Zero Marginal Product (ZMP) workers

by on June 3, 2011 at 8:57 am in Current Affairs, Data Source, Economics | Permalink

Via Annie Lowrey, from Neil Irwin:

People unemployed over 6 months rose by a whopping 361k, 44% of all unemployed.

1 DW June 3, 2011 at 9:14 am

Moved to NYC form Canada in September and my wife hasn’t found a job yet. She left a job back home and has now been unemployed for over six months.

Is she ZMP?

2 FYI June 3, 2011 at 1:11 pm

Hard to tell but from what you describe it looks like your NYC job is worth more than your Canada job + your wife’s Canada job.

3 Ironman June 3, 2011 at 9:43 am

That’s no surprise – there has been a structural shift in U.S. employment. Here’s where many of those in that category used to work…..

4 Bill June 3, 2011 at 10:16 am

With capacity utilization at less than 75% and effective unemployment at 16%, what we now need is MORE austerity. We need to make our citizens more anxious so they save more and do not spend.

I mean, state and local governments have done their share of layoffs in the last six months (with more to come), why can’t we do more austerity.

Perhaps with increased unemployment, and a drop in aggregate demand, businesses will spend more (on what, I don’t know, but they have this money sitting abroad, so I’m told.)

In addition, what we should do is create a fiscal crisis by not raising the debt limit until there is disruption in the financial markets, so we will have a bigger hole we can dig out of.

This message brought to you by a person who withdrew money from the stock market and commodities in early May and who is waiting for an opportunity to come back in.

5 Rich Berger June 3, 2011 at 11:00 am

Yes, clearly when the decision is between squeezing the budgets of the government at all levels and squeezing the budgets of taxpayers and investors, the taxpayers should tighten their belts. Clearly money going to the government is more wisely spent than if it is left in the hands of the less enlightened, who may spend it on the wrong things.

6 Jim June 3, 2011 at 12:17 pm

It’s just horrifying to me that anyone could look at the unmitigated, disastrous failure of the last 2.5 years and say: “You know, higher Government spending is the answer.”

7 Phill June 3, 2011 at 12:48 pm

Hrm, yes, quite, I see you have an incredibly nuanced perception of public policy.

8 Rich Berger June 3, 2011 at 12:58 pm

So what is the nuanced view? I have heard that the stimulus was not big enough (Krugman et al) or that things were worse than we thought (White House et al). Do you have any other nuanced explanations?

9 Bill June 3, 2011 at 12:59 pm

And, what are the interest rates to the government again?

Rich, Cutting spending is equivalent to raising taxes if there is no private spending. In the last cycle, by the way, we gave out tax cuts to the wealthy and put them on a credit card and increased debt. I would have begun phasing out the Bush cuts in 2006.

Jim, I’ve read economists who’ve claimed that if we had not done what we did unemployment would have been at 17 to 21%. We’ve had a real estate bubble, we have persons in construction dependent indsustries who have to reallocate, we have overleveraged consumers who invested in real estate whose value has declined, we have politicians scaring people in their 50s and early 60s so that they will save and not spend and who will not retire as they would have otherwise.

If you want to look at the degree of household overleveraging, comparing private to public debt, you might want to look at these charts from late 2009: http://www.comstockfunds.com/(X(1)S(zslpya55esps132y54brfo45))/files/NLPP00000/425.pdf US household debt to GDP increased from 64% in 2001 to 102% in 2009.

Lets austere our way out of this. It worked for Hoover.

10 Rich Berger June 3, 2011 at 1:21 pm

I am glad to hear that there is a lot of excess cash waiting to be taxed away.

BTW, you’re grossly wrong about Hoover. Here is a table of receipts and expenditures by FY.

1929 3,862 3,127
1930 4,058 3,320
1931 3,116 3,577
1932 1,924 4,659
1933 1,997 4,598

11 Rich Berger June 3, 2011 at 1:39 pm

Those are in millions, nominal amounts (the White House constant dollar numbers appear to start in 1940). I think there was deflation in part of that period, which would mean the real amounts may have increased more, but I am not sure.

12 Bill June 3, 2011 at 2:52 pm

Oh, the good old days.
Now I know where you’re coming from.
Tough it out, as Mellon once said.

13 mjw149 June 4, 2011 at 10:56 am

There IS a lot of excess cash needing to be taxed. The tax burden has been historically low in this country, far lower than similar Euro countries. That money has gone largely to the wealthy that have spent it on luxuries produced overseas and investments into China and India. That’s why we’re in trouble, not the underfunded federal government you whine about.

For the last 20 years, we’ve cut taxes and ceased infrastructure investment and how well are we doing? Why not return to the high tax ways of the 50s and 60s? Clearly our grandparents were better off than we were statistically.

Why cling to the ludicrous idea that government is a problem? Ask Somalia how well anarchy works. A good economy requires predictability and that requires a strong, well-funded government that doesn’t change much. That’s the real conservative way. Not this GOP nonsense anarchy movement.

14 FYI June 3, 2011 at 1:24 pm

Bill

The problem with all this theory is that is completely non-scientific. How can we prove that unemployment would be 17-21%? When Obama took over he said we would have 10% unemployment if we did nothing. I assume the economists who were guiding him followed the same keynesian mantra that your sources do. Even worse, even if we assume that unemployment would have been so much worse, can you guarantee that we wouldn’t have a stronger recovery by now if we allowed things to ‘hit the bottom’? Look at what is happening in the housing market. We spent billions (trillions?) trying to ‘correct’ the bubble after it exploded and all we did was delay the bottom, which will be reached now instead of 2008 or 2009. Is that really helping the recovery?

To say that cutting spending is a tax hike if there is no private spending is like saying that buying insurance is throwing money at the window if you don’t get sick. It is all about expectations and whether business feel confident in the future or not.

15 Bill June 3, 2011 at 3:00 pm

FYI,
Re Your comment: “The problem with all this theory is that is completely non-scientific.”
That may explain some of the proposals for austerity to prosperity, in my non-scientific opinion.

16 JonF June 5, 2011 at 12:59 pm

Actually, it was 8%. That was not a number specific to Obama, or Keynesian econoists. It was the consensus view of the entire economic field (regardles of political ideology), based on Okun’s Law which relates unemployment to declines in GDP– and has been valid in every downturn since the Great Depression. The fact that Okun’s Law failed this time and unemployment grew much worse than the numbers predicted is one of the major mysteries of our current ecomony, and needs to be explained since understanding this may be crucial to turning the situation around.

17 Ron Fondler June 3, 2011 at 2:03 pm

Bill is the intellectual equivalent of a Cleveland Steamer:

http://www.urbandictionary.com/define.php?term=cleveland+steamer

18 J Thomas June 3, 2011 at 3:12 pm

With capacity utilization at less than 75% and effective unemployment at 16%, what we now need is MORE austerity. We need to make our citizens more anxious so they save more and do not spend.

Bill, I understand you’re being satirical, but I’m afraid there’s some truth to this.

If the problem was only that a small elite had reached the point they owned most everything and they didn’t want to consume enough to justify jobs for a lot of people, then I’d say who cares what they want, increase consumption and jobs and if necessary take control from those people. These are the guys who won the dot.com bubble, and won the real estate bubble, and won the bank crisis, what do we really owe them?

But it’s more than that. We use 25% of the world’s oil, and we use a lot of stuff we import, and we don’t export enough value to justify that. Unless we figure out how to export a lot more, austerity is in our future.

We need to cut way back on our use of imported resources, both by government and by everybody else. We can have as much of an economy as we can manage while we do that.

If we pull our military out of Iraq and Afghanistan and a whole lot of foreign bases, it will help our foreign exchange a lot. This is government spending we can’t afford.

We mostly can’t afford warplanes that use 9000 pounds of aviation fuel an hour, or that cost $300 million each.

We mostly can’t afford SUVs etc, but if gasoline is a reasonable price like $8/gallon that can be an individual choice.

We can’t afford to eat so much beef. Maybe we can’t afford to export so much beef the way we produce it. Our fuel subsidies could leave us exporting stuff for less than it actually cost us. So get rid of fuel subsidies of all sorts. Let the market pay actual costs.

We need austerity about everything that takes imports. We can make and buy whatever we want and sell it to each other as long as it doesn’t use importado, and so long as we can afford it compared to foreigners who can pay in hard currency.

19 Bill June 3, 2011 at 5:33 pm

I couldn’t agree with you more about military spending, nor do I disagree with competitive consumptive patterns in automobile usage which disfavor smaller cars in favor of SUVs. I also agree with ending ethanol subsidies.

But, this doesn’t lead to the other points.

If you look at personal debt as a percentage of GDP, it increased dramatically from 2001 to 2009 (think mortgage borrowing (and that borrowing was from abroad, my friend). Household debt as a percentage of GDP increased from about 64-68% in 2001 to 102-105% in 2009. Government spending as a percent of GDP pretty much stayed the same, even though revenues decreased because of tax cuts. Government debt is at a 3 plus percent rate, so that is either telling me that the market is wrong, or that your predictions of government is wrong. If the problem is revenue, we have enough capacity to modestly increase SS retirement age, raise the cap, drill down on medicare costs and look at managed medicare with a private supplement if you want to extend your life with medically unnecessary procedures, etc.

20 Ted Craig June 3, 2011 at 8:51 pm
21 J Thomas June 3, 2011 at 11:58 pm

I couldn’t agree with you more about military spending, nor do I disagree with competitive consumptive patterns in automobile usage which disfavor smaller cars in favor of SUVs. I also agree with ending ethanol subsidies.

But, this doesn’t lead to the other points.

Let me stress my main point. When you have an economy that flies like a dead duck, the issue isn’t whether government or consumers consume more, or whether government or consumers should consume less. The issue has to be to get your economy running.

We cannot keep buying so much importado on credit. We are better off to cut down on that before our credit is cut off, if we can. Unfortunately it looks like that takes international agreement which may not be coming. All the obvious choices look bad. But arguing about taxes versus inflation versus cutting government budgets enough to put massive numbers of government employees out of work, does not address the issue at all.

If you look at personal debt as a percentage of GDP, it increased dramatically from 2001 to 2009 (think mortgage borrowing (and that borrowing was from abroad, my friend). Household debt as a percentage of GDP increased from about 64-68% in 2001 to 102-105% in 2009. Government spending as a percent of GDP pretty much stayed the same, even though revenues decreased because of tax cuts.

Some years ago people argued about the balance of payments problem, and a lot of people said that foreigners needed our markets. They needed our consumers, because they didn’t have enough consumers to keep their economies going. So they got to work hard and produce and get low pay, and they sent stuff to us that we bought on credit, and that kept the economy running. There were people who said there was no problem with this because nobody wanted it to end.

This is where it ends. We are not good credit risks so they won’t keep selling to us on credit whatever that does to their economies. What do we do now? Of course personal debt went way up. Now what?

Government debt is at a 3 plus percent rate, so that is either telling me that the market is wrong, or that your predictions of government is wrong. If the problem is revenue, we have enough capacity to modestly increase SS retirement age, raise the cap, drill down on medicare costs and look at managed medicare with a private supplement if you want to extend your life with medically unnecessary procedures, etc.

What did I predict for government? What I say now is that government depends on an economy, and if the economy goes way bad, what then? Government can print dollars or tax dollars to pay government workers, but if they go to the grocery store and most of the food has gone abroad to people who can pay with hard currency, what good is it?

If we get a real crisis, the obvious approach is to have a war. In wartime we can do rationing, we can draft the unemployed, we can put the retiring guys to work for the war effort, we can ignore our health care issues in favor of treating the wounded until after the war, etc. Every time we start to do something for the war effort that we couldn’t agree on before and somebody says “But it isn’t fair!” we’ll say “There’s a war on, buddy, let’s work out something fair after the war.”.

After the war the situation will be changed so much that we won’t have the same dilemmas. If we win we can cancel our debts. If we lose it will be the occupiers who decide what to do about us.

I hope it doesn’t come to that. But we are heading for a great big problem, and we have no hint of a consensus how to prepare for it, and that’s the obvious thing for us to do when we can’t get a consensus.

22 Bill June 4, 2011 at 8:22 am

There has to be some logic in this comment, but I haven’t found it: “Let me stress my main point. When you have an economy that flies like a dead duck, the issue isn’t whether government or consumers consume more, or whether government or consumers should consume less. The issue has to be to get your economy running.”

Ah, someone has to spend more. I vote for the guy who can borrow at 3%.

23 J Thomas June 4, 2011 at 11:28 am

There has to be some logic in this comment, but I haven’t found it

Sorry. I’m saying something you aren’t predisposed to hear, and I’m not doing it well.

Ah, someone has to spend more. I vote for the guy who can borrow at 3%.

I say that’s completely missing the point.

I want to propose a hypothetical situation here. I don’t claim to have the evidence that it’s true, but I think it’s likely true.

Imagine you have a nation where (for various reasons including a long Cold War) there are subsidies etc for a lot of businesses. So for example, farmers don’t pay full price for gasoline, and so we import oil and make gasoline and sell it to farmers at low prices. The farmers grow a lot of crops — oil intensively — and export them. The farmers make a profit, but after you count the subsidies the nation has lost money on the deal.

Meanwhile the government pays for lots of special military equipment etc. They learned not to buy that overseas because foreign manufacturers sold their military technology to their enemies. The military contractors do buy a lot of imports, including a lot of oil, and they produce stuff that gets used to attack third-world foreign nations. The military spends a lot of money overseas doing this, and for the economy it’s all loss except for whatever it does for security and the possibility that it might somehow result in cheaper imports.

Due to peculiarities in the way their dollar is exchanged, a whole lot of foreign products are cheaper and/or better than their own products, and so imports are higher than exports, and this does not change over decades. They owe increasing amounts to foreigners.

The public is in debt to the point that they are having trouble getting more credit, and they actually prefer to reduce their debt. But first they need paying jobs….

So, how to jump-start the economy? Ideally they should get lots of industry etc going, and pay people to work, and export a lot, and have lots of domestic products for the hard-working people to buy. And since local consumers don’t want to buy a whole lot since they don’t have the cash, and local businesses are not particularly successful at exporting, the simple obvious choice is for government to buy a lot and that will get things moving.

But somehow when they do that, some of what they buy is warplanes and bombs and foreign wars, and that doesn’t get the economy moving — it just increases the foreign debt. And some of what they buy is imports that American middlemen sell them, and that just increases the foreign debt. And meanwhile they can’t sell a whole lot to foreigners except for raw materials like wood, and things that are subsidised to the point that selling those exports increases the foreign debt.

It’s almost certainly true that their economy is not going to get started up unless the government spends money. But in the short run, under the circumstances, the government spending money doesn’t get much.

The highest priority has to be to arrange that businesses which make a profit are actually making a profit and not depending on government subsidies or tax breaks. Because until that’s managed, successful businesses make the problem *worse*.

They have to find a way to import less until they can arrange to export more, because until they do that more deficit spending only stimulates other national economies.

I do not have the expertise to say for sure whether the hypothetical situation I describe fits the US economy. I think it does, but I couldn’t begin to prove it. If it does fit, do you disagree with my conclusions?

In that case, how much deficit spending the US government should do is not at all the central issue. The spending is mostly useless until the underlying problems are solved, and it’s most likely utterly and completely necessary when they are solved. But it is not the first order of business.

24 Heimdall June 3, 2011 at 10:22 am

If you think this is an eye opener search through the California job postings.

80% want bi-lingual only.

Everyday there is an article in the paper re if you are white, over 50 and unemployed you may never work again.

25 E. Barandiaran June 3, 2011 at 10:34 am

Tyler, please tell your readers what textbooks teach: as long as the marginal cost of hiring a person (much higher than the market nominal wage) is greater than the marginal benefit (most likely positive rather than zero as you assume) no firm will hire the person. You should be asking yourself why marginal cost is higher than marginal benefit at a time in which macro models suggest the opposite. Please don’t say “I’m mostly a macroeconomist” as in
http://3.bp.blogspot.com/-DM6gLCmXKtk/TeectmxmrgI/AAAAAAAABPQ/ajDDino-vcw/s1600/arloandjanis060211.gif

Maybe you’d like to take the challenge to explain why the similarities with 1937 are not enough to repeat the “mistakes of 1937” as suggested in
http://libertystreeteconomics.newyorkfed.org/2011/06/commodity-prices-and-the-mistake-of-1937-would-modern-economists-make-the-same-mistake.html

26 Bill June 3, 2011 at 1:01 pm

E. I totally agree with you.

We should send some people “I want to Go Back To Policies of 1937” t-shirts.

27 rcyran June 3, 2011 at 10:38 am

I think this post is a good expression of cognative dissonance among certain economists.

It takes a lot of mental gymnastics to not recognize these people could be doing something and produce value – like the road I ride on every weekend outside NYC that was produced by the CCC during the depression.

28 CBBB June 3, 2011 at 1:00 pm

Really though, this whole ZMP bullshit is just…well bullshit. I mean ZMP, what does that really mean? The productivity of labour depends highly on how it’s deployed. The unemployed also consists of a lot of graduates right out of university many of them with technical (not liberal arts) backgrounds. Are they ZMP? I don’t think so – what it is, is a general lack of imagination as to how to deploy these workers on new products or working on new projects.

29 David O June 3, 2011 at 10:44 am

Tyler, please clarify the difference between ZMP workers and workers with marginal product below minimum wage.

30 Andrew' June 3, 2011 at 12:02 pm

About $7

31 Kinch June 3, 2011 at 4:54 pm

Andrew – that was hilarious.

32 Anon. June 3, 2011 at 10:55 am

I believe Tyler’s “ZMP” is actually Zero Net (of costs) Marginal Product workers.

33 Jamie_NYC June 3, 2011 at 12:59 pm

+1

34 rpl June 3, 2011 at 1:14 pm

That’s one category of ZMP workers. Recall, though, that all this talk about ZMP came about when people observed many companies making reductions in employment without corresponding reductions in output. That means anybody who doesn’t contribute to output today shows up as ZMP. Thus, another category is workers whose product is really a form of investment. For example, if you fire your R&D staff, you don’t produce any less in the short term, but that doesn’t necessarily mean that the value of their work was less than or equal to their costs. Likewise, you can get by with a lot less IT staff if you’re just maintaining what you’ve got, rather than upgrading and planning for growth.

35 dirk June 3, 2011 at 1:45 pm

Exactly. And that’s where Tyler gets it wrong. Current output is not the appropriate metric. Company valuations are the appropriate metric, and they are lower than they were 11 years ago for the reason that earnings expectations are lower than they were both 3 and 11 years ago. Then again, maybe all the good R&D staff fortune 500 companies would like to hire are all working on Wall Street these days…

So we’ve got the best and the brightest valuating corporate America and they are valuating it lower than before for the reason that the best and the brightest doesn’t work there anymore.

36 dirk June 3, 2011 at 1:49 pm

Wait. Here’s a good maudlin song to accompany my comment: http://www.youtube.com/watch?v=lOWrqR_QFfg

37 Anon. June 3, 2011 at 1:56 pm

That’s a legitimate critique, but unemployment is heavily concentrated in the category of workers with little/no education. Those aren’t R&D people.

38 dirk June 3, 2011 at 3:37 pm

Unemployment among the college educated is double what it normally is. If a company has cut back on R&D and has lower future earnings expectation than before it might also cut back on marketing, on improving its IT infrastructure, internal training, longer term internal projects, etc. “Output” is merely a function of operations. There’s the saying in advertising that probably half of it is wasted but you never know which half. That’s probably also true of all internal projects, but many companies seem to have now taken the view that since they don’t know which half of projects are worthless they’ve decided to cut them all. Ultimately it means that companies are cynical about growth.

39 CBBB June 3, 2011 at 3:42 pm

Unemployment has increased across all workers. There are legions of underemployed or unemployed university graduates – even those with technical/scientific backgrounds. It REALLY isn’t true that the unemployed are all lazy, uneducated, ex-construction/factory workers. Maybe some of them are but huge numbers of educated workers also find themselves either unemployed or workings jobs way below their skill level.

40 R.A. Student June 3, 2011 at 11:00 am

So, these people had positive marginal products 7 months ago and now they have zero marginal products? That’s an incredibly fast structural shift.

41 Bill June 3, 2011 at 1:37 pm

It works if you stick to theory.

42 Richard June 3, 2011 at 4:46 pm

No, they had zero or negative marginal products but were sticky. Recessions are a good opportunity for mass layoffs cutting out the cruft. Note how output hasn’t declined despite these people being laid off.

Anecdotally, this includes many individuals I know at my father’s firm who were hanger-ons from the 1999 tech boom with no applicable skills but long years of employment history that mad them difficult to fire. After being laid off, most of them had trouble finding employment again, justifiably.

In short, the solution to these individuals is to increase their competitiveness. After all, there are millions in India earning $1 a day who are working hard to acquire skills to take your (vastly overpaid) job.

43 Bill June 3, 2011 at 9:06 pm

Richard,

How Mellonesque.

As Mellon once said: “”liquidate labor, liquidate stocks, liquidate farmers, liquidate real estate… it will purge the rottenness out of the system. High costs of living and high living will come down. People will work harder, live a more moral life. Values will be adjusted, and enterprising people will pick up from less competent people.”[

44 The Fresh Prince of Darkness June 3, 2011 at 9:49 pm

Therefore…what, exactly? You seem to think this quote speaks for itself. But you are a partisan hack, so I guess that’s not too surprising.

45 blah June 4, 2011 at 9:59 pm

To me it reads “Do as I say, not as I do.” Also: “Pay no attention to that man (or cabal of rich bastards who have no moral dilemmas raping the rest of the populace) behind the curtain.

46 TGGP June 4, 2011 at 6:04 pm

There is no record of him saying that, it was Hoover’s description of Mellon. And there’s reasons to distrust Hoover’s self-serving account.

47 Julius Seizure June 4, 2011 at 11:14 pm

And there’s even more reason to distrust ANYTHING Bill posts here.

48 JonF June 5, 2011 at 12:55 pm

Pertyy much everyone has zero marginal product insofar as their coworkers can be forced to pick up the slack when they are gone. During the last generation workplaces became much more efficient, but this happened so gradually that it was wasn’t particularly noticed, so most businesses were over-staffed but only vaguely realized it. When the crunch hit they dumped a lot of workers and discovered they could produce the same output with fewer employees. That’s all there is to it. The people laid off were not especially lazy or worthless: any one of their remaining coworkers could have been axed instead with the same result.

49 Rahul June 3, 2011 at 1:57 pm

For Tyler is all unemployment due to ZMP workers? Is this axiomatic? Or does Tyler uses some cues based on data to decide when it is and when it isn’t?

50 JonF June 5, 2011 at 12:50 pm

To a large extent we are all ZMP workers, in so far as any of us could be laid off and our remaining coworkers be forced to cover for us. There was nothing at all unique or unusual about the people who lost their jobs in 2008-2009 (and continuing). Employers simply discovered they were overstaffed and could produce rthe same output with fewer workers.

51 Laura S. June 3, 2011 at 2:33 pm

What’s surprising is that there isn’t pressure to fix the tax-cut package from last year:

We need to restore the employee’s payroll tax to 6.2% and cut (or eliminate the employer’s payroll tax) instead. That will get people back to work faster than any proposal thus far implemented.

52 Bill June 3, 2011 at 2:56 pm

If I’m the employer and not seeing a growth in demand, do you mind if I just pocket the employer’s contribution.
Funny how people argue that the incidence of the payroll tax on the employer is actually on the employee, but then when the employees payroll tax is curtailed for a year now claim it would be better to have given the cut to the employer because the incidence is on the employer. Either it is or it isn’t.

53 Richard June 3, 2011 at 4:49 pm

I suspect that this won’t accomplish much. It will help at the margins where individuals’ lower output levels can justify a hire due to lower wages, but $2000 in difference won’t move many workers into the net positive output zone.

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