were zero marginal product, but only retrospectively as a counter-factual, as in: if-only-the-increasing-productivity-technology-had-been-implemented-earlier sense. Or even: if-only-we-had-driven-the-existing-workers-like-slaves-back-then sense.

If we buy my ad-hoc theory that recessions spur productivity gains to reach their yet-unrealized potential, then we should also expect realized productivity gains to now revert to the mean and for future near-term growth to require more hiring, as potential productivity gains now fall back to trend and no recession exists to spur us to continue to maximize them.

14 Master of None January 6, 2011 at 3:06 pm

What about wage price floors?

Both the minimum wage and rising healthcare costs could have made the employment cuts worse than they otherwise would have been.

Is there a possibility that when companies force their employees onto the government health plans in 2014, we could see a surge in employment?

15 dirk January 6, 2011 at 3:38 pm

"If a business owner fires 10 people and a year later output is almost back to normal, it's pretty hard to make the argument that they were doing much in the first place."

I'm going to invoke the EMH here. The stock market is still 16% off its highs two years ago. So as of right now the market does not think — and has not thought for the past year — that American companies are worth nearly as much as they were before the crisis. Add to that the fall from the growth trend and things still seem far from "almost back to normal".

As to this point: "But it's unlikely that spending is the only problem, as unemployment is too high and too persistent relative to similar episodes of disinflation in recent history."

What about relative to similar episodes in which the stock market has gone nowhere in 10 years?

16 JonF January 6, 2011 at 4:35 pm

Once again this line of reasoning ignores the manner in which many of the layoffs were carried out. These were mass layoffs, not a few people dumped here and there. Entire retail outlets, factories, offices and divisions have been eliminated, with the loss of all the jobs they held. And who kept his job at Crcuit City or one of the other companies that shut down completely? No one sat down and figured out who specifically to fire: you were in the wrong job at the wrong time and you were out the door, period (except here and there for a few well-connected people, of whom I am one).

The laid off workers (yes, with exceptions) did nothing wrong and they were not necessarily low productivity people. Why does that blame-the-victim line keep resurfacing?

17 justanothereconomist January 6, 2011 at 5:27 pm

Many errors in this article:

“Even if the December rate of job creation continues, it will be 2014 before unemployment is down to 5 percent.”

Yes, because this is when aggregate demand is expected to return to trend.

“In November, a sum total of 92,000 new jobs were created — but that didn’t lower the unemployment rate.”

Due to changes in the labor force, by definition. This doesn’t tell us anything about structural employment, as this type of “jobless recovery” happens in the early stages of the last two recessions as well. Would you say those exhibited stuctural unemployment?

“The simple Keynesian explanation for the initial unemployment is that aggregate demand — the country’s combined spending and investment — has been too low. But it’s unlikely that spending is the only problem, as unemployment is too high and too persistent relative to similar episodes of disinflation in recent history. ”

Disinflation can happen for reasons other than weak aggregate demand, like a change in the monetary authorities inflation target, if credible. This doesn’t address the aggregate demand argument at all. Disinflation can happen due to falls in aggregate demand, but not all disinflation occur due to aggregate demand, so this argument doesn’t address the question.

“If weak demand was the main problem, profits should be collapsing too, but they are not.”

Not if employers reduce their workforce in line with falls in demand. Profits should fall if employers can’t reduce their workforces, but of course they are, as we can see through the sharp declines in employment.

“here’s a second problem with the Keynesian story, which relies heavily on the notion that real, inflation-adjusted wages are sitting at too high a level.”

I also think the wage stickiness story is a weak explanation, but the fall in aggregate demand story still holds.

“As time passes, it is harder to avoid the notion that a lot of those old jobs simply weren’t adding much to the economy. Except for the height of the housing boom — October 2007 through June 2008 — real GDP is now higher than it has been in the entirety of U.S. history. The fact that the United States has pre-crisis levels of output with fewer workers raises doubts as to whether those additional workers were producing very much in the first place. ”

Real GDP can increase due to an increase in inputs or an increase in productivity. Obviously productivity has increased, so a country can produce more without hiring. Take a country that experiences a mass murderer who kills off many citizens while leaving productivity unchanged. Real GDP could stay the same with increases in productivity as long as productivity growth exceeded the murder rate. This example has nothing to say about the value of jobs of structural unemployment.

To put it another way, the USA returned to it’s 1929 level of output by about 1936-1937, but unemployment was still high. Would you say that this was due to structural employment in the US workforce? Obviously not, as employment would return to full employment by late 1941. (or if you disagree with this, full employment was reached in the post-war). This return to pre-crisis output was due to increases in productivity. Aggregate Demand returns to trend by late 1941 of course, when unemployment in finally returning to low levels.

“If a business owner fires 10 people and a year later output is almost back to normal, it’s pretty hard to make the argument that they were doing much in the first place.”

Unless productivity increases the same amount. If productivity grows at 2%, then employers can fire up to 2% of workers and yet output will grow. Again, this has nothing to do with the value of the jobs.

“The era of low unemployment may be in our rearview mirror for a long time to come.”

Nope, but unfortunately we can’t put this structural argument which rears its ugly head ever recession in our rearview mirror. This argument relies on misunderstandings of the way productivity and basic growth theory, and not on any tangible facts.

18 Joe January 6, 2011 at 5:43 pm

The article is asking, how do we employ those who are unemployable in the current economic conditions? How does a floor sweeper get their job back?

These questions are putting the cart in front of the horse, or making the problem fit the solution (the solution being that the government needs to do “more”, and businesses should be artificially induced to hire those who are currently unemployable.)

However if one looks at the situation objectively, the question changes to ” what can those who are currently unemployable with their skillet do to improve their ability to get a job?” The answer of course is to put the responsibility on the individual to improve their skillset to maintain/improve their employability.

If unemployment is low for college grads, and high for non grads then it is clear that non grads need to improve themselves. Lowering the bar to employ the less skilled is not a productive solution

19 CBBB January 6, 2011 at 6:41 pm

I don’t buy this “unemployment is only 5% for college graduates” line. It’s technically true but how many of these employed college graduates are simply taking jobs usually done by high school drop outs? I’m sure if you looked into it you would see many of these graduates are simply employed flipping burgers or stocking shelves at grocery stores. It has nothing to do with skills.

20 darren January 6, 2011 at 6:49 pm

i think a very large percentage of those laid off were:

1)60 to 80K/year earners aged 35 to 55 who had been cruising with constant raises and barely any skills. you didnt bother to learn to type, but you've got time now.

2)the enormous group of 'secretaries' with various job titles. they have masters degrees but should be taking don draper's coat when he gets in

21 dirk January 6, 2011 at 7:41 pm

@Andrew — http://www.themoneyillusion.com/

Ask that question over there and Scott Sumner will happily respond.

22 Jim January 6, 2011 at 8:48 pm

Yes, it’s the low-skilled workers who have the highest unemployment.

Perhaps it is time to stop lazily blaming “the econonmy” for this, as well as insisting that people will have to be patient for “things to get better,” and instead stop making it so brutally expensive for companies to hire those who contribute only minimally to the bottom line.

Hint: jacking up the minimum wage and forcing employers to buy them (and their kids up to age 26) premium health insurance is not helping them, Barry. Neither does leaving the border wide open so that they can be replaced for one-third the price.

23 Morgan Warstler January 7, 2011 at 6:27 am

The answer is to institute full private market employment immediately:
http://biggovernment.com/mwarstler/2011/01/04/gua

24 McGreevey January 7, 2011 at 8:44 am

Maybe I read through too fast, but I did not see reference to the Schumpeterian 'creative destruction.' Seems to me that is what has been going on and it's not going to be over for a while yet. But in the longer run, we're better off for it. Leaving this issue: What's your discount rate?

25 Tom Grey January 7, 2011 at 9:15 am

One huge issue is the bailouts & tax support for capital over labor.
Unfair, not free market.
Another issue is the wholesale department, company, project shut down (or outsource, to China, or India, or my town Bratislava w/ high value Euro workers at low wages picking up backoffice office work, saving companies money.)

Another issue is the marginal value of the average, overpaid, American worker. (Especially the gov’t clerks). There should be much more support / less obstacles for anybody and everybody starting a business.

As for gov’t, there should be forced half-time work pushed on the highest paid, and most senior, “public servants”. Those making over $120k/ year could be reassigned to only their most important work at $60k and open a new entry level gov’t job at $40k. This should continue, with most expensive getting reassigned first, until the turnover of those leaving reaches 10% or more. Gov’t worker clerks are among the most disposable/replaceable workers and managers, because they make so little strategic decisions about “maximizing profit” for the firm. That is, none. They mostly do tactical “how to get this mandate done”.

Finally, on rating knowledge workers, it is not that hard to have managers with 10 direct reports to rate them 1-10. Just relative ratings, nothing absolute — but if done every year (or 1/2 year), it will be pretty obvious who should be let go for small pruning.

Early @David K comment claimed:
“companies with potential expansion as a result of cheaper low-skilled labor end up cash-starved.”Where are the data, or even anecdotes, about such companies? I believe it in theory, but have seen no evidence for it for this Recessesion.

26 anonymous January 7, 2011 at 5:03 pm

chris,

It's not so paradoxical if you think in terms of an ongoing talent transfer from poorly managed bureaucratic companies fond of silly metrics to scrappier companies with clueful hands-on managers who make better decisions for both hiring and firing. Not all companies are alike. It would be a Dilbertesque caricature to portray every manager out there as clueless.

Also, even if management might sometimes have trouble evaluating performance, an employee's own peers will usually know. So with a few phone calls and a bit of networking with former colleagues who put in a good word with their bosses, top performers often do quickly land on their feet. In a normal economy.

At least it worked that way for small companies in the tech sector, with a less rigid HR process and where rapid job changes are the norm, so that rival companies are already populated with a broad networking-ready spectrum of former colleagues. Maybe not so much for sectors where people tend to be lifers.

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